Chapter 18 Shareholders’ Equity
56. The shareholders’ equity of Red Corporation includes $200,000 of $1 par common stock and
$400,000 par value of 6% cumulative preferred stock. The board of directors of Red declared
cash dividends of $50,000 in 2016 after paying $20,000 cash dividends in 2015 and $40,000
in 2014. What is the amount of dividends common shareholders will receive in 2016?
a. $18,000.
b. $22,000.
c. $26,000.
d. $28,000.
57. Rick Co. had 30 million shares of $1 par common stock outstanding at January 1, 2016. In
October 2016, Rick Co.’s Board of Directors declared and distributed a 1% common stock
dividend when the market value of its common stock was $60 per share. In recording this
transaction, Rick would:
a. Debit retained earnings for $18 million.
b. Credit paid-in capital—excess of par for $18 million.
c. Credit common stock for $18 million.
d. None of these answer choices correct.
58. Which of the following transactions decreases retained earnings?
a. A property dividend.
Chapter 18 Shareholders’ Equity
b. A stock dividend.
c. A cash dividend.
d. All of these answer choices are correct.
59. Poodle Corporation was organized on January 3, 2016. The firm was authorized to issue
100,000 shares of $5 par common stock. During 2016, Poodle had the following transactions
relating to shareholders’ equity:
Issued 30,000 shares of common stock at $7 per share.
Issued 20,000 shares of common stock at $8 per share.
Reported a net income of $100,000.
Paid dividends of $50,000.
What is total paid-in capital at the end of 2016?
a. $420,000.
b. $370,000.
c. $470,000.
d. $320,000.
60. Olsson Corporation received a check from its underwriters for $72 million. This was for the
issue of one million of its $5 par stock that the underwriters expect to sell for $72 per share.
Which is the correct entry to record the issue of the stock?
a.
Cash
72,000,000
Stock issue expense
20,000,000
Stock contract receivable
52,000,000
b.
Cash
72,000,000
Deferred stock issue revenue
20,000,000
Common stock
5,000,000
Chapter 18 Shareholders’ Equity
Paid-in capital—excess of par
47,000,000
c.
Cash
72,000,000
Common stock
72,000,000
d.
Cash
72,000,000
Common stock
5,000,000
Paid-in capital—excess of par
67,000,000
61. Montgomery & Co., a well-established law firm, provided 500 hours of its time to Fink
Corporation in exchange for 1,000 shares of Fink’s $5 par common stock. Montgomery’s
usual billing rate is $700 per hour, and Fink’s stock has a book value of $250 per share. By
what amount will Fink’s paid-in capital—excess of par increase for this transaction?
a. $345,000.
b. $295,000.
c. $350,000.
d. $300,000.
62. In 2014, Winn, Inc., issued $1 par value common stock for $35 per share. No other common
stock transactions occurred until July 31, 2016, when Winn acquired some of the issued shares
for $30 per share and retired them. Which of the following statements correctly states an effect
of this acquisition and retirement?
a. 2016 net income is decreased.
b. Additional paid-in capital is decreased.
c. 2016 net income is increased.
d. Retained earnings is increased.
63. Treasury shares are most often reported as:
a. A reduction of total shareholders’ equity.
b. A reduction of total paid-in capital.
c. A reduction of retained earnings.
d. An expense in the income statement.
64. Coy, Inc., initially issued 200,000 shares of $1 par value stock for $1,000,000 in 2014. In
2015, the company repurchased 20,000 shares for $200,000. In 2016, 10,000 of the
repurchased shares were resold for $160,000. In its balance sheet dated December 31, 2016,
Coy, Inc.’s treasury stock account shows a balance of:
a. $ 0.
b. $ 40,000.
c. $100,000.
d. $200,000.
65. When treasury shares are sold at a price above cost:
a. A gain account is credited.
b. A loss is reported.
c. A revenue account is credited.
d. Paid-in capital is increased.
66. When treasury shares are resold at a price below cost:
a. Paid-in capital and/or retained earnings is reduced.
b. Paid-in capital and/or retained earnings is increased.
c. Retained earnings is always reduced.
d. A loss is taken on the income statement.
