Name:
Class:
Date:
chapter 8
Indicate whether the statement is true or false.
1. If prior to the last weekly payroll period of the calendar year, the cumulative earnings for an employee are $75,200,
earnings subject to social security tax are $106,800, and the tax rate is 7.5%, the employer’s social security tax on the $800
gross earnings paid on the last day of the year is $60.
a. True
b. False
2. The declaration and issuance of a stock dividend does not affect the total amount of a corporation’s assets, liabilities, or
stockholders’ equity.
a. True
b. False
3. Medicare taxes are withheld from an employee’s pay only until the employee has earned a specific amount each year.
a. True
b. False
4. Federal unemployment compensation tax becomes an employer’s liability at the time the employees are paid.
a. True
b. False
5. The main source of paid-in capital is from issuing stock.
a. True
b. False
6. FICA tax is a payroll tax that is paid only by employers.
a. True
b. False
7. Obligations that depend on past events and that are based on future transactions are contingent liabilities.
a. True
b. False
8. If 50,000 shares are authorized, 35,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding
shares is 33,000.
a. True
b. False
9. Preferred stockholders must receive their current-year dividends before the common stockholders can receive any
dividends.
a. True
b. False
10. If 20,000 shares are authorized, 14,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of
$1 per share would amount to $13,500.
Name:
Class:
Date:
chapter 8
a. True
b. False
11. For accounting purposes, stated value is treated the same way as par value.
a. True
b. False
12. A corporation has 10,000 shares of $100 par value stock outstanding. If the corporation issues a 4-for-1 stock split, the
number of shares outstanding after the split will be 40,000.
a. True
b. False
13. If the market rate of interest is 9% and a corporation’s bonds bear interest at 7%, the bonds will sell at a premium.
a. True
b. False
14. A corporation has 10,000 shares of $100 par value stock outstanding that has a current market value of $160. If the
corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately $32.
a. True
b. False
15. Obligations that depend on future events and are based on past transactions are contingent liabilities.
a. True
b. False
16. Paid-in capital and retained earnings are the two major categories of stockholders’ equity for a corporation.
a. True
b. False
17. For proper matching of revenues and expenses, the estimated cost of fringe benefits must be recognized as an expense
of the period during which the employee earns the benefits.
a. True
b. False
18. If the market rate of interest is 6% and a corporation’s bonds bear interest at 7%, the bonds will sell at a discount.
a. True
b. False
19. Before a stock dividend can be declared or paid, there must be sufficient cash.
a. True
b. False
20. Bonds payable due in the following year are reported on the balance sheet as long-term liabilities.
a. True
Name:
Class:
Date:
chapter 8
b. False
21. During the first year of operations, employees earned vacation pay of $50,000. The vacations will be taken during the
second year. The vacation pay expense should be recorded in the first year of operations.
a. True
b. False
22. Most employers are required to withhold a portion of the earnings of each employee for FICA tax.
a. True
b. False
23. The issuance of common stock affects both paid-in capital and retained earnings.
a. True
b. False
24. The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more
investors to enter the market for the company’s shares.
a. True
b. False
25. The total earnings of an employee for a payroll period is referred to as gross pay.
a. True
b. False
26. Liabilities that are due and payable beyond one year or paid out of noncurrent assets are termed long-term liabilities.
a. True
b. False
27. Treasury stock is a contra-equity account.
a. True
b. False
28. A 10% stock dividend will increase the book value per share.
a. True
b. False
29. During the first year of operations, a company granted warranties on its products. The estimated cost of the product
warranty liability at the end of the year is $12,750. The product warranty expense of $12,750 should be recorded in the
year the related product sale is made.
a. True
b. False
30. FICA tax is a payroll tax that is paid by both the employee and the employer.
a. True
Name:
Class:
Date:
chapter 8
b. False
31. The declaration of a cash dividend decreases a corporation’s stockholders’ equity and decreases its assets.
a. True
b. False
32. The total earnings of an employee for a payroll period is referred to as the net pay.
a. True
b. False
33. The reduction in the par or stated value of common stock, accompanied by the issuance of a proportionate number of
additional shares, is called a stock split.
