Chapter 16—Contributed Capital Key
1. The corporate form of organization is important to the U.S. economy because
2. Universities, hospitals, and churches are examples of which type of corporation?
3. Which of the following is not a characteristic of the corporate form of business entity?
4. All of the following are true statements about a corporation except that it
5. Which of the following types of corporations is owned or operated by a government unit?
6. A corporation whose stock is traded on a stock exchange is called a(n)
7. A corporation that operates in Texas but is incorporated in Nevada is viewed as a
8. Smooth Corp. has both Class A and Class B shares of common stock. The difference between the two classes
of stock is most likely related to
9. Shares of capital stock issued to and held by stockholders as of a specific date are
Authorized
Issued
Outstanding
Capital Stock
Capital Stock
Capital Stock
I.
Yes
Yes
No
II.
Yes
Yes
Yes
III.
No
No
Yes
IV.
No
No
No
10. Which one of the following equations is accurate?
11. In most states, it is illegal to sell stock
12. Which of the following is not part of the stockholders’ equity section of the balance sheet?
13. The legal capital of a corporation may be any of the following except
14. A preemptive right is
15. Which one of the following statements is false?
16. Which one of the following phrases is least desirable when describing an amount received from a sale of
stock in excess of the par value of the stock?
17. The authorized shares of capital stock is the number of shares
18. If a company has 30,000 shares of treasury stock, 120,000 shares outstanding, and 500,000 shares
authorized, how many shares are issued?
19. Which of the following represents shares of stock that will be issued upon completion of an installment
purchase contract?
20. A corporation is a legal entity
21. A corporation’s legal capital
22. Exhibit 16-1
Hanson Co. issued 10,000 shares of its $5 par common stock for $15 a share. In addition, it incurred legal and
accounting fees, stock certificate costs, and other related expenses totaling $8,500.
Refer to Exhibit 16-1. Assume the sale was the initial issuance of stock at incorporation for Hanson Co. The
entry to record the sale would include a
23. Exhibit 16-1
Hanson Co. issued 10,000 shares of its $5 par common stock for $15 a share. In addition, it incurred legal and
accounting fees, stock certificate costs, and other related expenses totaling $8,500.
Refer to Exhibit 16-1. Assume the sale occurred after the initial issuance at incorporation. The entry to record
24. The Securities and Exchange Commission requires that Subscriptions Receivable be disclosed on the
financial statements filed with it as a(n)
25. Exhibit 16-2
Lowball, Inc., entered into a subscription contract with several subscribers that calls for the purchase of 2,000
shares of $5 par common stock for $15 a share. The contract calls for a 20% down payment and specifies that
any amounts not paid within the contract period will be forfeited in full.
Refer to Exhibit 16-2. The initial entry to record this subscription and the down payment would include a
26. Exhibit 16-2
Lowball, Inc., entered into a subscription contract with several subscribers that calls for the purchase of 2,000
shares of $5 par common stock for $15 a share. The contract calls for a 20% down payment and specifies that
any amounts not paid within the contract period will be forfeited in full.
Refer to Exhibit 16-2. Lowball received final payment (80%) on 1,800 shares and issued those shares.
Subscribers defaulted on 200 shares. The entries to record receipt of final payment and issuance of 1,800 shares
would include a
27. Exhibit 16-2
Lowball, Inc., entered into a subscription contract with several subscribers that calls for the purchase of 2,000
shares of $5 par common stock for $15 a share. The contract calls for a 20% down payment and specifies that
any amounts not paid within the contract period will be forfeited in full.
Refer to Exhibit 16-2. Lowball received final payment (80%) on 1,800 shares and issued those shares.
Subscribers defaulted on 200 shares. The entry to record the default on 200 shares would include a
28. When common stock is issued at an amount greater than par value, the difference between the par value and
the proceeds from the sale is recorded by
29. A corporation acquired a copyright by issuing 1,000 shares of $10 par common stock. At the time of the
exchange, the stock was selling for $40 per share. The copyright had a carrying value of $8,000 to the author.
The purchasing corporation should assign to the copyright a value of
30. A corporation issues 50 “packages” of securities for $154 per package. Each package consists of three
shares of $5 par common stock and one share of $50 par preferred stock. If the market values of $40 per share
for the common stock and $100 per share for preferred stock are known, the journal entry to record the sale
would assign a total value to the common stock (Common Stock and Additional Paid-in Capital on Common
Stock) of
31. In the financial statements, dividends in arrears on cumulative preferred stock should be
32. What account should be debited when stock issuance costs are associated with the initial issuance of stock at
incorporation?
