Chapter 18 Shareholders’ Equity
True/False Questions
1. Mandatorily redeemable preferred stock is reported as a liability.
2. Noncash assets received as consideration for the issue of stock are always valued based on the
fair value of the stock.
3. Treasury stock transactions never increase retained earnings or net income.
4. Investors should be wary of stock buybacks during down times because the resulting decrease
in shares and increase in earnings per share can be used to mask a slowdown in earnings
growth.
5. Paid-in capital must consist solely of amounts invested by shareholders.
6. Restrictions on retained earnings must be disclosed in the body of the balance sheet.
7. Stock designated as preferred usually has preferential rights over other classes of stock relative
to dividends and liquidating distributions.
8. Dividends in arrears on cumulative preferred stock are liabilities to be paid at a later date.
9. Cash dividends become a binding liability as of the record date.
10. Under GAAP, the declaration of a property dividend may require the recognition of a gain or
loss if the fair value of the property is different from its book value on the declaration date.
11. Stock dividends cause a reduction in retained earnings, but they never reduce total
shareholders’ equity.
Chapter 18 Shareholders’ Equity
Multiple Choice Questions
12. The net assets of a corporation are equal to:
a. Contributed capital.
b. Retained earnings.
c. Shareholders’ equity.
d. None of the above.
13. Two of the three primary account classifications within shareholders’ equity are:
a. Preferred stock and retained earnings.
b. The par value of common stock and retained earnings.
c. Paid-in capital and retained earnings.
d. Preferred and common stock.
14. Details of each class of stock must be reported:
a. On the face of the balance sheet only.
b. In disclosure notes only.
c. On the face of the balance sheet or in disclosure notes.
d. On the face of the balance sheet and in disclosure notes.
15. In terms of business volume, the dominant form of business organization is the:
a. Partnership.
b. Corporation.
c. Limited liability company.
d. Proprietorship.
Chapter 18 Shareholders’ Equity
16. The corporate charter sometimes is known as (a):
a. Articles of incorporation.
b. Statement of organization.
c. By-laws.
d. Registration statement.
17. Corporations are formed in accordance with:
a. The Model Business Corporation Act.
b. Federal statutes.
c. The laws of individual states.
d. Federal trade commission regulations.
18. Outstanding common stock is:
a. Stock that is performing well on the New York Stock Exchange.
b. Stock that has been authorized by the state for issue.
c. Stock held in the corporate treasury.
d. Stock in the hands of shareholders.
Chapter 18 Shareholders’ Equity
19. Issued stock refers to the number of shares:
a. Outstanding plus treasury shares.
b. Shares issued for cash.
c. In the hands of shareholders.
d. That may be issued under state law.
20. The Model Business Corporation Act:
a. Uses the words “common” and “preferred” in describing distinguishing characteristics of
stock.
b. Defines legal capital as the amount of net assets not available for distribution to
shareholders.
c. Provides guidance for choosing an appropriate par value for new issues of stock.
d. Has affected the laws of most states.
21. When preferred stock carries a redemption privilege, the shareholders may:
a. Purchase new shares as they become available.
b. Exchange their preferred shares for common shares.
c. Surrender the preferred shares for a specified amount of cash.
d. Purchase treasury shares ahead of common shareholders.
22. The common stock account in a company’s balance sheet is measured as:
Chapter 18 Shareholders’ Equity
a. The number of common shares outstanding multiplied by the stock’s par value per share.
b. The number of common shares outstanding multiplied by the stock’s current market value
per share.
c. The number of common shares issued multiplied by the stock’s par value per share.
d. None of these answer choices is correct.
Use the following to answer questions 23–26:
The following partial information is taken from the comparative balance sheet of Levi Corporation:
Shareholders’ equity
12/31/2016
12/31/2015
Common stock, $5 par value; 20
million shares authorized; 15 million
shares issued and 9 million shares
outstanding at 12/31/2016; and
____million shares issued and
____shares outstanding at
12/31/2015.
$75 million
$45 million
Additional paid-in capital on
common stock
520 million
392 million
Retained earnings
197 million
157 million
Treasury common stock, at cost, 6
million shares at 12/31/2016 and 4
million shares at 12/31/2015
(72 million)
(50 million)
Total shareholders’ equity
$720 million
$544 million
23. How many of Levi’s common shares were outstanding on 12/31/2015?
a. 14 million.
b. 9 million.
c. 5 million.
d. None of these answer choices is correct.
24. What was the average price (rounded to the nearest dollar) of the additional shares issued by
Levi in 2016?
a. $5 per share.
b. $26 per share.
c. $39 per share.
d. Cannot be determined from the given information.