a. True
b. False
34. The declaration of a stock dividend decreases a corporation’s stockholders’ equity and decreases its liabilities.
a. True
b. False
35. Federal unemployment compensation taxes that are collected by the federal government are not paid directly to the
unemployed but are allocated among the states for use in state programs.
a. True
b. False
36. When a corporation issues bonds, it executes a contract with the bondholders known as a bond debenture.
a. True
b. False
37. If 50,000 shares are authorized, 35,000 shares are issued, and 1,000 shares are reacquired, the number of outstanding
shares is 36,000.
a. True
b. False
38. Cash dividends are not paid on shares of treasury stock.
a. True
b. False
39. If paid-in capital in excess of par—preferred stock is $80,000, preferred stock is $500,000, paid-in capital in excess of
par—common stock is $50,000, common stock is $1,000,000, and retained earnings is $230,000, the total stockholders’
equity is $1,860,000.
a. True
b. False
Name:
Class:
Date:
chapter 8
40. A corporation has 10,000 shares outstanding of $25 par value and a current market value of $100 per share. If the
corporation issues a 5-for-1 stock split, the market value of the stock will fall to approximately $20.
a. True
b. False
41. A bond is simply a form of an interest-bearing note.
a. True
b. False
42. The two main sources of stockholders’ equity are investments contributed by stockholders and net income retained in
the business.
a. True
b. False
43. One of the conditions for paying a cash dividend is formal action by the board of directors.
a. True
b. False
44. When a corporation issues bonds, it executes a contract with the bondholders known as a bond indenture.
a. True
b. False
45. FICA tax becomes a liability to the federal government at the time the employees are paid.
a. True
b. False
46. Bonds are sold at face value when the contract rate is equal to the market rate of interest.
a. True
b. False
47. Federal unemployment compensation tax is a tax that is paid only by employers.
a. True
b. False
48. Medicare taxes are paid only by employee.
a. True
b. False
49. If 50,000 shares are authorized, 37,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding
shares is 35,000.
a. True
b. False
50. If the market rate of interest is 7% and a corporation’s bonds bear interest at 8%, the bonds will sell at a premium.
Name:
Class:
Date:
chapter 8
a. True
b. False
51. Most employers are required to withhold federal unemployment taxes from employee earnings.
a. True
b. False
52. The debt ratio measures the percent of the company‘s assets financed by debt.
a. True
b. False
53. A corporation has 10,000 shares of $100 par value stock outstanding. If the corporation issues a 5-for-1 stock split, the
number of shares outstanding after the split will be 2,000.
a. True
b. False
54. The declaration of a cash dividend decreases a corporation’s stockholders’ equity and increases its liabilities.
a. True
b. False
55. The par value of common stock is rarely equal to its market value on the date the stock is issued.
a. True
b. False
56. In order to record a contingent liability, the liability must be probable and reasonably estimated.
a. True
b. False
57. When the market rate of interest is more than the contract rate of a bond, the bond will sell for a discount.
a. True
b. False
58. The amount of capital paid-in by the stockholders of the corporation is called legal capital.
a. True
b. False
59. If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are reacquired, the number of outstanding
shares is 19,500.
a. True
b. False
60. If the market rate of interest is 8% and a corporation’s bonds bear interest at 7%, the bonds will sell at a premium.
a. True
b. False
Name:
Class:
Date:
chapter 8
61. One of the conditions for paying a cash dividend is sufficient retained earnings.
a. True
b. False
62. Earnings per common share are one factor that influence the decision to use debt financing or equity financing.
a. True
b. False
63. The prices of bonds are quoted on bond exchanges as a percentage of the bonds’ face value.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
64. For the year that just ended, a company reports net income of $1,500,000. There are 500,000 shares authorized,
300,000 shares issued, and 250,000 shares of common stock outstanding. What is the earnings per share?
a. $5.00
b. $2.50
c. $6.00
d. $3.00
65. When the contract rate of interest on bonds is higher than the market rate of interest, the bonds sell at _____.
a. a premium
b. their face value
c. their maturity value
d. a discount
66. Contingent liabilities that are probable but cannot be reasonably estimated are disclosed in the _____.
a. notes to the financial statements
b. current liabilities section of the balance sheet
c. retained earnings section of the statement of stockholders’ equity
d. long term-liabilities section of the balance sheet
67. Which of the following is necessary for a corporation to pay cash dividends?
a. Market value in excess of par value per share
b. Order by the court of law
c. Sufficient retained earnings
d. Prior declaration of stock dividends
68. Where is interest expense listed on the income statement?
a. Other expense section
b. Cost of merchandise sold
c. Operating expenses
d. Interest expense is listed on the balance sheet, not the income statement.