33. When existing corporations issue stock, costs such as legal fees and underwriter’s fees are usually accounted
for as
34. Which one of the following entries would not be likely to be made by a corporation?
35. A company is exchanging its common stock for land in a nonmonetary exchange. This transaction should be
valued based upon the
36. In accounting for a stock split, a company usually
37. Werling Co. had 10,000 shares of $8 par common stock outstanding just prior to a stock split. The stock was
split two-for-one and the par value was reduced to $3. Which entry correctly records this stock split?
38. A noncompensatory stock option plan is designed to
39. Common stock issued to employees through the exercise of stock warrants under a stock option plan that is
classified as a noncompensatory stock option plan is recorded by the corporation at the
40. The value assigned to stock warrants for a noncompensatory stock option plan is calculated as
41. Assume common stock is issued to employees as a result of exercising stock warrants issued under a
noncompensatory stock option plan. Which of the following accurately describes the effect on the company’s
income, paid-in capital, and retained earnings, respectively?
42. How will stockholders’ equity and net income be affected by the issuance of stock warrants to employees
under a noncompensatory stock option plan?
Stockholders’ Equity
Net Income
I.
no effect
no effect
II.
no effect
decreased
III.
decreased
decreased
IV.
decreased
no effect
43. Which one of the following statements is not true with regard to employee compensatory stock option
plans?
44. For a noncompensatory employee stock option plan, a formal journal entry or entries would be required for
which of the following dates?
Issuance of Stock
Issuance of Stock
Warrants
Under the Plan
I.
Yes
Yes
II.
Yes
No
III.
No
No
IV.
No
Yes
45. A stock option plan will be defined as compensatory if it has which one of the following characteristics?
46. Which of the following can be accounted for under the intrinsic value method?
47. When stock options are exercised by an employee under a compensatory stock option plan, the issuance of
the common stock is recorded at the
48. Which of the following stock option plans would involve the creation of a liability account over the life of
the plan?
A. all stock option plans
B. fixed compensatory stock option plans
C. performance-based compensatory stock option plans
D. stock option plans with stock appreciation rights
49. The measurement date of an employee compensatory stock option plan under the intrinsic value method is
50. Under the fair value method, the grant date is the date
51. Under the fair value method, if an executive does not exercise a stock option and it is allowed to lapse,
Common Stock Option Warrants is debited. What is credited?
52. When using the preferred approach to account for a compensatory stock option plan, the total compensation
cost is the
53. When accounting for a fixed compensatory stock option plan, a company must make which of the following
on the date of grant?
54. On January 1, 2010, Wilson Corporation granted Emelia Walker, its president, a compensatory stock option
plan to purchase 8,000 shares of Wilson’s $10 par common stock. The option price is $25 per share and the
option has a fair value of $7 per option, which is exercisable on January 1, 2014, after four years of service.
How much compensation expense should Wilson recognize on December 31, 2010?
55. Exhibit 16-3
On January 1, 2010, Hilltop, Inc. granted to a key executive a fixed compensatory option plan for 1,000 shares
of $4 par common stock for $30 a share. The fair value per option on that date was $12 per option. The service
period extended through December 31, 2011.
Refer to Exhibit 16-3. What entry, if any, was required on December 31, 2010?
56. Exhibit 16-3
On January 1, 2010, Hilltop, Inc. granted to a key executive a fixed compensatory option plan for 1,000 shares
of $4 par common stock for $30 a share. The fair value per option on that date was $12 per option. The service
period extended through December 31, 2011.
Refer to Exhibit 16-3. Which balance sheet disclosure would be correct at December 31, 2010?
57. Exhibit 16-4
On January 1, 2010, Marvel, Inc., grants a compensatory stock option plan to 10 of its executives. The plan
allows each executive to buy 1,000 shares of its $1 par common stock at $30 a share after a three-year service
period. The value of each option is estimated to be $8. The company estimates it will have an annual 2%
employee turnover rate during the service period.
Refer to Exhibit 16-4. What is the compensation expense for the year ended December 31, 2011?
58. Exhibit 16-4
On January 1, 2010, Marvel, Inc., grants a compensatory stock option plan to 10 of its executives. The plan
allows each executive to buy 1,000 shares of its $1 par common stock at $30 a share after a three-year service
period. The value of each option is estimated to be $8. The company estimates it will have an annual 2%
employee turnover rate during the service period.