25. What was the average price of the additional treasury shares purchased by Levi during 2016?
a. $11 per share.
b. $12 per share.
c. $12.50 per share.
d. None of these answer choices is correct.
26. What was the amount of net income earned by Levi during 2016?
a. $0.
b. $40 million.
c. $62 million.
d. Cannot be determined from the given information.
27. Roberto Corporation was organized on January 1, 2016. The firm was authorized to issue
100,000 shares of $5 par common stock. During 2016, Roberto had the following transactions
relating to shareholders’ equity:
Issued 10,000 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.
Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8).
What is total shareholders’ equity at the end of 2016?
a. $270,000.
b. $300,000.
c. $250,000.
d. $200,000.
28. Heidi Aurora Imports issued shares of the company’s Class B stock. Heidi Aurora Imports
should report the stock in the company’s statement of financial position:
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.
29. The changes in account balances for Elder Company for 2016 are as follows:
Assets
$480,000 debit
Common stock
250,000 credit
Liabilities
160,000 credit
Paid-in capital—excess of par
30,000 credit
Assuming the only changes in retained earnings in 2016 were for net income and a $50,000
dividend, what was net income for 2016?
a. $40,000.
b. $60,000.
c. $70,000.
d. $90,000.
Net income
30. The changes in account balances for Allen Inc. for 2016 are as follows:
Assets
$225,000 debit
Common stock
125,000 credit
Liabilities
80,000 credit
Paid-in capital—excess of par
15,000 credit
Assuming the only changes in retained earnings in 2016 were for net income and a $25,000
dividend, what was net income for 2016?
a. $30,000.
b. $20,000.
c. $15,000.
Chapter 18 Shareholders’ Equity
d. $ 5,000.
Net income
______?
Use the following to answer questions 31–33:
As of December 31, 2016, Warner Corporation reported the following:
Dividends payable
20,000
Treasury stock
600,000
Paid-in capital – share repurchase
20,000
Other paid-in capital accounts
4,000,000
Retained earnings
3,000,000
During 2017, half of the treasury stock was resold for $240,000; net income was $600,000; cash
dividends declared were $1,500,000; and stock dividends declared were $500,000.
31. What was shareholders’ equity as of December 31, 2016?
a. $7,020,000.
b. $6,440,000.
c. $6,420,000.
d. $6,400,000.
32. What would shareholders’ equity be as of December 31, 2017?
a. Amount is not shown.
b. $5,760,000.
c. $5,820,000.
d. $6,760,000.
33. The 2017 sale of half of the treasury stock would:
a. Reduce income before tax by $60,000.
b. Reduce retained earnings by $60,000.
c. Increase total shareholders’ equity by $300,000.
d. Reduce retained earnings by $40,000.
Chapter 18 Shareholders’ Equity
Use the following to answer questions 34 and 35:
Yellow Enterprises reported the following ($ in 000s) as of December 31, 2016. All accounts have
normal balances.
Deficit (debit balance in retained earnings)
3,000
Common stock
2,000
Paid-in capital-treasury stock
1,000
Treasury stock at cost
400
Paid-in capital—excess of par
30,000
During 2017 ($ in 000s), net income was $9,000; 25% of the treasury stock was resold for $450; cash
dividends declared were $600; cash dividends paid were $500.
34. What ($ in 000s) was shareholders’ equity as of December 31, 2016?
a. $29,600.
b. $35,600.
c. $30,400.
d. $28,600.
35. What ($ in 000s) was shareholders’ equity as of December 31, 2017?
a. $38,100.
b. $37,450.
c. $38,450.
d. $38,350.
Chapter 18 Shareholders’ Equity
36. Accumulated other comprehensive income:
a. is a liability.
b. might include prior service cost from pension plan amendments.
c. includes accumulated pension expense.
d. is reported in the income statement.
37. A statement of comprehensive income does not include:
a. Net income.
b. Losses resulting from the return on pension assets exceeding expectations.
c. Losses from changes in estimates regarding the PBO.
d. Prior service cost.
38. Accumulated other comprehensive income is reported:
a. In the balance sheet as an asset.
b. In the balance sheet as a liability.
c. In the balance sheet as a component of shareholders’ equity.
Chapter 18 Shareholders’ Equity
d. In the statement of comprehensive income.
39. A statement of comprehensive income does not include:
a. Gains resulting from the return on assets exceeding expectations.
b. Gains and losses on unsold held–to-maturity securities.
c. Losses resulting from the return on pension assets falling short of expectations.
d. Prior service cost.
40. Characteristics of the corporate form that have led to the growth of this form of business
ownership include all of the following except:
a. Ease of raising capital.
b. Low government regulation.
c. Limited liability.
d. Ease of ownership transfer.
