978-1337276337 Test Bank Chapter 11 Part 2

Chapter 11

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54. With regard to preferred stock,

a. its issuance provides no flexibility to the issuing company because its terms always require mandatory dividend

payments.

b. no dividends are expected by the stockholders.

c. its stockholders may have the right to participate, along with common stockholders, if an extra dividend is

declared.

d. there is a legal requirement for a corporation to declare a dividend on preferred stock.

55. Stockholders may prefer to invest in preferred stock because

a. preferred stock confers preferred voting rights.

b. preferred stock can always be converted to common stock if the owner desires.

c. the dividends are generally increased each year.

d. the dividends are paid on preferred stock before they are paid on common stock.

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56. On January 1, 2017, Bogart Acres Company issued 10,000 shares of 10%, $20 par value cumulative preferred stock.

In 2017 and 2018, no dividends were declared on preferred stock. In 2019, Bogart had a profitable year and decided to

pay dividends to stockholders of both preferred and common stock. If it has $200,000 available for dividends in 2019,

how much could it pay to the common stockholders?

a. $140,000

b. $160,000

c. $180,000

d. $200,000

57. The Stockholders’ Equity section of the balance sheet of Sea Turtle Company reveals the following information:

Common stock, $3 par value $150,000

Additional paid-in capital—common 850,000

There have been two issues of stock since the corporation began business. The average issue price per share of stock was

a. $3.00.

b. $17.00.

c. $20.00.

d. Not enough information to determine.

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60. Refer to the information about Anole Company.

Anole’s total stockholders’ equity reported on the balance sheet at December 31, 2017, is

a. $60,000.

b. $120,000.

c. $180,000.

d. $555,000.

61. Valor Company issued 5,000 shares of $1 par common stock for $30 per share, providing the company with $150,000

in cash. What effect, in addition to the increase in cash, does this transaction have on the accounting equation for Valor?

a. Common Stock increases $150,000.

b. Common Stock increases $5,000; Additional Paid-In Capital—Common increases $145,000.

c. Common Stock increases $5,000; Retained Earnings increases $145,000.

d. Common Stock increases $5,000; Gain on Sale of Common Stock increases $145,000.

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62. Perry Corporation issues 20,000 shares of $0.50 par common stock for $6 per share; the Additional Paid–In Capital—

Common account will increase by

a. $110,000.

b. $10,000.

c. $120,000.

d. $130,000.

63. Abilene Western Shop began business on January 1, 2017. The corporate charter authorized issuance of 10,000 shares

of $2 par value common stock and 4,000 shares of $8 par value, 6% cumulative preferred stock. Abilene issued 2,400

shares of common stock for cash at $20 per share on January 2, 2017. What effect does the entry to record the issuance of

stock have on total stockholders’ equity?

a. Increase of $4,800

b. Decrease of $4,800

c. Increase of $48,000

d. Decrease of $48,000

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64. Poole Company began business on January 1, 2017. The corporate charter authorized issuance of 5,000 shares of $1

par value common stock, and 4,000 shares of $8 par value, 6% cumulative preferred stock. None of the preferred shares

were issued. On July 1, Poole issued 1,000 shares of common stock in exchange for two years rent on a retail location.

The cash rental price is $2,400 per month, and the rental period begins on July 1. The correct entry to record the July 1

transaction will

a. increase Cash, $57,600 and decrease Prepaid Rent, $57,600.

b. increase Prepaid Rent, $57,600 and increase Common Stock, $57,600.

c. increase Prepaid Rent, $57,600; increase Common Stock, $1,000 and increase Additional Paid-In Capital—

Common, $56,600.

d. increase Prepaid Rent, $57,600; increase Common Stock, $5,000 and increase Additional Paid-In Capital—

Common, $52,600.

65. Vegas Finance Company reported the following:

Common stock, $10 par, 100,000 shares authorized, 80,000 shares issued and outstanding

What is the effect of issuing 1,000 shares of common stock at $15 per share?

a. Cash increases $10,000.

b. Common Stock increases $15,000.

c. Additional Paid-In Capital increases $5,000.

d. Retained Earnings increases $5,000.

