10.2-26 Falcon Crest Corporation issues 100 shares of no-par ordinary shares for $10 per share. The
shares have a stated value of $1 per share. This transaction will include a credit to Ordinary
shares for:
A) $100 and a Gain on Issue of Ordinary shares for $900.
B) $100 and a credit to Retained Earnings for $900.
C) $100 and a credit to Paid-in Capital in Excess of Stated Value for $900.
D) $1,000 and no entry to Paid-in Capital.
10.2-27 The entry to record the issuance of 13,000 shares of no-par value ordinary shares at $25
per share includes a:
A) credit to Ordinary shares for $325,000.
B) debit to Retained Earnings for $325,000.
C) credit to Retained Earnings for $325,000.
D) credit to Paid-in Capital in Excess of Par Value-Ordinary for $325,000.
10.2-28 A company issues one hundred shares of no-par ordinary shares with a $10 stated value
for $17 per share. The entry to record this issuance includes a:
A) debit to Paid-in Capital in Excess of Stated Value–Ordinary for $1,000.
B) credit to Paid-in Capital in Excess of Stated Value–Ordinary for $700.
C) credit to Ordinary shares for $1,700.
D) credit to Ordinary shares for $700.
10.2-29 The entry to record the issuance of 1,000 shares of $1 par value ordinary shares at $10
per share includes a:
A) credit to Ordinary shares for $10,000.
B) debit to Ordinary shares for $1,000.
C) credit to Paid-in Capital in Excess of Par Value–Ordinary for $9,000.
D) debit to Paid-in Capital in Excess of Par Value–Ordinary for $1,000.
10.2-30 Jenny’s Lawn Service issued 100 shares of $10 par value shares and received a
lawnmower with a fair market value of $2,500. The entry to record this transaction would include:
A) a debit to Equipment for $2,500.
B) a credit to Ordinary shares for $1,000.
C) a credit to Paid-in Capital in Excess of Par-Ordinary shares for $1,500
D) all of the above.
10.2-31 When reporting shareholders’ equity on the balance sheet, a corporation lists the accounts
in the following order:
A) Ordinary shares, preference shares, retained earnings
B) Preference shares, ordinary shares, retained earnings
C) Retained earnings, preference shares, ordinary shares
D) There is no preference order.
10.2-32 When convertible preference shares are converted into ordinary shares:
A) a gain or loss can be recognized.
B) the preference shares is removed from the books and the ordinary shares accounts are credited
for the prior book value of the preference.
C) cash is debited.
D) none of the above occur.
10.2-33 A corporation’s own shares that it has issued and later reacquired are called:
A) authorized shares.
B) treasury shares.
C) issued shares.
D) outstanding shares.
10.2-34 A corporation has 10,000 shares authorized, 8,000 shares issued and 7,000 shares outstanding.
Which of the following statements is TRUE?
A) There are 1,000 treasury shares.
B) 10,000 shares have been sold.
C) There are 7,000 treasury shares.
D) The amount of treasury shares cannot be determined from the information given.
10.3-1 One reason a company will purchase treasury shares is to help avoid a takeover of the company
by another shareholder.
10.3-2 The purchase of treasury shares has the opposite effect of issuing shares.
10.3-3 Treasury shares reduce the number of shares outstanding.
10.3-4 Treasury shares decrease total shareholders’ equity.
10.3-5 Additional Paid-in Capital–Ordinary shares increases when Treasury shares are issued above its
purchase price.
10.3-6 Shares that a corporation purchases from shareholders are called:
A) authorized shares.
B) issued shares.
C) outstanding shares.
D) treasury shares.
10.3-7 Treasury shares is a (n):
A) asset account.
B) liability account.
C) contra-asset account.
D) contra-equity account.
10.3-8 Reasons that a company would purchase treasury shares include:
A) it needs the shares for distribution to employees under shares purchase plans.
B) it wants to increase net assets by buying its shares low and reselling it at a higher price.
C) management wants to avoid a takeover by an outside party.
D) all of the above.
10.3-9 Which statement below regarding treasury shares is TRUE?
A) Treasury shares transactions have no effect on assets and equity.
B) Purchasing treasury shares decreases assets and equity.
C) Issuing treasury shares decreases assets and equity.
D) Issuing treasury shares increases assets and decreases equity.
10.3-10 Treasury shares account for the difference between:
A) authorized shares and outstanding shares.
B) issued shares and authorized shares.
C) issued shares and preference shares.
D) outstanding shares and issued shares.
10.3-11 The number of treasury shares plus the number of shares outstanding equals the number
of shares:
A) authorized that have not been issued.
B) authorized.
C) issued.
D) issued that have not been reacquired by the company.
10.3-12 If treasury shares is sold at a price greater than its reacquisition costs, the difference is:
A) credited to Paid-in Capital from Treasury shares Transactions.
B) debited to Paid-in Capital from Treasury shares Transactions.
C) credited to Retained Earnings.