41. The preemptive right refers to the shareholder’s right to:
a. Maintain a proportional ownership interest in the corporation.
b. Vote for members of the board of directors.
c. Receive a share of dividends.
d. Share in profits proportionally with all other stockholders.
42. Common shareholders usually have all of the following rights except:
a. To share in the profits.
b. To share in assets upon liquidation.
c. To elect a board of directors.
d. To participate in the day-to-day operations.
43. The par value of shares issued is normally recorded in the:
a. Paid-in capital in excess of par account.
b. Common stock account.
c. Retained earnings account.
d. Appropriated retained earnings account.
44. Authorized common stock refers to the total number of shares:
a. Outstanding.
b. Issued.
c. Issued and outstanding.
d. That can be issued.
45. The par value of common stock represents:
a. The arbitrary dollar amount assigned to a share of stock.
Chapter 18 Shareholders’ Equity
b. The liquidation value of a share.
c. The book value of a share of stock.
d. The amount received when the stock was issued.
46. When stock traded on an active exchange is issued for a machine:
a. No entry is recorded until restrictions are lifted.
b. An asset is recorded for the fair value of the stock.
c. An asset is recorded for the appraised value of the machine.
d. Paid-in capital is increased by the appraised value of the machine.
47. Paid-in capital in excess of par is reported:
a. As a reduction of shareholders’ equity.
b. As a noncurrent asset.
c. As a noncurrent liability.
d. As an increase in shareholders’ equity.
48. Share issue costs refer to the costs of obtaining the legal, promotional, and accounting services
necessary to effect the sale of shares. The costs reduce the net cash proceeds from selling the
shares and thus paid-in capital—excess of par, and are:
a. Not recorded separately.
b. Recorded as an asset.
c. Recorded as a liability.
d. Amortized over time.
Chapter 18 Shareholders’ Equity
49. When stock is issued in exchange for property, the best evidence of fair value might be any of
the following except:
a. The appraised value of the property received.
b. The selling price of the stock in a recent transaction.
c. The price of the stock quoted on the stock exchange.
d. The average book value of outstanding stock.
50. When more than one security is sold for a single price and the total selling price is not equal to
the sum of the market prices, the cash received is allocated between the securities based on:
a. Relative book values.
b. Par values.
c. Relative market values.
d. The earnings per share.
51. The owners of a corporation are its shareholders. If a corporation has only one class of shares,
they typically are labeled common shares. Each of the following are ownership rights held by
common shareholders, unless specifically withheld by agreement, except:
a. The right to vote on policy issues.
b. The right to share in profits when dividends are declared (in proportion to the percentage
of shares owned by the shareholder).
c. The right to dividends equal to a stated rate time par value (if dividends are paid).
d. The right to share in the distribution of any assets remaining at liquidation after other
claims are satisfied.
Chapter 18 Shareholders’ Equity
Use the following to answer questions 52–54:
The 12/31/2016 balance sheet of Despot Inc. included the following:
Common stock, 25 million shares at $20 par
$500 million
Paid-in capital—excess of par
3,000 million
Retained earnings
980 million
52. In January 2016, Despot recorded a transaction with this journal entry:
Cash
150 million
Common stock
100 million
Paid-in capital—excess of par
50 million
The transaction was for the:
a. Issue of 2 million shares of common stock at par value.
b. Issue of common stock for $150 million in cash.
c. Receipt of $20 per share for a new stock issue.
d. All of these answer choices are correct.
53. In February 2016, Despot declared cash dividends of $12 million to be paid in April of that
year. What effect did the April transaction have on Despot’s accounts?
a. Decreased assets and liabilities.
b. Decreased assets and shareholders’ equity.
c. Increased liabilities and decreased shareholders’ equity.
d. None of these answer choices is correct.
Chapter 18 Shareholders’ Equity
54. Despot declared a property dividend to give marketable securities to its common stockholders.
The securities had cost Despot $7 million and currently have a fair value of $16 million.
Which of the following would be included in recording the property dividend declaration?
a. Increase in a liability for $16 million.
b. Decrease in retained earnings for $7 million.
c. Decrease in marketable securities by $16 million.
d. All of these answer choices are correct.
55. The shareholders’ equity of Green Corporation includes $200,000 of $1 par common stock
and $400,000 par value of 6% cumulative preferred stock. The board of directors of Green
declared cash dividends of $50,000 in 2016 after paying $20,000 cash dividends in each of
2015 and 2014. What is the amount of dividends common shareholders will receive in 2016?
a. $18,000.
b. $26,000.
c. $28,000.
d. $32,000.