Financial Accounting, 3e (Kemp/Waybright)
Chapter 10 Corporations: Paid-In Capital and Retained Earnings
10.1 Questions
1) Capital stock represents the number of shares of stock a corporation is authorized by a state to
sell.
2) Outstanding stock of a corporation represents 100% of its ownership.
3) A corporation is a separate legal entity from its owners.
4) A corporation must incorporate through the local government of any state it chooses.
5) A corporate charter describes the purpose, place of business, and other details of the business
being incorporated.
6) A corporation must incorporate in every state in which it does business.
7) Limited liability means that the stockholders of a corporation share a personal liability for all
debts of the corporation.
8) Changes in ownership through transfer of shares of stock have no effect on the life of a
corporation.
9) A business wanting to incorporate must file articles of incorporation with:
A) the federal government.
B) the state office dealing with incorporation.
C) the local government.
D) any state in which they will do business.
10) The number of shares of stock that a corporation is given the right to sell is called:
A) issued stock.
B) authorized stock.
C) outstanding stock.
D) capital stock.
11) The basic unit of stock is called a(n):
A) authorization.
B) certificate.
C) share.
D) ownership record.
12) Stockholders will be issued ________ physically or electronically.
A) charters
B) articles of incorporation
C) authorized stock
D) stock certificates
13) Stock that is held by stockholders is called:
A) issued stock.
B) authorized stock.
C) outstanding stock.
D) open stock.
14) Which of the following business types is largest by number?
A) Not-for-profits
B) Proprietorships and partnerships
C) Corporations
D) Government entities
15) Which of the following business types dominates by the amount of business transacted?
A) Partnerships
B) Proprietorships
C) Corporations
D) Government entities
16) Which of the following is NOT an advantage of a corporation?
A) Unlimited liability
B) Ease of raising capital
C) Ease of transfer ownership
D) Continuous life
17) Which of the following is NOT an advantage of a corporation?
A) Ease of raising capital
B) Government regulation
C) Limited liability
D) Transfer of ownership
18) Which of the following is an advantage of a corporation?
A) Double taxation
B) Continuous life
C) Unlimited liability
D) Non-transfer of ownership
19) Which of the following are considered to be legal entities that exist separate and distinct
from their owners?
A) Sole proprietorships
B) Partnerships
C) Corporations
D) Organizations with more than 100 partners
20) Authorized capital stock are those shares:
A) listed in the charter.
B) issued to the corporation’s officers.
C) sold and in stockholder possession.
D) that pay dividends.
10.2 Questions
1) Dennis owns 2% of the total shares in a company; if the company issues a dividend he will
receive 2% of the dividend.
2) Stockholders’ Equity consists of contributed capital and paid-in capital.
3) Retained Earnings represent internally generated capital.
4) A stockholder may have three basic rights.
5) For most companies, preemptive rights are the exception, rather than the rule.
6) Preferred stock is considered a voting “class” of stock.
7) Preferred stockholders generally have the same basic rights as common stockholders EXCEPT
for:
A) voting.
B) dividends.
C) liquidation.
D) preemption.
8) Which of the following stockholder rights is the one that allows a stockholder to participate in
the management of a corporation?
A) Vote
B) Dividends
C) Liquidation
D) Preemption
9) Maintaining their proportionate share in the ownership of a corporation when new stock is
available to be purchased is an example of which stockholder right?
A) Vote
B) Dividends
C) Liquidation
D) Preemption
10) Stockholders receiving their proportionate share of any assets left after a company goes out
of business is an example of which stockholder right?
A) Vote
B) Dividends
C) Liquidation
D) Preemption
11) Earnings that a stockholder receives from a corporation is an example of which stockholder
right?
A) Vote
B) Dividends
C) Liquidation
D) Preemption
12) If you own 500 shares (2% of a corporation’s stock) and the corporation issues 15,000 new
shares, how many of the new shares can you purchase under preemptive right?
