CHAPTER 15
STOCKHOLDERS’ EQUITY
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer No. Description
MULTIPLE CHOICE—Conceptual
Answer No. Description
Test Bank for Intermediate Accounting, Seventeenth Edition
15 – 2
MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
MULTIPLE CHOICE—Computational
Answer No. Description
Stockholders’ Equity
15 – 3
MULTIPLE CHOICE—Computational (cont.)
Answer No. Description
Test Bank for Intermediate Accounting, Seventeenth Edition
15 – 4
MULTIPLE CHOICE—CPA Adapted
Answer No. Description
EXERCISES
Item Description
E15-131 Lump sum issuance of stock.
E15-132 Treasury stock.
E15-133 Treasury stock.
E15-134 Treasury stock.
E15-135 Treasury stock.
E15-136 Stockholders’ equity.
E15-137 Stock dividends.
E15-138 Stock dividends and stock splits.
E15-139 Computation of selected ratios.
*E15-140 Dividends on preferred stock.
*E15-141 Dividends on preferred stock.
PROBLEMS
Item Description
P15-142 Equity transactions.
P15-143 Treasury stock transactions.
P15-144 Stock dividends.
P15-145 Equity transactions.
*P15-146 Dividends on preferred and common stock.
Stockholders’ Equity
15 – 5
CHAPTER LEARNING OBJECTIVES
1. Describe the corporate form and the issuance of shares of stock.
2. Describe the accounting and reporting for reacquisition of shares.
3. Explain the accounting and reporting issues related to dividends.
4. Indicate how to present and analyze stockholders’ equity.
*5. Explain the different types of preferred stock dividends and their effect on book value per
share.
*6. Compare the accounting procedures for stockholders’ equity under GAAP and IFRS.
Test Bank for Intermediate Accounting, Seventeenth Edition
15 – 6
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
Item
LO
BT
Item
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Item
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Item
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TRUE-FALSE STATEMENTS
1
K
5.
1
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9.
1
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13.
3
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17.
3
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1
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1
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10.
2
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3
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3
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1
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19.
4
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1
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12.
2
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16.
3
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20.
4
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MULTIPLE CHOICE QUESTIONS
1
K
43.
1
K
65.
4
K
87.
3
AP
109.
4
AN
1
K
44.
1
K
66.
4
C
88.
3
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110.
4
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1
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45.
1
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67.
4
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89.
3
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111.
4
AP
1
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46.
1
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68.
5
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90.
3
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112.
4
AP
1
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47.
3
C
69.
5
K
91.
3
AP
113.
4
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1
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48.
3
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70.
5
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92.
3
AP
114.
4
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1
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49.
3
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71.
1
AP
93.
3
AP
115.
5
AP
1
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50.
3
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72.
1
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94.
3
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116.
5
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1
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51.
3
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73.
1
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95.
3
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117.
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52.
3
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74.
1
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96.
3
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118.
5
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53.
3
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75.
1
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97.
3
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119.
5
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1
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54.
3
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76.
1
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98.
3
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120.
1
C
1
K
55.
3
K
77.
1
AP
99.
3
AN
121.
1
AP
1
K
56.
3
C
78.
2
AP
100.
3
AN
122.
2
AP
1
C
57.
3
AP
79.
2
AP
101.
3
AP
123.
2
AP
2
AN
58.
3
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80.
2
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102.
3
AN
124.
2
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2
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59.
3
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81.
2
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103.
4
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125.
3
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2
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60.
3
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82.
2
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104.
4
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126.
3
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2
C
61.
3
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83.
2
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105.
3
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127.
3
AN
2
AP
62.
3
C
84.
2
AP
106.
3
AN
128.
3
AN
2
C
63.
4
K
85.
2
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107.
4
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129.
3
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2
C
64.
4
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86.
2
AP
108.
4
AP
130.
5
AP
EXERCISES
1
AP
134.
2
AP
137.
3
C
140.
5
AP
2
C
135.
2
AP
138.
3
AN
141.
5
AP
2
AP
136.
3
AN
139.
4
AP
PROBLEMS
1
AP
143.
2
AP
144.
3
AP
145.
3
AP
146.
5
AP
Stockholders’ Equity
15 – 7
TRUE-FALSE—Conceptual
1. A corporation is incorporated in only one state regardless of the number of states in which
it operates.
2. The preemptive right allows stockholders the right to vote for directors of the company.
3. Common stock is the residual corporate interest that bears the ultimate risks of loss.
4. Earned capital consists of additional paid-in capital and retained earnings.
5. True no-par stock should be carried in the accounts at issue price without any additional
paid-in capital reported.
6. Companies allocate the proceeds received from a lump-sum sale of securities based on
the securities’ par values.
7. Companies should record stock issued for services or noncash property at either the fair
value of the stock issued or the fair value of the consideration received, whichever is more
clearly determinable.