Name:
Class:
Date:
chapter 8
69. Current liabilities are _____.
a. due but not receivable for more than one year
b. due but not payable for more than one year
c. due and receivable within one year
d. due and payable within one year
70. _____ liabilities may arise from past transactions if certain events occur in the future.
a. Current
b. Noncurrent
c. Long-term
d. Contingent
71. A corporation has 50,000 shares of $100 par value stock outstanding that has a current market value of $180. If the
corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately _____.
a. $30
b. $36
c. $45
d. $50
72. An employee receives an hourly rate of $27, with time and a half for all hours worked in excess of 40 during a week.
Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $350; cumulative
earnings for year prior to current week, $99,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare
tax rate, 1.5% on all earnings. What is the gross pay for the employee?
a. $798.85
b. $873.77
c. $1,242.00
d. $1,323.00
73. On July 1, George Co. issued $3,000,000 of 10-year, 8% bonds at par. Interest on the bonds is payable semiannually
on December 31 and June 30. As a result of this transaction, net assets of the company _____.
a. decrease by $240,000
b. increase by $3,000,000
c. are not effected
d. decrease by $120,000
74. Which of the following transactions decreases the profitability of a company?
a. Issuing a note payable
b. Purchasing treasury stock
c. Declaring cash dividend
d. Recording payroll tax expense
75. If $1,000,000 of 10% bonds are issued at 98, the amount of cash received from the sale is _____.
a. $980,000
b. $975,000
c. $987,500
d. $1,000,000
Name:
Class:
Date:
chapter 8
76. Rico Inc. issues a 90-day, 4%, $3,000 note on account. This transaction _____.
a. increases net assets and earnings per share of the company
b. decreases net assets and increases earnings per share of the company
c. has no effect on net assets and earnings per share of the company
d. decreases net assets and earnings per share of the company
77. On July 1, Mark Co. issued $3,000,000 of 10-year, 8% bonds at par. Interest on the bonds is payable semiannually on
December 31 and June 30. On payment of interest, net assets of the company _____.
a. decrease by $150,000
b. increase by $240,000
c. decrease by $120,000
d. remain unaffected
78. As interest is recorded on an interest-bearing note, the Interest Expense account is _____.
a. decreased; the Interest Payable account is increased.
b. increased; the Interest Payable account is increased.
c. increased; the Notes Payable account is decreased.
d. increased; the Notes Payable account is increased.
79. The excess of issue price over par of common stock is termed as _____.
a. a discount
b. more income
c. a deficit
d. a premium
80. The par value per share of common stock represents _____.
a. the minimum selling price of the stock established by the articles of incorporation
b. the minimum amount the stockholder will receive when the corporation is liquidated
c. the monetary amount assigned to each share of stock in the articles of incorporation
d. the amount of dividends per share to be received each year
81. The reduction of par or stated value of stock by issuance of a proportionate number of additional shares is termed a
_____.
a. stock dividend
b. stock split
c. stock option
d. preferred dividend
82. An employee receives an hourly rate of $30, with time and a half for all hours worked in excess of 40 during a week.
Payroll data for the current week are as follows: hours worked, 46; federal income tax withheld, $300; cumulative
earnings for year prior to current week, $90,700; social security tax rate, 6.0% on maximum of $106,800; and Medicare
tax rate, 1.5% on all earnings. What is the net pay for the employee?
a. $1,147.95
b. $1,059.75
c. $1,470.00
Name:
Class:
Date:
chapter 8
d. $1,359.75
83. On November 21 of the current year, Maroon Inc. reacquired 50,000 shares of its common stock at $4 per share. As a
result of this transaction, net assets of the company _____.