67. When treasury stock is purchased for an amount greater than its par value, what is the effect
on total shareholders’ equity?
a. Increase.
b. Decrease.
c. No effect.
d. Cannot tell from the given information.
68. When preferred stock is purchased by the issuing corporation at a price below the original
issue price and the stock is retired, the transaction:
a. Increases net income for the year.
b. Increases retained earnings.
c. Increases revenue for the year.
d. Increases paid-in capital share repurchase.
69. Retained earnings represent:
a. Earned capital.
b. Cash.
c. Assets.
d. Net assets.
70. Retained earnings represent a company’s:
a. Undistributed net income.
b. Undistributed net assets.
c. Extra paid-in capital.
d. Undistributed cash.
71. The retained earnings balance reported in the balance sheet typically is not affected by:
Chapter 18 Shareholders’ Equity
a. Net income.
b. A prior period adjustment.
c. Dividends paid.
d. Restrictions.
72. Boxer Company owned 20,000 shares of King Company that were purchased in 2014 for
$500,000. On May 1, 2016, Boxer declared a property dividend of 1 share of King for every
10 shares of Boxer stock. On that date, there were 50,000 shares of Boxer stock outstanding.
The market value of the King stock was $30 per share on the date of declaration and $32 per
share on the date of distribution. By how much is retained earnings reduced by the property
dividend?
a. $0.
b. $150,000.
c. $160,000.
d. $300,000.
73. On October 1, 2016, Chief Corporation declared and issued a 10% stock dividend. Before this
date, Chief had 80,000 shares of $5 par common stock outstanding. The market value of Chief
Corporation on the date of declaration was $10 per share. As a result of this dividend, Chief’s
retained earnings will:
a. Decrease by $80,000.
b. Not change.
c. Decrease by $40,000.
d. Increase by $80,000.
74. Preferred stock is called preferred because it usually has two preferences. These preferences
relate to:
a. Dividends and voting rights.
b. Par value and dividends.
c. The preemptive right and voting rights.
d. Assets at liquidation and dividends.
75. When dividends are declared in one fiscal year and paid in the next fiscal year, the liability for
the dividend should be recorded as of the:
a. Date the dividend is declared.
b. Last day of the fiscal year.
c. Date of record.
d. Date of payment.
76. Any dividend that is considered to be a liquidating dividend will:
a. Reduce retained earnings.
b. Reduce paid-in capital.
c. Increase paid-in capital.
d. Reduce the common stock account.
77. On June 1, 2016, Blue Co. distributed to its common stockholders 200,000 outstanding
common shares of its investment in Red, Inc., an unrelated party. The book value on Blue’s
Chapter 18 Shareholders’ Equity
books of Red’s $1 par common stock was $2 per share. Immediately after the declaration, the
market price of Red’s stock was $2.50 per share. In its income statement for the year ended
June 30, 2016, what amount should Blue report as gain before income taxes on disposal of the
stock?
a. $ 0.
b. $100,000.
c. $400,000.
d. $500,000.
78. Which of the following statements is true when dividends are not declared or paid on
cumulative preferred stock?
a. The shareholders must be allowed to convert their shares to common stock.
b. The unpaid dividends are accrued as a liability.
c. The unpaid dividends are reported in a note to the financial statements.
d. The unpaid dividends accrue interest until paid.
79. Preferred shares that are participating may:
a. Vote for the board of directors.
b. Be exchanged for common stock.
c. Receive extra cash during corporate liquidation.
d. Receive additional dividends beyond the stated amount.
80. When a property dividend is declared, the reduction in retained earnings is for:
a. The book value of the property on the date of declaration.
b. The book value of the property on the date of distribution.
c. The fair value of the property on the date of distribution.
d. The fair value of the property on the date of declaration.
81. When a property dividend is declared, the property to be distributed should be revalued to fair
value as of the:
a. Record date.
b. Date of distribution.
c. Date of declaration.
d. Announcement date.
82. At the beginning of 2014, Emily Corporation issued 10,000 shares of $100 par, 5%,
cumulative, preferred stock for $110 per share. No dividends have been paid to preferred or
common shareholders. What amount of dividends will a preferred shareholder owning 100
shares receive in 2016 if Emily pays $1,000,000 in dividends?
a. $ 500.
b. $ 1,500.
c. $ 1,650.
d. $10,000.