8. Participating preferred stock requires that if a company fails to pay a dividend in any year,
it must make it up in a later year before paying any common dividends.
9. Callable preferred stock permits the corporation at its option to redeem the outstanding
preferred shares at specified future dates and at stipulated prices.
10. Treasury stock is a company’s own stock that has been reacquired and retired.
11. The cost method records all transactions in treasury shares at their cost and reports the
treasury stock as a deduction from capital stock only.
Test Bank for Intermediate Accounting, Seventeenth Edition
15 – 8
12. When a corporation sells treasury stock below its cost, it usually debits the difference
between cost and selling price to Paid-in Capital from Treasury Stock.
13. The laws of some states require that corporations restrict their legal capital from
distribution to stockholders.
14. The SEC makes it mandatory for companies to disclose their dividend policy in their
annual report.
15. All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a
corporation.
16. Dividends payable in assets of the corporation other than cash are called property
dividends or dividends in kind.
17. When a stock dividend is less than 20-25 percent of the common stock outstanding, a
company is required to transfer the fair value of the stock issued from retained earnings.
18. Stock splits and large stock dividends have the same effect on a company’s retained
earnings and total stockholders’ equity.
19. The rate of return on common stock equity is computed by dividing net income by the
average common stockholders’ equity.
20. The payout ratio is determined by dividing cash dividends paid to common stockholders
by net income available to common stockholders.
True-False Answers—Conceptual
Stockholders’ Equity
15 – 9
MULTIPLE CHOICE—Conceptual
21. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
22. The preemptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
23. The preemptive right enables a stockholder to
a. retain their ownership interest if additional stock is issued.
b. receive cash dividends after other classes of stock with the preemptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. receive unequal amounts of dividends on a percentage basis as the preferred
stockholders,
S24. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to accumulate
over its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to generate.
d. the total capital raised by a corporation within the limits set by the Securities and
Exchange Commission.
S25. Common stockholders of a business enterprise are said to be the residual owners. The
term residual owner means that shareholders
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise
ownership.
d. can negotiate individual contracts on behalf of the enterprise.
26. Total stockholders’ equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by a company.
c. a claim against a portion of the total assets of a company.
d. only the amount of earnings that have been retained in the business.
Test Bank for Intermediate Accounting, Seventeenth Edition
15 – 10
27. A primary source of stockholders’ equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.
28. Stockholders’ equity is generally classified into two major categories:
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.
29. The accounting problem in a lump sum issuance is the allocation of proceeds between the
classes of securities. An acceptable method of allocation is
a. the pro forma method.
b. the proportional method.
c. the incremental method.
d. either the proportional method or the incremental method.
30. When a corporation issues its capital stock in payment for services, the least appropriate
basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. The market value of the services received or the market value of the share issues
31. Direct costs incurred to sell stock such as underwriting costs should be accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset.
a. 1
b. 2
c. 3
d. 1 or 3
32. A “secret reserve” will be created if
a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders’ equity is overstated.
Stockholders’ Equity
15 – 11
P33. Which of the following represents the total number of shares that a corporation may issue
under the terms of its charter?
a. Authorized shares
b. Issued shares
c. Unissued shares
d. Outstanding shares
S34. Stock that has a fixed per-share amount printed on each stock certificate is called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.
S35. Which of the following is not a legal restriction related to profit distributions by a
corporation?
a. The amount distributed to owners must be in compliance with the state laws governing
corporations.
b. The amount distributed in any one year can never exceed the net income reported for
that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to preferences
and participation.
S36. In January 2020, Finley Corporation, a newly formed company, issued 10,000 shares of
its $10 par common stock for $15 per share. On July 1, 2020, Finley Corporation
reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of
these treasury shares
a. decreased total stockholders’ equity.
b. increased total stockholders’ equity.
c. did not change total stockholders’ equity.
d. decreased the number of issued shares.
P37. Treasury shares are shares
a. held as an investment by the treasurer of the corporation.
b. held as an investment of the corporation.
c. issued and outstanding.
d. issued but not outstanding.
Test Bank for Intermediate Accounting, Seventeenth Edition
15 – 12
38. When treasury stock is purchased for more than the par value of the stock and the cost
method is used to account for treasury stock, what account(s) should be debited?
a. Treasury stock for the par value and paid-in capital in excess of par for the excess of
the purchase price over the par value.
b. Paid-in capital in excess of par for the purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained earnings for the excess of the purchase
price over the par value.
39. “Gains” on sales of treasury stock (using the cost method) should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.
40. Porter Corp. purchased its own par value stock on January 1, 2020 for $20,000 and
debited the treasury stock account for the purchase price. The stock was subsequently
sold for $12,000. The $8,000 difference between the cost and sales price should be
recorded as a deduction from
a. additional paid-in capital to the extent that previous net “gains” from sales of the same
class of stock are included therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as to whether or not there have been previous
net “gains” from sales of the same class of stock included therein.
c. retained earnings.
d. net income.