D) debited to Retained Earnings.
10.3-13 The treasury shares cost is subtracted from:
A) ordinary shares.
B) paid-in capital.
C) retained earnings.
D) total shareholders’ equity.
10.3-14 The purchase of treasury shares:
A) increases assets and decreases shareholders’ equity.
B) decreases assets and decreases shareholders’ equity.
C) decreases assets and increases shareholders’ equity.
D) decreases assets and increases liabilities.
10.3-15 The purchase of treasury shares is recorded:
A) at the par value of the shares.
B) at cost, without regard to the par value of the shares.
C) at the price set up the board of directors.
D) at none of the above.
10.3-16 Treasury shares have a:
A) debit balance, the same as other equity accounts.
B) debit balance, the opposite of other equity accounts.
C) credit balance, the same as other equity accounts.
D) credit balance, the opposite of other equity accounts.
10.3.17 A company should recognize a gain on treasury shares:
A) when treasury shares is sold for more than the par value of the shares.
B) when treasury shares is purchased for less than the par value of the shares.
C) when treasury shares is sold for less than the par value of the shares.
D) in none of the above situations. No gain is recognized on treasury shares transactions.
10.3.18 Retained earnings:
A) can only be debited in any treasury shares transaction.
B) can only be credited in any treasury shares transaction.
C) can be debited or credited in any treasury shares transaction.
D) is never part of any treasury shares transaction.
10.3-19 If treasury shares are sold at a price below its reacquisition cost, and there is no balance in the
Paid-in Capital from Treasury shares Transactions account, the difference is:
A) debited to Treasury shares.
B) debited to Retained Earnings.
C) debited to Loss on Sale of Treasury shares.
D) credited to Paid-in Capital from Treasury shares Transactions.
10.3-20 Gertrudis Corporation has $10 par value Ordinary shares and has 1,000,000 shares authorized,
750,000 shares issued. The entry to record Gertrudis’ purchase of 10,000 ordinary shares at $15
per share is a:
A) credit to Paid-in Capital in Excess of Par Value–Ordinary for $65,000.
B) debit to Treasury shares for $150,000.
C) credit to Ordinary shares for $130,000.
D) debit to Retained Earnings for $65,000.
10.3-21 The entry to record the sale of 7,000 treasury shares that cost $11 per share for $13 per
share includes a:
A) credit to Paid-in Capital in Excess of Par Value–Ordinary for $98,000.
B) debit to debit to Retained Earnings for $98,000.
C) credit to Paid-in Capital from Treasury shares transactions for $14,000.
D) debit to Treasury shares for $24,000.
10.3-22 If 3,000 shares of $5 par ordinary shares are purchased as treasury shares for $16, the
total shareholders equity:
A) decreases by $48,000.
B) decreases by $1,500.
C) is the same as before the purchase of the treasury shares.
D) increases by $46,500.
10.3-23 Monteverde Company repurchased 1,000 shares of its $5 par value ordinary shares at $10
per share. The entry to record this transaction includes a:
A) debit to Ordinary shares for $5,000.
B) debit to Treasury shares for $5,000.
C) debit to Ordinary shares for $10,000.
D) debit to Treasury shares for $10,000.
10.3-24 Cole Company issued 10,000 ordinary shares. Cole purchased 1,000 shares and later
reissued 500 shares. How many shares are issued and outstanding?
A) 10,000 issued and 9,500 outstanding
B) 9,000 issued and 9,000 outstanding
C) 9,500 issued and 9,000 outstanding
D) 10,000 issued and 10,000 outstanding
10.3-25 CityScape Company repurchased 10,000 shares of its own $5 par value ordinary shares
for $10 per share. The company later reissued 5,000 shares for $15 per share. These transactions
resulted in a:
A) $100,000 increase in paid-in capital.
B) $25,000 increase in paid-in capital.
C) $25,000 gain on the sale of treasury shares.
D) $100,000 gain on the sale of treasury shares.
10.3-26 A corporation purchased 10,000 shares of its own $20 par value ordinary shares for $30
per share. The effect on total shareholders’ equity is:
A) $200,000 increase.
B) $200,000 decrease.
C) $300,000 increase.
D) $300,000 decrease.
10.3-27 Which of the following statements regarding the retirement of shares is INCORRECT?
A) Retiring shares decreases the corporation’s outstanding shares.
B) When retiring shares, the corporation removes the balances from all paid-in capital accounts
related to the retired shares.
C) Retirements of ordinary shares occur more often than retirements of preference shares.
D) Retired shares cannot be reissued.
10.3-28 Gertrudis Corporation has $10 par value Ordinary shares with 1,000,000 shares
authorized, and a value of $7,000,000 before purchasing 3,000 ordinary shares. The resulting
number of ordinary shares issued and outstanding is:
A) 750,000 shares issued and 697,000 shares outstanding.
B) 700,000 shares issued and 697,000 shares outstanding.
