120. A company declared a $0.50 per share cash dividend. The company has 20,000 shares
authorized, 9,000 shares issued, and 8,000 shares of common stock outstanding. The journal
entry to record the dividend declaration is:
A. Debit Retained Earnings $4,000; credit Common Dividends Payable $4,000.
B. Debit Common Dividends Payable $4,000; credit Cash $4,000.
C. Debit Retained Earnings $4,500; credit Common Dividends Payable $4,500.
D. Debit Common Dividends Payable $4,500; credit Cash $4,500.
E. Debit Retained Earnings $10,000; credit Common Dividends Payable $10,000.
121. A corporation’s distribution of additional shares of its own stock to its stockholders
without the receipt of any payment in return is called a:
A. Stock dividend.
B. Stock subscription.
C. Premium on stock.
D. Discount on stock.
E. Treasury stock.
122. A stock dividend:
A. Is not a liability on the balance sheet.
B. Does not reduce a corporation’s assets and stockholders’ equity.
C. Transfers a portion of equity from retained earnings to contributed capital.
D. Does not affect total equity, but does affect the components of equity.
E. All of the options are correct.
123. On September 1, a corporation had 50,000 shares of $5 par value common stock, and
$1,000,000 of retained earnings. On that date, when the market price of the stock is $15 per
share, the corporation issues a 2-for-1 stock split. The general journal entry to record this
transaction is:
A. Debit Retained Earnings $750,000; credit Common Stock Split Distributable $750,000.
B. Debit Retained Earnings $750,000; credit Common Stock $750,000.
C. Debit Retained Earnings $250,000; credit Common Stock $250,000.
D. Debit Retained Earnings $250,000; credit Stock Split Payable $250,000.
E. No entry is made for this transaction.
124. All of the following statements regarding stock dividends are true except:
A. Directors can use stock dividends to keep the market price of the stock affordable.
B. Stock dividends provide evidence of management’s confidence that the company is doing
well.
C. Stock dividends do not reduce assets or equity.
D. Stock dividends decrease the number of shares outstanding.
E. Stock dividends transfer a portion of equity from retained earnings to contributed capital.
125. A stock dividend transfers:
A. Contributed capital to retained earnings.
B. Retained earnings to contributed capital.
C. Retained earnings to assets.
D. Contributed capital to assets.
E. Assets to contributed capital.
126. A corporation declared and issued a 15% stock dividend on November 1. The following
information was available immediately prior to the dividend:
Retained earnings ……………………………. $750,000
Shares issued and outstanding …………….. 60,000
Market value per share ……………………… $15
Par value per share ………………………….. $5
The amount that contributed capital will increase (decrease) as a result of recording this stock
dividend is:
A. $45,000.
B. $135,000.
C. $(45,000).
D. $(135,000).
E. $0.
127. A corporation had 50,000 shares of $20 par value common stock outstanding on July 1.
Later that day the board of directors declared a 10% stock dividend when the market value of
each share was $27. The entry to record this dividend is:
A. Debit Retained Earnings $135,000; credit Common Stock Dividend Distributable
$135,000.
B. Debit Retained Earnings $135,000; credit Cash $135,000.
C. Debit Retained Earnings $135,000; credit Common Stock Dividend Distributable
$100,000; credit Paid-In Capital in Excess of Par Value, Common Stock $35,000.
D. Debit Retained Earnings $100,000; credit Common Stock Dividend Distributable
$100,000.
E. No entry is made until the stock is issued.
128. A corporation had 10,000 shares of $10 par value common stock outstanding when the
board of directors declared a stock dividend of 3,000 shares. At the time of the stock dividend,
the market value per share was $12. The entry to record this dividend is:
A. Debit Retained Earnings $36,000; credit Common Stock Dividend Distributable $36,000.
B. Debit Retained Earnings $36,000; credit Common Stock Dividend Distributable $30,000;
credit Paid-In Capital in Excess of Par Value, Common Stock $6,000.