83. Pug Corporation has 10,000 shares of $10 par common stock outstanding and 20,000 shares of
$100 par, 6% noncumulative, nonparticipating preferred stock outstanding. Dividends have
not been paid for the past two years. This year, a $150,000 dividend will be paid. What are the
dividends per share for preferred and common, respectively?
a. $7.50; $0.
b. $6; $3.
c. $6; $1.50.
d. None of these answer choices is correct.
84. Beagle Corporation has 20,000 shares of $10 par common stock outstanding and 10,000
shares of $100 par, 6% cumulative, nonparticipating preferred stock outstanding. Dividends
have not been paid for the past two years. This year, a $300,000 dividend will be paid. What
are the dividends per share payable to preferred and common, respectively?
a. $6; $12.
b. $18; $6.
c. $6; $6.
d. None of these answer choices is correct.
85. On January 1, 2016, the board of directors of Goby Inc. declared a $540,000 dividend. The
following data is from the balance sheet of Goby on that date:
Common stock
$500,000
Paid-in capital—excess of par
$300,000
Retained earnings
$400,000
Paid-in capital from sale of treasury stock
$ 50,000
Chapter 18 Shareholders’ Equity
How much is the liquidating dividend?
a. $140,000.
b. $240,000.
c. $290,000.
d. None of these answer choices is correct.
86. ABC declared a property dividend. The dividend consisted of 10,000 common shares of its
investment in XYZ Company. The shares had originally been purchased at $4 per share and
had a $1 par value. The value of the shares on the declaration date is $7 per share. What is the
first entry that should be recorded related to this dividend?
a.
Retained earnings
70,000
Property dividends payable
70,000
b.
Retained earnings
70,000
Property dividends payable
40,000
Gain
30,000
c.
Investment in XYZ
30,000
Retained earnings
30,000
d.
Investment in XYZ
30,000
Gain on investment
30,000
Investment in XYZ [10,000 x ($7 – $4)]
Gain on appreciation of investment
87. The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par
common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares
issued, and 5,000 shares held as treasury stock. What is the entry for the dividend declaration?
a.
Retained earnings
9,000
Dividends payable
9,000
Chapter 18 Shareholders’ Equity
b.
Retained earnings
9,000
Cash
9,000
c.
Retained earnings
10,000
Dividends payable
10,000
d.
Retained earnings
10,000
Cash
10,000
88. Lucid Company declared a property dividend of 20,000 shares of $1 par Polk Company
common stock. The Polk stock was purchased for $5 per share. Market value was $10 per
share on the declaration date and $11 per share on the distribution date. What is the amount of
the dividend?
a. $100,000.
b. $200,000.
c. $220,000.
d. $300,000.
89. The declaration and issuance of a stock dividend on shares of common stock:
a. Has no effect on assets, liabilities, or total shareholders’ equity.
b. Decreases total shareholders’ equity and increases common stock.
c. Decreases assets and decreases total shareholders’ equity.
d. Does not change retained earnings or paid-in capital.
90. Stock splits are issued primarily to:
a. Increase the number of outstanding shares.
b. Increase the number of authorized shares.
c. Increase legal capital.
d. Induce a decline in market value per share.
91. A small stock dividend is defined as one that is:
a. Less than or equal to 40%.
b. Less than 40%.
c. Less than or equal to 10%.
d. Less than 25%.
92. When a company issues a stock dividend, which of the following would be affected?
a. Earnings per share.
b. Total assets.
c. Total liabilities.
d. Total shareholders’ equity.
93. R Co. has outstanding 100 million shares, $1 par common stock, selling for $8 per share. After
a 1 for 4 reverse stock split:
a. R would have 25 million shares, $4 par per share.
Chapter 18 Shareholders’ Equity
b. The market price per share would be about $2.
c. Fractional shares would be issued.
d. Retained earnings would be reduced.