a. increase by $200,000
b. decrease by $200,000
c. remain unchanged
d. increase by $50,000
84. The _____ is determined by transactions between buyers and sellers of similar bonds.
a. stated interest rate
b. effective interest rate
c. internal interest rate
d. straight-line rate
85. Which of the following is a reason to undergo a reverse stock split?
a. To reduce the stock’s market price per share
b. To increase total stockholders’ equity
c. To reduce total stockholders’ equity
d. To increase the market value of the stock per share
86. The FICA tax withheld from employees contributes to _____.
a. Federal and state unemployment compensation.
b. Social Security and federal unemployment compensation
c. Social Security and Medicare.
d. Medicare only
87. ABC Co. has a gross payroll of $18,000. The FICA tax rate is 7.65% of the gross payroll, and the federal and state
withholding are $1,600 and $963 respectively. On recording the payroll tax liability, net assets of the company _____.
a. increase by $13,940
b. decrease by $14,060
c. increase by $21,940
d. decrease by $5,485
88. The following data (in millions) is given for Magenta Inc. for the current year.
Total assets $720,000
Total liabilities $411,000
Total stockholders’ equity $309,000
Compute the debt ratio. (Round to the nearest whole number.)
a. 10%
b. 44%
c. 57%
d. 75%
Name:
Class:
Date:
chapter 8
89. A company sold 200 shares of common stock with a par value of $5 at a price of $12 per share. Which section of the
statement of cash flows will contain this transaction?
a. Operating activities
b. Investing activities
c. Financing activities
d. Sale of stock will not appear on the statement of cash flows.
90. The price at which stock is sold depends on a variety of factors such as _____.
a. the financial condition and dividend record of the corporation
b. the corporation’s ability to measure potential liability
c. the likelihood of an uncertain event happening
d. the corporation’s efficiency in using current assets to pay interest on debt
91. The cost of a product warranty should be included as an expense in the _____.
a. period the cash is collected for a product sold on account
b. future period when the cost of repairing the product is paid
c. period of the sale of the product
d. future period when the product is repaired or replaced
92. Treasury stock is reported in the _____ section of the balance sheet.
a. stockholders’ equity
b. investment
c. contingent liabilities
d. current liabilities
93. Vivi Corporation’s earnings per share of common stock were $1.50 with a market price of $33.50; calculate the price–
earnings ratio.
a. 50.6
b. 22.3
c. 44.0
d. 33.5
94. When a company has a high debt ratio, it is an indication of a _____.
a. high solvency risk
b. weak operating efficiency
c. high profit margin
d. low asset turnover
95. Emerald Co. has 50,000 shares at $12 par common stock outstanding. If the company decides to buy 20% of its shares
for $15 per share, the total stockholders’ equity will _____.
a. increase by $600,000
b. increase by $750,000
c. decrease by $150,000
d. decrease by $120,000
96. On which of the following dates does a company incur liability for a dividend?
Name:
Class:
Date:
chapter 8
a. The date of record
b. The date of payment
c. The date of liquidation
d. The date of declaration
97. If $500,000 of 8% bonds are issued at 102, the amount of cash received from the sale is _____.
a. $540,000
b. $510,000
c. $500,000
d. $530,000
98. If bonds are issued at a premium, the stated interest rate is _____.
a. higher than the market rate of interest
b. lower than the market rate of interest
c. too low to attract investors
d. adjusted to a higher rate of interest
99. Which of the following is an effect of payment of cash dividends on a company’s financial statements?
a. A decrease in cash and stockholders’ equity
b. A decrease in cash and liability
c. An increase in stockholders’ equity and liability
d. A decrease in cash and an increase in liability
100. Liabilities due beyond one year are classified as _____.
a. current liabilities
b. long-term liabilities
c. contingent liabilities
d. fixed liabilities
101. Which of the following will be classified as a current liability?
a. Two-year notes payable
b. Bonds payable
c. Mortgage loan
d. Unearned rent
102. The primary purpose of a stock split is to _____.
a. increase paid-in capital
b. reduce the market price of the stock per share
c. increase the market price of the stock per share
d. increase retained earnings
103. Which of the following accounts is reported in the noncurrent liabilities section of the corporate balance sheet?
a. Bonds payable
b. Common stock
c. Dividends payable
d. Cash