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66. A new company issues 2,000 shares of $5 par common stock in exchange for the services of a lawyer during its first

month of business. The lawyer’s normal fee is $15,000 for similar work. Which of the following would be the impact on

the accounting equation if the stock is not currently trading?

a. A decrease to Common Stock for $10,000

b. An increase to Common Stock for $15,000

c. A decrease to Additional Paid-In Capital—Common Stock of $5,000

d. An increase to Additional Paid-In Capital—Common Stock of $5,000

67. Vegan Company reported the following:

Common stock, $5 par, 200,000 shares authorized, 50,000 shares issued and outstanding

What is the effect of issuing 2,000 shares of common stock in exchange for land valued by a realtor at $36,000 if the

common stock sells for $12 per share and is regularly traded?

a. The Land account increases by $24,000.

b. Retained Earnings decreases by $10,000.

c. Common Stock increases by $36,000.

d. Additional Paid-In Capital—Common increases by $24,000.

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68. Fairchild Company acquired a building valued at $210,000 for property tax purposes in exchange for 6,000 shares of

its $10 par common stock. The stock is widely traded and selling for $31 per share. At what amount should the building

be recorded by Fairchild Company?

a. $210,000

b. $60,000

c. $186,000

d. $150,000

69. Montana City Company began business on January 1, 2017. The corporate charter authorized issuance of 500 shares

of $1 par value common stock and 400 shares of $4 par value, 3% cumulative preferred stock. What is the maximum

amount that can be reported on the balance sheet for Common Stock and Preferred Stock, respectively, if all of the stock

is issued?

Common Stock Preferred Stock

a.

$500 $1,600

b.

$5,000 $120

c.

$500 $120

d. Not enough information provided.

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70. Portland Sound Cafe began business on January 1, 2017. The corporate charter authorized issuance of 1,000 shares of

no-par value common stock, of which 200 shares were issued on January 1, and 4,000 shares of $8 par value, 6%

cumulative preferred stock, of which none were issued on January 1. Portland Sound sold 400 shares of common stock at

$8 per share on May 1. The entry to record the issuance of the shares on May 1 will

a. increase Cash, $1,000; increase Additional Paid-In Capital—Common, $320 and increase Common Stock, $680.

b. increase Cash, $3,200; increase Additional Paid-In Capital—Common, $2,800 and increase Common Stock,

$400.

c. increase Cash, $4,800 and increase Common Stock, $4,800.

d. increase Cash, $3,200 and increase Common Stock, $3,200.

71. Ari’s Cafe began operations on March 1, 2017. The corporate charter authorized the issuance of 3,000 shares of $2 par

value common stock and 1,000 shares of $3 par value, 8% cumulative preferred stock. The company’s fiscal year ends on

February 28. Ari’s sold 500 shares of common stock at $6 per share on April 1. What impact does the entry to record the

April 1 transaction have on total stockholders’ equity?

a. No effect

b. Increase by $1,000

c. Increase by $3,000

d. Increase by $6,000

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72. If a company issues $5 par value common stock,

a. $5 per share is presented in the Common Stock account on the balance sheet.

b. the minimum selling price is $5.

c. the shareholders will receive $5 in dividends.

d. liabilities are increased as a result of the transaction.

73. A company purchased machinery by issuing 2,000 shares of $3 par value common stock. Since the company is new,

there is no established market price for its stock. How would the company record the transaction?

a. In terms of the par value of the stock issued

b. At the fair market value of the machine

c. At the cost recorded by the previous owner of the machine

d. Recording the transaction would be postponed until a market price for the stock could be determined.

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74. Museum Corporation acquired a new manufacturing building by issuing 10,000 shares of its $50 par value preferred

stock with a $75 per share market price. Similar buildings have recently cost $780,000. What are the effects of this

transaction on the accounting equation for Museum?

a. Building and Preferred Stock increase $780,000.

b. Building and Preferred Stock increase $500,000.

c. Building increases $780,000; Preferred Stock increases $500,000; and Additional Paid-In Capital—Preferred

increases $280,000.

d. Building increases $750,000; Preferred Stock increases $500,000; and Additional Paid-In Capital—Preferred

increases $250,000.