Refer to Exhibit 16-4. By how much has contributed capital increased as of the beginning of 2013?
59. For a compensatory stock option plan, any compensation cost related to the plan must be recognized over
60. For a compensatory stock option plan, a formal journal entry or entries would be required for which of the
following dates?
Issuance of Stock
Warrants on the
Issuance of Stock on
Grant Date
the Exercise Date
I.
Yes
Yes
II.
Yes
No
III.
No
No
IV.
No
Yes
61. How is Common Stock Option Warrants classified in the financial statements?
62. Exhibit 16-5
On January 1, 2010, Roberto Company adopts a compensatory stock option plan and grants 40 executives 1,000
shares each at $30 a share. The fair value per option is $7 on the grant date. The company estimates that its
annual employee turnover rate during the service period of three years will be 4%.
Refer to Exhibit 16-5. The journal entry to record compensation expense for 2010 will be (Round off any
turnover calculations to three decimal places.)
63. Exhibit 16-5
On January 1, 2010, Roberto Company adopts a compensatory stock option plan and grants 40 executives 1,000
shares each at $30 a share. The fair value per option is $7 on the grant date. The company estimates that its
annual employee turnover rate during the service period of three years will be 4%.
Refer to Exhibit 16-5. At the end of 2011, the company estimates that the employee turnover will be 5% a year
for the entire service period. The compensation expense for 2011 will be (Round off turnover calculations to
three decimal places and answer to the nearest dollar.)
64. Exhibit 16-5
On January 1, 2010, Roberto Company adopts a compensatory stock option plan and grants 40 executives 1,000
shares each at $30 a share. The fair value per option is $7 on the grant date. The company estimates that its
annual employee turnover rate during the service period of three years will be 4%.
Refer to Exhibit 16-5. At the end of 2011, the company estimates that the employee turnover will be 5% a year
for the entire service period. At the end of 2012, only 30,000 options vest as only 30 of the 40 executives
actually remain. The compensation expense for 2012 will be (Round off turnover calculations to three decimal
places and answer to the nearest dollar.)
65. Exhibit 16-6
On January 1, 2010, 50 executives were given a performance-based stock option plan that would award them
with a maximum of 200 shares of $10 par common stock for $20 a share. On the grant date, the fair value of an
option was $16.50. The number of options that will vest depends on the size of the annual average increase in
sales over the next three years according to the following table:
Annual Average Increase in Sales
No. of Shares
Greater than 5%
50
Greater than 10%
100
Greater than 15%
200
On the grant date, the company estimates the annual average sales increase will be 12%.
Refer to Exhibit 16-6. The estimated total compensation cost will be
66. Exhibit 16-6
On January 1, 2010, 50 executives were given a performance-based stock option plan that would award them
with a maximum of 200 shares of $10 par common stock for $20 a share. On the grant date, the fair value of an
option was $16.50. The number of options that will vest depends on the size of the annual average increase in
sales over the next three years according to the following table:
Annual Average Increase in Sales
No. of Shares
Greater than 5%
50
Greater than 10%
100
Greater than 15%
200
On the grant date, the company estimates the annual average sales increase will be 12%.
Refer to Exhibit 16-6. In 2012, the company determined that the actual annual average increase was 16%. The compensation expense for 2012 will
be
67. Exhibit 16-7
On January 1, 2010, 70 executives were granted a performance-based stock option plan that would award them
each a maximum of 300 shares of $5 par common stock for $12 a share based on the increase in sales over the
next three years. The fair value per option on the grant date was $16. The award table is as follows:
Increase in Sales
No. of Shares
10%
100
15%
200
20%
300
The company estimates that the sales increase will be 22% and that the annual employee turnover rate will be 2%.
Refer to Exhibit 16-7. The compensation expense for 2011 is (to the nearest dollar)
68. Exhibit 16-7
On January 1, 2010, 70 executives were granted a performance-based stock option plan that would award them
each a maximum of 300 shares of $5 par common stock for $12 a share based on the increase in sales over the
next three years. The fair value per option on the grant date was $16. The award table is as follows:
Increase in Sales
No. of Shares
10%
100
15%
200
20%
300
The company estimates that the sales increase will be 22% and that the annual employee turnover rate will be 2%.