41. How should a “gain” from the sale of treasury stock be reflected when using the cost
method of recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an other revenue and gain shown on the income statement.
42. Which of the following best describes a possible result of treasury stock transactions by a
corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.
Stockholders’ Equity
15 – 13
43. Which of the following features of preferred stock makes it more like a debt than an equity
instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative
44. The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to the par value of the preferred stock.
b. requires that dividends not paid in any year must be made up in a later year before
dividends are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is equal to the par
value of common stock at which time it can be converted into common stock.
d. enables a preferred stockholder to accumulate dividends until they equal the par value
of the stock and receive the stock in place of the cash dividends.
P45. According to the FASB, redeemable preferred stock should be
a. included with common stock.
b. included as a liability.
c. included in stockholders’ equity.
d. included as a contra item in stockholders’ equity.
S46. Cumulative preferred dividends in arrears should be shown in a corporation’s balance
sheet as
a. an increase in current liabilities.
b. an increase in stockholders’ equity.
c. a footnote.
d. an increase in current liabilities for the current portion and long-term liabilities for the
long-term portion.
47. At the date of the financial statements, common stock shares issued would exceed
common stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.
48. An entry is not made on the
a. date of declaration.
b. date of record.
c. date of payment.
d. date or payment and date of declaration.
Test Bank for Intermediate Accounting, Seventeenth Edition
15 – 14
49. Cash dividends are paid on the basis of the number of shares
a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.
50. Which of the following statements about property dividends is not true?
a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carrying value (book
value) of the nonmonetary assets transferred.
d. Property dividends may be merchandise or real estate.
51. Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December
31, 2020, Houser distributed these shares of stock as a dividend to its stockholders. This
is an example of a
a. property dividend.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.
52. A dividend which is a return to stockholders of a portion of their original investments is a
a. liquidating dividend.
b. property dividend.
c. liability dividend.
d. participating dividend.
53. A mining company declared a liquidating dividend. The journal entry to record the
declaration must include a debit to
a. Retained Earnings.
b. a paid-in capital account.
c. Accumulated Depletion.
d. Accumulated Depreciation.
54. If management wishes to “capitalize” part of the earnings, it may issue a
a. cash dividend.
b. stock dividend.
c. property dividend.
d. liquidating dividend.
Stockholders’ Equity
15 – 15
55. Which dividends do not reduce stockholders’ equity?
a. Cash dividends
b. Stock dividends
c. Property dividends
d. Liquidating dividends
56. The declaration and issuance of a stock dividend larger than 25% of the shares previously
outstanding
a. increases common stock outstanding and increases total stockholders’ equity.
b. decreases retained earnings but does not change total stockholders’ equity.
c. may increase or decrease paid-in capital in excess of par but does not change total
stockholders’ equity.
d. increases retained earnings and increases total stockholders’ equity.
57. Quirk Corporation issued a 100% stock dividend of its common stock which had a par
value of $10 before and after the dividend. At what amount should retained earnings be
capitalized for the additional shares issued?
a. There should be no capitalization of retained earnings.
b. Par value
c. Fair value on the declaration date
d. Fair value on the payment date
58. The issuer of a 5% common stock dividend to common stockholders should transfer from
retained earnings to paid-in capital an amount equal to the
a. fair value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.
59. At the date of declaration of a small common stock dividend, the entry should not include
a. a credit to Common Stock.
b. a credit to Paid-in Capital in Excess of Par.
c. a debit to Retained Earnings.
d. a credit to Common Stock Dividend Distributable.
60. The balance in Common Stock Dividend Distributable should be reported as a(n)
a. deduction from common stock issued.
b. addition to capital stock.
c. current liability.
d. contra current asset.
Test Bank for Intermediate Accounting, Seventeenth Edition
15 – 16
61. A feature common to both stock splits and stock dividends is
a. a transfer to earned capital of a corporation.
b. that there is no effect on total stockholders’ equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.
62. What effect does the issuance of a 2–for-1 stock split have on each of the following?
Par Value per Share Retained Earnings
a. No effect No effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease
63. Which one of the following disclosures should be made in the equity section of the
balance sheet, rather than in the notes to the financial statements?
a. Dividend preferences
b. Liquidation preferences
c. Call prices
d. Conversion or exercise prices
64. The rate of return on common stock equity is calculated by dividing
a. net income less preferred dividends by average common stockholders’ equity.
b. net income by average common stockholders’ equity.
c. net income less preferred dividends by ending common stockholders’ equity.
d. net income by ending common stockholders’ equity.
65. The payout ratio can be calculated by dividing
a. dividends per share by earnings per share.
b. cash dividends by net income less preferred dividends.
c. cash dividends by market price per share.
d. dividends per share by earnings per share and dividing cash dividends by net income
less preferred dividends.