75. Which of the following combinations appropriately reflects the type of accounts represented by the Treasury Stock

account and the Additional Paid-In Capital—Treasury Stock account?

Treasury Stock Additional Paid-In Capital—Treasury Stock

a.

contra stockholders’ equity stockholders’ equity

b.

contra stockholders’ equity contra stockholders’ equity

c.

stockholders’ equity stockholders’ equity

d.

retained earnings retained earnings

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76. A company issued 4,000 shares of $5 par common stock for $30 per share. The company purchased 1,200 shares as

treasury stock at $32 per share. Later, the company reissued 400 shares of the treasury stock at $34 per share. Which of

the following is true?

a. The Treasury Stock account should have a balance of $25,600.

b. The company has a gain of $800 that should appear on the income statement.

c. The Treasury Stock account should have a balance of $24,800.

d. The company has a gain of $1,600 that should appear on the income statement.

77. How is treasury stock shown on the balance sheet?

a. Treasury stock is not shown on the balance sheet.

b. Treasury stock is shown as an increase in stockholders’ equity.

c. Treasury stock is shown as a decrease in stockholders’ equity.

d. Treasury stock is shown as an asset.

78. All of the following are reasons for a company to repurchase its previously issued stock, except

a. to support the market price of the stock.

b. to resell to employees.

c. to increase the shares outstanding.

d. for bonuses to employees.

79. The Stockholders’ Equity section of Twilight Time’s balance sheet on January 1, 2017, appeared as follows:

Common stock, $2 par, 2,000 shares issued and outstanding $ 4,000

Additional paid-in capital—common 1,600

Retained earnings 5,400

Total stockholders’ equity $11,000

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On March 1, 2017, Twilight reacquired 800 shares of common stock at $10 per share. Twilight sold 400 of the treasury

shares on November 15 for $12 per share. The entry to record the sale on November 15 would show a(n)

a. increase in Gain on Sale of Treasury Stock, $800.

b. increase in Common Stock, $4,800.

c. decrease in Cash, $4,800.

d. decrease in Treasury Stock, $4,000.

80. A company would repurchase its own stock for all of the following reasons except

a. it needs the stock for employee bonuses.

b. it wishes to make an investment in its own stock.

c. it wishes to prevent unwanted takeover attempts.

d. it wishes to improve the company’s financial ratios.

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81. When a company purchases treasury stock, which of the following statements is true?

a. Treasury stock is considered to be an asset because cash is paid for the stock.

b. The cost of the treasury stock reduces stockholders’ equity.

c. Dividends continue to be paid on the treasury stock because it is still issued.

d. Since treasury stock is held by the original issuer, it is no longer considered to be issued.

82. If a company purchases treasury stock for $10,000 and then reissues it for $3,000, the difference of $7,000 is

a. treated as a gain on the sale.

b. treated as a loss on the sale.

c. an increase in stockholders’ equity.

d. a decrease in stockholders’ equity.

83. When a company wishes to purchase and retire its own stock, the company must

a. decrease the Stock account balances by the original issue price.

b. record a gain or loss depending on the difference between the original selling price and the repurchase cost.

c. get the approval of the state to do so.

d. issue a different class of stock to the former stockholders.

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84. The Stockholders’ Equity section of Deer Lakes Manor’s balance sheet on January 1, 2017, appeared as follows:

Common stock, $30 par, 20,000 shares issued and outstanding $ 600,000

Additional paid-in capital—common 240,000

Retained earnings 700,000

Total stockholders’ equity $1,540,000

On March 1, 2017, Deer Lakes reacquired 4,000 shares of common stock at $50 per share. All common shares were

originally sold for $42 each. How much should be reported in the Treasury Stock account on the March 31, 2017, balance

sheet?

a. $128,000

b. $168,000

c. $200,000

d. $32,000

85. Watson Company has 5,000 shares of $5 par, 3% preferred stock outstanding and 25,000 shares of $2 par common

stock outstanding. The preferred stock is cumulative, and no dividends have been paid for the past two years. If the

company wishes to distribute $2 per share to the common stockholders, what is the total amount of dividends that must be

paid in the current year?

a. $2,250

b. $50,000

c. $50,750

d. $51,500

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86. Which of the following should be considered when a company decides to declare a cash dividend on common stock?

a. The retained earnings balance only

b. The amount of authorized shares of common stock

c. The book value of the company’s stock

d. The cash available and the retained earnings balance

87. When a company declares a cash dividend, which of the following is true?

a. Stockholders’ equity is increased.

b. Liabilities are increased.

c. Assets are increased.

d. Assets are decreased.