C. Debit Common Stock Dividend Distributable $36,000; credit Retained Earnings $36,000.
D. Debit Retained Earnings $30,000; credit Common Stock Dividend Distributable $30,000.
E. No entry is needed.
129. Preferred stock which confers no right to prior periods’ unpaid dividends if they were not
declared is called:
A. Noncumulative preferred stock.
B. Participating preferred stock.
C. Callable preferred stock.
D. Cumulative preferred stock.
E. Convertible preferred stock.
130. Preferred stock that the issuing corporation at its option may retire by paying a specified
amount to the preferred stockholders is called:
A. Convertible preferred stock.
B. Callable preferred stock.
C. Premium stock.
D. Cumulative preferred stock.
E. Participating preferred stock.
131. Achieving an increased return on common stock by paying dividends on preferred stock
at a rate that is less than the rate of return earned with the assets invested from the preferred
stock issuance is called:
A. Financial leverage.
B. Discount on stock.
C. Premium on stock.
D. Preemptive right.
E. Capital gain.
132. Preferred stock with a feature allowing preferred stockholders to share with common
shareholders in any dividends in excess of the percent or dollar amount stated on the preferred
stock is called:
A. Cumulative preferred stock.
B. Callable preferred stock.
C. Participating preferred stock.
D. Convertible preferred stock.
E. Preferential preferred stock.
133. Xtreme Sports has $100,000 of 8% noncumulative, nonparticipating, preferred stock
outstanding. Xtreme Sports also has $500,000 of common stock outstanding. In the
company’s first year of operation, no dividends were paid. During the second year, Xtreme
Sports paid cash dividends of $30,000. This dividend should be distributed as follows:
A. $8,000 preferred; $22,000 common.
B. $16,000 preferred; $14,000 common.
C. $7,500 preferred; $22,500 common.
D. $15,000 preferred; $15,000 common.
E. $0 preferred; $30,000 common.
134. A company has 1,000 shares of $50 par value, 4.5% cumulative and nonparticipating
preferred stock and 10,000 shares of $10 par value common stock outstanding. The company
paid total cash dividends of $1,000 in its first year of operation. The cash dividend that must
be paid to preferred stockholders in the second year before any dividend is paid to common
stockholders is:
A. $1,000.
B. $1,250.
C. $2,250.
D. $3,500.
E. $4,500.
135. Preferred stock on which the right to receive dividends is forfeited for any year that the
dividends are not declared is referred to as:
A. Participating preferred stock.
B. Callable preferred stock.
C. Cumulative preferred stock.
D. Convertible preferred stock.
E. Noncumulative preferred stock.
136. A dividend preference for preferred stock means that:
A. Preferred stockholders are allocated their dividends before dividends are allocated to
common shareholders.
B. Preferred shareholders are guaranteed dividends.
C. Dividends are paid quarterly.
D. Preferred stockholders prefer dividends more than common stockholders.
E. Dividends must be declared on preferred stock.
137. A company issued 7% preferred stock with a $100 par value. This means that:
A. Preferred shareholders have a guaranteed dividend.
B. The amount of the potential dividend is $7 per year per preferred share.
C. Preferred shareholders are entitled to 7% of the annual income.
D. The market price per share will approximate $100 per share.
E. Only 7% of the total paid-in capital can be preferred stock.
138. Stock that was reacquired and is still held by the issuing corporation is called:
A. Capital stock.
B. Treasury stock.
C. Redeemed stock.
D. Preferred stock.
E. Callable stock.
139. Treasury stock is classified as:
A. An asset account.
B. A contra asset account.
C. A revenue account.
D. A contra equity account.
E. A liability account.
140. The following data were reported by a corporation:
Authorized shares ……..…………………….. 20,000
Issued shares ……..………………………….. 15,000
Treasury shares ……..……………………….. 3,000
The number of outstanding shares is:
A. 12,000.
B. 15,000.
C. 17,000.
D. 20,000.
E. 23,000.
141. Corporations often buy back their own stock:
A. To avoid a hostile take-over.
B. To have shares available for a merger or acquisition.
C. To have shares available for employee compensation.
D. To maintain market value for the company stock.
E. All of the options are reasons for corporations buying back their own stock.
142. The following data has been collected about a company’s stockholders’ equity accounts:
Common stock $10 par value 20,000 shares
authorized and 10,000 shares issued, 1,000 shares in
treasury
$100,000
Paid-in capital in excess of par value, common stock 50,000
Retained earnings 25,000
Treasury stock 11,500
The treasury shares were all purchased at the same price.
The cost per share of the treasury stock is:
A. $1.15.
B. $1.28.
C. $11.50.
D. $10.50.
E. $10.00.
143. Prior to June 1, a company has never had any treasury stock transactions. A company
repurchased 100 shares of its common stock on June 1 for $5,000. On July 1, it reissued 50 of
these shares at $52 per share. On August 1, it reissued the remaining treasury shares at $49
per share. What is the balance in the Paid-in Capital, Treasury Stock account on August 2?
A. $5,050.
B. $2,600.
C. $100.
D. $50.
E. $0.
144. All of the following regarding accounting for Treasury Stock under U.S. GAAP and
IRFS is true except:
A. U. S. GAAP applies the principle that companies do not record gains or losses on
transactions involving their own stock.