Stockholders’ Equity
15 – 17
66. Younger Company has outstanding both common stock and nonparticipating, non-
cumulative preferred stock. The liquidation value of the preferred is equal to its par value.
The book value per share of the common stock is unaffected by
a. the declaration of a stock dividend on preferred payable in preferred stock when the
market price of the preferred is equal to its par value.
b. the declaration of a stock dividend on common stock payable in common stock when
the market price of the common is equal to its par value.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2–for-1 split of the common stock.
P67. Assume common stock is the only class of stock outstanding in the Manley Corporation.
Total stockholders’ equity divided by the number of common stock shares outstanding is
called
a. book value per share.
b. par value per share.
c. stated value per share.
d. fair value per share.
*68. Dividends are not paid on
a. noncumulative preferred stock.
b. nonparticipating preferred stock.
c. treasury common stock.
d. cumulative preferred stock
*69. Noncumulative preferred dividends in arrears
a. are not paid or disclosed.
b. must be paid before any other cash dividends can be distributed.
c. are disclosed as a liability until paid.
d. are paid to preferred stockholders if sufficient funds remain after payment of the
current preferred dividend.
*70. How should cumulative preferred dividends in arrears be shown in a corporation’s balance
sheet?
a. Note disclosure
b. Increase in stockholders’ equity
c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within the year or
operating cycle, and increase in long-term liabilities for the balance
Test Bank for Intermediate Accounting, Seventeenth Edition
15 – 18
Multiple Choice Answers—Conceptual
Stockholders’ Equity
15 – 19
MULTIPLE CHOICE—Computational
Use the following information for questions 71 and 72.
Presented below is information related to Hale Corporation:
Common Stock, $1 par $3,500,000
Paid-in Capital in Excess of Par—Common Stock 550,000
Preferred 8 1/2% Stock, $50 par 2,000,000
Paid-in Capital in Excess of Par—Preferred Stock 400,000
Retained Earnings 1,500,000
Treasury Common Stock (at cost) 150,000
71. The total stockholders’ equity of Hale Corporation is
a. $7,800,000.
b. $7,950,000.
c. $6,300,000.
d. $6,450,000.
72. The total paid-in capital (cash collected) related to the common stock is
a. $3,500,000.
b. $4,050,000.
c. $5,450,000.
d. $3,900,000.
73. Manning Company issued 10,000 shares of its $5 par value common stock having a fair
value of $25 per share and 15,000 shares of its $15 par value preferred stock having a fair
value of $20 per share for a lump sum of $520,000. How much of the proceeds would be
allocated to the common stock?
a. $250,000
b. $236,364
c. $283,636
d. $276,250
74. Norton Company issues 4,000 shares of its $5 par value common stock having a fair
value of $25 per share and 6,000 shares of its $15 par value preferred stock having a fair
value of $20 per share for a lump sum of $205,000. What amount of the proceeds should
be allocated to the preferred stock?
a. $167,727
b. $128,125
c. $111,818
d. $93,181
Test Bank for Intermediate Accounting, Seventeenth Edition
15 – 20
75. Berry Corporation has 100,000 shares of $10 par common stock authorized. The following
transactions took place during 2020, the first year of the corporation’s existence:
Sold 20,000 shares of common stock for $13.50 per share.
Issued 20,000 shares of common stock in exchange for a patent valued at $300,000.
At the end of the Berry’s first year, total paid-in capital amounted to
a. $120,000.
b. $270,000.
c. $300,000.
d. $570,000.
76. Glavine Company issues 6,000 shares of its $5 par value common stock having a fair
value of $25 per share and 9,000 shares of its $15 par value preferred stock having a fair
value of $20 per share for a lump sum of $310,000. The proceeds allocated to the
common stock is
a. $124,000
b. $140,909
c. $150,000
d. $169,091
77. Wheeler Company issued 5,000 shares of its $5 par value common stock having a fair
value of $25 per share and 7,500 shares of its $15 par value preferred stock having a fair
value of $20 per share for a lump sum of $253,000. The proceeds allocated to the
preferred stock is
a. $151,800
b. $150,000
c. $138,000
d. $115,000
78. Pember Corporation started business in 2015 by issuing 200,000 shares of $20 par
common stock for $27 each. In 2020, 25,000 of these shares were purchased for $39 per
share by Pember Corporation and held as treasury stock. On June 15, 2021, these 25,000
shares were exchanged for a piece of property that had an assessed value of $760,000.
Pember’s stock is actively traded and had a market price of $45 on June 15, 2021. The
cost method is used to account for treasury stock. The amount of paid-in capital from
treasury stock transactions resulting from the above events would be
a. $750,000.
b. $450,000.
c. $215,000.
d. $150,000.