88. Tropical Co. declared a cash dividend of $30,000. The entry includes a(n)

a. decrease to Cash of $30,000.

b. increase to Retained Earnings of $30,000.

c. decrease to Retained Earnings of $30,000.

d. decrease to Cash Dividend Payable of $30,000.

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89. Port, Inc. paid a cash dividend on January 2 that had been declared prior to the end of its fiscal year. The entry to pay

the dividend will

a. increase Cash and increase Cash Dividend Payable.

b. decrease Cash Dividend Payable and decrease Cash.

c. decrease Retained Earnings and increase Cash Dividend Payable.

d. decrease Cash Dividend Payable and increase Retained Earnings.

90. Arco Corporation declared a cash dividend on June 2 of $6 per common share. The company has 2,000 shares of

common stock authorized, 1,000 shares issued, and 200 in the treasury. The entry to record the declaration of the cash

dividend increases a(n)

a. liability.

b. asset.

c. expense.

d. stockholders’ equity account.

91. A liability for dividends is created at the

a. end of each fiscal year.

b. date of payment.

c. date of record.

d. date of declaration.

92. Dividends in Arrears

a. is a liability account.

b. appears in the notes to the financial statements.

c. is a stockholders’ equity account.

d. is a contra-stockholders’ equity account.

Chapter 11

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93. CarWorks Company has 100,000 authorized shares of $4 par common stock. The company issued 40,000 shares at $8.

Subsequently, CarWorks declared a 2% stock dividend on a date when the market price was $11 a share. What is the

amount transferred from the Retained Earnings account to paid-in capital accounts as a result of the stock dividend?

a. $8,800

b. $4,800

c. $3,200

d. $6,400

94. What is the effect of a stock dividend on stockholders’ equity?

a. Stockholders’ equity is decreased.

b. Retained earnings is increased.

c. Additional paid-in capital is decreased.

d. Total stockholders’ equity stays the same.

95. The Stockholders’ Equity section of the balance sheet for Scuba Gear Corporation appeared as follows before its

recent stock dividend:

Common stock, $5 par, 100,000 shares issued and outstanding $ 500,000

Additional paid-in capital 100,000

Retained earnings 725,000

Total stockholders’ equity $1,325,000

Scuba Gear declared a 10% stock dividend when the market price per share was $8. After the stock dividend was

distributed, the components of the stockholders’ equity section were:

Common Stock Additional Paid-In Capital Retained Earnings

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a.

$580,000 $100,000 $645,000

b.

$550,000 $100,000 $675,000

c.

$550,000 $130,000 $645,000

d. There would be no change in the components of stockholders’ equity.

96. When a company declares a stock dividend, which of the following occurs?

a. A liability is created.

b. Retained earnings is reduced.

c. Stockholders’ equity is decreased.

d. The Financing section of the statement of cash flows is decreased.

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97. Which of the following statements with regard to large stock dividends is true?

a. As a result of the stock dividend, retained earnings is reduced by the par value of the stock issued.

b. Retained earnings is reduced by the market value of the stock issued in the stock dividend.

c. If the market price of the stock before a 50% stock dividend is $30, after the stock dividend it will be $45.

d. As the result of a 50% stock dividend, a stockholder who had previously held 20 shares will then hold 40 shares.

98. Lawrenceville Co. reported the following:

Common stock, $3 par, 10,000 shares authorized, 5,000 shares issued and outstanding

What is the effect of a 10% stock dividend if the market price of the common stock is $30 per share when the dividend is

declared?

a. Cash decreases $30,000.

b. Retained earnings in the amount of $15,000 is transferred to the contributed capital accounts.

c. Additional Paid-In Capital decreases $30,000.

d. A stock dividend has no effect on any stockholders’ equity accounts.