A) 500
B) 300
C) 800
D) 0
13) If you own 500 shares (2% of a corporation’s stock) and the corporation issues 15,000 new
shares, how many total shares will you have after exercising your preemptive rights?
A) 500
B) 300
C) 800
D) 0
14) If you own 800 shares (3% of a corporation’s stock) and the corporation issues 10,000 new
shares, how many of the new shares can your purchase under preemptive right?
A) 0
B) 300
C) 800
D) 1,100
15) If you own 800 shares (3% of a corporation’s stock) and the corporation issues 10,000 new
shares, how many total shares will you have after exercising your preemptive right?
A) 0
B) 300
C) 800
D) 1,100
16) At least one “class” of stock MUST have:
A) preemptive rights.
B) dividend rights.
C) liquidation rights.
D) voting rights.
17) Which right do preferred stockholders receive before common stockholders?
A) Selling rights
B) Dividend rights
C) Voting rights
D) Preemptive rights
18) Which is NOT a value placed on a certificate for a share of the company’s stock?
A) Par
B) Stated value
C) No par
D) Market value
19) Values such as par, stated value, and no-par are assigned based upon:
A) federal regulation.
B) choice of the organizers of the corporation.
C) tax law.
D) market values of the stock.
20) Stated value is assigned:
A) when the corporate charter is filed.
B) at a later date, when the company decides to issue the stock.
C) after the stock has been issued.
D) at the first meeting of the organizers of the corporation.
21) If there is only one class of stock outstanding, such stock would be classified as:
A) authorized stock.
B) common stock.
C) preferred stock.
D) issued stock.
22) Stockholders’ Equity consists of:
A) contributed capital and paid-in capital.
B) common stock and preferred stock.
C) paid-in capital and Retained Earnings.
D) legal capital and paid in capital.
10.3 Questions
1) Many companies raise capital by issuing stock directly to stockholders or by using an
underwriter.
2) The issue price of the stock usually is equal to the par value of the stock.
3) A company can have a profit or loss when buying or selling its own stock.
4) When stock is sold, the total paid-in capital should equal the amount of cash received.
5) A corporation may issue stock for assets other than cash, requiring the recording of the assets
at fair market value.
6) A company issues 20,000 shares of its $28 par common stock for $32 per share. The entry to
record this will include a debit to Cash for $560,000.
7) A company issues 25,000 shares of its $25 par common stock for $27 per share. The entry to
record this will include a debit to Cash for $675,000.
8) The type of stock that does NOT carry paid-in capital in excess of par is called:
A) par stock.
B) no-par stock.
C) stated value stock.
D) outstanding stock.
9) The formula needed to compute “additional paid-in capital in excess of par” is:
A) number of shares of stock times par value per share of stock.
B) number of shares of stock times selling price per share of stock.
C) number of shares of stock times (selling price per share – par value per share).
D) number of shares of stock times (selling price per share + par value per share).
10) Accounting for stock at a stated value is almost identical to recording:
A) outstanding stock.
B) no-par stock.
C) issued stock.
D) par stock.
11) A company issues 15,000 shares of its $25 par common stock for $29 per share. The amount
to be debited to Cash is:
A) $60,000.
B) $435,000.
C) $375,000.
D) $405,000.
12) A company issues 50,000 shares of its $8 par common stock for $15 per share. The amount
to be debited to Cash is:
A) $50,000.
B) $400,000.
C) $350,000.
D) $750,000.
13) A journal entry for the sale of $10 par-common stock for $18 per share would include a:
A) credit to Cash.
B) debit to Common Stock.
C) credit to Paid-In Capital in Excess of Par–Common Stock.
D) debit to Paid-In Capital in Excess of Par–Common Stock.
14) If shares of preferred stock are sold at par value for cash, the transaction would be entered
by:
A) debiting Cash and crediting Preferred Stock.
B) debiting Preferred Stock and crediting Cash.