Refer to Exhibit 16-7. In 2012 the actual sales increase was determined to be 18%, and the overall turnover rate was exactly 2%. The compensation
69. For a stock appreciation rights (SAR) compensation plan, the measurement date is the date
70. The accounting method that is used for stock appreciation rights (SARs) compensation plans is similar to
the accounting procedures that can be used for
71. For stock appreciation rights (SARs) compensation plans where the employee is expected to receive cash on
the exercise date, the account that is credited in the year-end adjusting journal entry to recognize the
compensation expense is
72. Exhibit 16-8
On January 1, 2010, Marietta Company granted stock appreciation rights (SARs) to the president, which
permitted her to receive cash or stock for the difference between the quoted market price and $50 for 2,000
shares of the company’s stock on the exercise date. The service period ends on December 31, 2012, and the
rights must be exercised by December 31, 2015. Assume that on December 31, 2013, the president exercises all
of her rights and receives cash. Using an options pricing model, the estimated fair values of the SARs were as
follows:
January 1, 2010
$10
December 31, 2010
15
December 31, 2011
20
December 31, 2012
19
December 31, 2013
23
Refer to Exhibit 16-8. What is the compensation expense related to the SARs for the year ending December 31, 2010?
73. Exhibit 16-8
On January 1, 2010, Marietta Company granted stock appreciation rights (SARs) to the president, which
permitted her to receive cash or stock for the difference between the quoted market price and $50 for 2,000
shares of the company’s stock on the exercise date. The service period ends on December 31, 2012, and the
rights must be exercised by December 31, 2015. Assume that on December 31, 2013, the president exercises all
of her rights and receives cash. Using an options pricing model, the estimated fair values of the SARs were as
follows:
January 1, 2010
$10
December 31, 2010
15
December 31, 2011
20
December 31, 2012
19
December 31, 2013
23
Refer to Exhibit 16-8. What is the compensation expense related to the SARs for the year ending December 31, 2011?
74. Exhibit 16-8
On January 1, 2010, Marietta Company granted stock appreciation rights (SARs) to the president, which
permitted her to receive cash or stock for the difference between the quoted market price and $50 for 2,000
shares of the company’s stock on the exercise date. The service period ends on December 31, 2012, and the
rights must be exercised by December 31, 2015. Assume that on December 31, 2013, the president exercises all
of her rights and receives cash. Using an options pricing model, the estimated fair values of the SARs were as
follows:
January 1, 2010
$10
December 31, 2010
15
December 31, 2011
20
December 31, 2012
19
December 31, 2013
23
Refer to Exhibit 16-8. What is the compensation expense related to the SARs for the year ending December 31, 2012?
75. Exhibit 16-8
On January 1, 2010, Marietta Company granted stock appreciation rights (SARs) to the president, which
permitted her to receive cash or stock for the difference between the quoted market price and $50 for 2,000
shares of the company’s stock on the exercise date. The service period ends on December 31, 2012, and the
rights must be exercised by December 31, 2015. Assume that on December 31, 2013, the president exercises all
of her rights and receives cash. Using an options pricing model, the estimated fair values of the SARs were as
follows:
January 1, 2010
$10
December 31, 2010
15
December 31, 2011
20
December 31, 2012
19
December 31, 2013
23
Refer to Exhibit 16-8. What is the compensation expense related to the SARs for the year ending December 31, 2013?
76. Preferred stockholders share with common stockholders in any “extra” dividends when the preferred stock
is
77. Which of the following methods should be used to account for the conversion of preferred stock to common
stock?
Book Value
Market Value
I.
Yes
No
II.
Yes
Yes
III.
No
Yes
IV.
No
No
78. Dividends in arrears pertain to
79. Lopez, Inc. issued 500 shares of $50 par value convertible preferred stock at $80 a share. Each preferred
share may be converted to 6 shares of $10 par common stock. The entry to record the conversion of all shares
would include a
80. Enterprise Leasing issued 500 shares of $20 par value convertible preferred stock at $22 per share. Each
preferred share is converted to 7 shares of $4 par value common stock. The entry to record this conversion
would include a
81. Wade, Inc. issued 500 shares of $10 par preferred stock at $83 a share. Each share had a warrant attached
that allowed the holder to purchase one share of $5 par common stock for $15. Soon after the preferred stock
was issued, the preferred stock was selling ex-rights for $64 a share and the warrants for $16 each. The entry to
record the issuance of the preferred stock would include a
82. Mercury Corp. has 10,000 shares of $10 par, cumulative, 6% preferred stock and 10,000 shares of common
stock outstanding since being organized at the beginning of 2010. It declared its first dividend of $40,000 at the
end of 2012. This means that