B. Only gains are recognized on retirements of treasury stock under IFRS.
C. IFRS applies the principle that companies do not record gains or losses on transactions
involving their own stock.
D. Gains are not recognized on retirements of treasury stock under U. S. GAAP.
E. A company’s assets and equity are always reduced by the amount paid for the retiring
stock.
145. A company declared a $0.55 per share cash dividend. The company has 200,000 shares
authorized, 190,000 shares issued, and 8,000 shares in treasury stock. The journal entry to
record the dividend declaration is:
A. Debit Retained Earnings $104,500; credit Common Dividends Payable $104,500.
B. Debit Common Dividends Payable $104,500; credit Cash $104,500.
C. Debit Retained Earnings $100,100; credit Common Dividends Payable $100,100.
D. Debit Common Dividends Payable $100,100; credit Cash $100,100.
E. Debit Retained Earnings $110,000; credit Common Dividends Payable $110,000.
146. A company declared a $0.55 per share cash dividend. The company has 200,000 shares
authorized, 190,000 shares issued, and 8,000 shares in treasury stock. The journal entry to
record the payment of the dividend is:
A. Debit Retained Earnings $104,500; credit Common Dividends Payable $104,500.
B. Debit Common Dividends Payable $104,500; credit Cash $104,500.
C. Debit Retained Earnings $100,100; credit Common Dividends Payable $100,100.
D. Debit Common Dividends Payable $100,100; credit Cash $100,100.
E. Debit Retained Earnings $110,000; credit Common Dividends Payable $110,000.
147. What is a corporation? Identify the key advantages and disadvantages of corporations.
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148. What are the rights generally granted to common stockholders?
149. Explain stock options and their effect on the company.
150. Explain how to calculate the price-earnings ratio and describe how it is used in analysis
of a company’s financial condition and performance.
151. Explain how to compute dividend yield and discuss how it is used in analysis of a
company’s financial condition.
152. Explain how to compute book value per share and discuss how it can be used to analyze
the financial condition of a corporation.
153. What is a stock split? How is a stock split different from a stock dividend?
154. Explain the difference between a large stock dividend and a small stock dividend. In
addition, explain how to record these two types of stock dividends.
155. What is treasury stock? How is the purchase and sale of treasury stock recorded?
156. How is the retirement of stock recorded?
Problems
157. A company is authorized to issue 50,000 shares of $50 par value, 8%, cumulative, fully
participating preferred stock, and 750,000 shares of $5 par value common stock. Prepare
journal entries to record the following selected transactions that occurred during the
company’s first year of operations:
May 5 Exchanged 2,000 shares of preferred stock for a building with a market value of
$135,000.
July 20 Sold 1,550 shares of preferred stock for $50 cash per share.
Dec. 20 Sold 1,000 shares of preferred stock at $55 cash per share.
158. A corporation received its charter and began business this year. The company is
authorized to issue 50,000 shares of $100 par, 10%, noncumulative, nonparticipating
preferred stock, and 500,000 shares of no-par common stock. The following selected
transactions occurred during this year:
Apr. 5 Issued 250 shares of preferred stock for $104 cash per share.
June 15 Exchanged 750 shares of common stock for $15,000 in legal services incurred in
the organization of the company.
Prepare journal entries to record these transactions.
159. A company is authorized to issue 50,000 shares of $50 par, 10%, noncumulative,
nonparticipating preferred stock and 500,000 shares of no-par common stock. Prepare journal
entries to record the following selected transactions that occurred during this year:
Mar. 1 Issued 1,000 shares of preferred stock for $30 cash per share.
15 Exchanged 2,000 shares of preferred stock for equipment and merchandise inventory with
market values of $90,000 and $20,000, respectively.
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160. Given the following information about a corporation’s current year activities, compute
the retained earnings for the current year.
Retained earnings, December 31 (prior year) $250,000
Cost of goods sold $90,000
Other operating expenses $54,000
Cash dividends $30,800
Correction of understatement of net income in prior
period (inventory error)
$23,000
Stock dividends $20,000
Net income $36,000
161. Explain where each of the following items should appear in the financial statements of a
corporation:
(1) The accounting department discovered that an entry was made last year to Prepaid
Insurance instead of to Insurance Expense. The after-tax effect of the charge to Prepaid
Insurance was $11,000.
(2) The company grants five of its employees the option to purchase 100 shares of its $5 par
value common stock at its current market price of $20 per share anytime with the next five
years. None of the employees exercised the options in the current year.