C) 750,000 shares issued and 747,000 shares outstanding.
D) 700,000 shares issued and 747,000 shares outstanding.
10.3-29 A retirement of ordinary shares:
A) decreases the number of ordinary shares issued and reduces the balance in the ordinary shares
account.
B) decreases the number of ordinary shares issued.
C) reduces the balance in the Ordinary shares account.
D) produces a gain or loss reported on the income statement.
10.4-1 A credit balance in Retained Earnings indicates that a company’s lifetime earnings exceeded its
lifetime losses and dividends issued.
10.4-2 The retained earnings account is a reservoir of cash for paying dividends to the shareholders.
10.4-3 If a corporation has a large balance in retained earnings, it will have enough cash to pay a
dividend.
10.4-4 The normal balance of retained earnings is a credit balance.
10.4-5 Dividends in arrears plus the current year dividend must be paid to the holders of preference
shares before ordinary shareholders can receive a dividend.
10.4-6 The ordinary shareholders receive dividends only if the total dividend is large enough to pay the
preference shareholders first.
10.4-7 Share dividends are recorded in retained earnings at the market value of shares distributed.
10.4-8 Dividends in arrears on cumulative preference shares are legal liabilities of the corporation until
the dividends are paid.
10.4-9 The declaration and distribution of a share dividend may increase paid-in capital.
10.4-10 Small share dividends are recorded at par value and large share dividends are recorded at
market value.
10.4-11 A stock split increases total shareholders’ equity.
10.4-12 A retained earnings deficit indicates that:
A) a company has experienced a net loss for the current year.
B) treasury shares was reissued at a loss.
C) a proposed dividend payment exceeds the existing cash on hand.
D) a company’s lifetime losses and dividends exceed lifetime earnings.
10.4-13 If a company has a deficit in retained earnings:
A) the deficit is subtracted to determine total shareholders’ equity.
B) the deficit is added to determine total shareholders’ equity.
C) then retained earnings has a credit balance.
D) both A and C are true.
10.4-14 A distribution, usually in cash, by a corporation to its shareholders is called a:
A) deficit.
B) dividend.
C) stock split.
D) treasury shares.
10.4-15 In order for a company to pay a dividend:
A) it must have enough retained earnings to declare the dividend.
B) it must have enough cash to pay the dividend.
C) it must have a legal liability to do so.
D) both A and B must occur.
10.4-16 The authority to declare a dividend lies with the:
A) shareholders.
B) CFO.
C) Board of Directors.
D) SEC.
10.4-17 A dividend becomes a legal liability of the corporation on the:
A) declaration date.
B) distribution date.
C) payment date.
D) record date.
10.4-18 The journal entry on the date of record is:
A) to debit retained earnings and credit dividends payable.
B) to debit dividends payable and credit cash.
C) non-existent. No journal entry is required on the date of record.
D) to credit dividends and credit cash.
10.4-19 The date, which follows the date of declaration, and determines which
shareholders will receive the dividend is the:
A) date of record.
B) distribution date.
C) payment date.
D) determination date.
10.4-20 Which of the following transactions does NOT decrease cash?
A) Treasury shares purchases
B) Cash dividends
C) Stock splits
D) Shares retirements
10.4-21 The declaration of a cash dividend:
A) increases liabilities and increases shareholders’ equity.
B) increases liabilities and decreases shareholders’ equity.
C) increases liabilities and reduces assets.
D) reduces liabilities and increases shareholders’ equity.
10.4-22 The entry to record the declaration of a cash dividend includes a debit to:
A) Dividends Payable and a credit to Cash.
B) Retained Earnings and a credit to Cash.
C) Retained earnings and a credit to Dividends Payable.
D) Cash and a credit to Dividends Payable.
10.4-23 The payment of a cash dividend previously recorded:
A) increases liabilities and increases assets.
B) increases shareholders’ equity and reduces liabilities.
C) reduces liabilities and reduces assets.
D) reduces shareholders’ equity and reduces assets.
10.4-24 The entry to record the payment of a cash dividend previously declared includes a debit to:
A) Retained Earnings and a credit to Dividends Payable.
B) Dividends Payable and a credit to Cash.
C) Cash and a credit to Dividends Payable.
D) Retained Earnings and a credit to Cash.
10.4-25 Before a company can pay dividends to the ordinary shareholders, the owners of
cumulative preference shares must receive:
A) all dividends in arrears, but not the current year’s dividends.
B) all dividends in arrears plus the current year’s dividends.
C) the current year’s dividends, but not dividends in arrears.
D) neither the current year’s dividends nor dividends in arrears.
10.4-26 When a company has both preference shares and ordinary shares:
A) the ordinary shareholders receive dividends before the preference shareholders.
B) no particular order needs to be followed for the payment of dividends.
C) the preference shareholders receive their dividends before the ordinary shareholders.
D) the preference shareholders receive their dividends before the ordinary shareholders only if
the preference shares is cumulative.