94. F Co. declares a 5% stock dividend. If the market price at declaration is $12 per share, a
shareholder with 110 shares likely would receive:
a. Five additional shares.
b. Fractional share rights for 5½ shares.
c. Five additional shares and $6 in cash.
d. Five additional shares and a fractional share right for 2½ shares.
95. Which of the terms or phrases listed below is more associated with financial statements
prepared in accordance with U.S. GAAP than with International Financial Reporting
Standards?
a. Accumulated other comprehensive income.
b. Investment revaluation reserve.
c. Share premium.
d. Preference shares.
96. Heidi Aurora Imports applies International Financial Reporting Standards. The company
issued shares of the company’s Class B stock. Heidi Aurora Imports should report the stock in
the company’s statement of financial position:
Chapter 18 Shareholders’ Equity
a. Among liabilities if the shares are mandatorily redeemable or redeemable at the option of
the shareholder.
b. As equity unless the shares are mandatorily redeemable.
c. As equity unless the shares are redeemable at the option of the issuer.
d. Among liabilities unless the shares are mandatorily redeemable.
97. Mandatorily redeemable preferred stock (preference shares) is reported as debt, with the
dividends reported in the income statement as interest expense, using:
a. U.S. GAAP.
b. IFRS.
c. Both U.S. GAAP and IFRS.
d. Neither U.S. GAAP nor IFRS.
98. Revenue and expense items and components of other comprehensive income can be reported
in a single statement of comprehensive income using:
a. U.S. GAAP.
b. IFRS.
c. Both U.S. GAAP and IFRS.
d. Neither U.S. GAAP nor IFRS.
99. Which of the following statements is true with regard to preferred stock (preference shares)?
a. Most preferred stock (preference shares) is reported under U.S. GAAP as debt.
b. Most preferred stock (preference shares) is reported under IFRS as equity.
Chapter 18 Shareholders’ Equity
c. Under U.S. GAAP, mandatorily redeemable preferred stock is reported as equity.
d. Under IFRS, preferred stock dividends are reported in the income statement as interest
expense.
100. Under IFRS, components of other comprehensive income:
a. Can be reported as part of a single statement of comprehensive income.
b. Are not permitted to be reported.
c. Must be reported in a separate statement of comprehensive income.
d. Can be reported as part of a statement of shareholders’ equity.
Chapter 18 Shareholders’ Equity
Matching Pair Questions
101. Use I = Increase, D = Decrease, or N = No effect, to indicate the effect on retained earnings
for each of the listed transactions.
____ Declaration of a property dividend.
____ Net income for the year.
____ Purchase of treasury stock at a cost greater than the original issue price.
____ Purchase of treasury stock at a cost less than the original issue price.
____ Issue common stock.
____ Resale of treasury stock for less than cost, assuming no previous treasury
stock sales.
____ Resale of treasury stock for more than cost.
Chapter 18 Shareholders’ Equity
102. Use I = Increase, D = Decrease, or N = No effect, to indicate the effect on retained earnings
for each of the listed transactions.
____ A net loss for the year.
____ A stock split effected in the form of a stock dividend.
____ A stock split in which the par per share is reduced (but not effected in the form of a stock
dividend).
____ Declaration of a 5% stock dividend.
____ Declaration of a cash dividend.
____ Issue stock for noncash assets.
____ Payment of previously declared cash dividend.
____ Retirement of common stock at a cost greater than the original issue price.
____ Retirement of common stock at a cost less than the original issue price.
____ Resale of treasury stock for less than book value assuming no previous
treasury stock sales.
Chapter 18 Shareholders’ Equity
103. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBE
R
1. Large stock dividend
A debit balance for retained earnings.
____
2. Participating
A feature that could increase the dividend
yield on preferred stock.
____
3. Deficit
Follows retained earnings in a balance
sheet.
____
4. Accumulated other
comprehensive income
A stock split in the form of a stock
dividend.
____
5. Paid-in capital—share
repurchase
Associated with retiring stock.
____
1. Large stock dividend
A debit balance for retained earnings.
2. Participating
A feature that could increase the dividend
yield on preferred stock.
3. Deficit
Follows retained earnings in a balance
sheet.
4. Accumulated other
comprehensive income
A stock split in the form of a stock
dividend.
104. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.