C) debiting Cash and crediting Paid-in Capital in Excess of Par.
D) debiting Paid-In Capital in Excess of Par and crediting Preferred Stock.
15) Lionworks, Inc. issues 2,000 shares of $40 par common stock for $43 per share. The amount
credited to paid-in capital in excess of par is:
A) $80,000.
B) $86,000.
C) $6,000.
D) $0.
16) Illusions Corp. issues 5,000 shares of $20 par common stock for $28 per share. The amount
credited to paid-in capital in excess of par is:
A) $100,000.
B) $40,000.
C) $6,000.
D) $140,000.
17) Evergreen Corp. issues 10,000 shares of $5 par common stock for $6.50 per share. The
amount credited to paid-in capital in excess of par is:
A) $65,000.
B) $10,000.
C) $50,000.
D) $15,000.
18) The entry to record TLR, Inc. selling 800 shares of $6 par common stock at $8 per share
would be to:
A) debit Cash $6,400; credit Common Stock $4,800; credit Paid-In Capital in Excess of Par–
Common Stock $1,600.
B) debit Cash $4,800; credit Common Stock $4,800.
C) debit Cash $6,400; debit Paid-In Capital in Excess of Par–Common $1,600; credit Common
Stock $8,000.
D) debit Cash $6,400; credit Common Stock $6,400.
19) The entry to record S&C, Inc. selling 1,000 shares of $12 par common stock for $20 per
share would be to:
A) debit Cash $20,000; credit Common Stock $20,000.
B) debit Cash $20,000; credit Common Stock $12,000; credit Paid-In Capital in Excess of Par-
Common Stock $8,000.
C) debit Cash $12,000; credit Common Stock $12,000.
D) debit Cash $12,000; debit Paid-In Capital in Excess of Par–Common $8,000; credit Common
Stock $20,000.
20) The entry to record selling 150 shares of $30 stated value common stock for $40 per share
would include:
A) debiting Common Stock for $6,000.
B) crediting Cash for $6,000.
C) crediting Paid-in Capital in Excess of Stated Value for $1,500.
D) debiting Paid-in Capital in Excess of Stated Value for $1,500.
21) The entry to record selling 300 shares of stated value $60 common stock for $70 per share
would be:
A) debit Cash $21,000; credit Common Stock $21,000.
B) debit Cash $18,000; credit Common Stock $18,000.
C) debit Cash $18,000; debit Paid-in Capital in Excess of Stated Value–$3,000; credit Common
Stock $21,000.
D) debit Cash $21,000; credit Common Stock $18,000; credit Paid-in Capital in Excess of Stated
Value–$3,000.
22) The entry to record selling 500 shares of stated value $40 common stock for $52 per share
would be:
A) debit Cash $26,000; credit Common Stock $20,000; credit Paid-in Capital in Excess of Stated
Value–$6,000.
B) debit Cash $20,000; credit Common Stock $20,000.
C) debit Cash $20,000; debit Paid-in Capital in Excess of Stated Value–$6,000; credit Common
Stock $26,000.
D) debit Cash $26,000; credit Common Stock $26,000.
23) A company issued 500 shares of $3 par common stock in exchange for a piece of equipment
with a current market value of $20,000. Which of the following is the correct journal entry for
this transaction?
A)
Equipment
20,000
Common Stock
1,500
Paid-in Capital in Excess of Par — Common
18,500
B)
Paid-in Capital in Excess of Par — Common
18,500
Common Stock
1,500
Equipment
20,000
C)
Equipment
20,000
Common Stock
20,000
D)
Equipment
20,000
Common Stock
500
Paid-in Capital in Excess of Par — Common
19,500
24) Five hundred shares of $25 par common stock were exchanged for a piece of equipment with
a current market value of $13,500. The journal entry to record the transaction would include a:
A) debit to Equipment for $12,500.
B) debit to Common Stock for $12,500.
C) credit to Paid-In Capital in Excess of Par–Common for $1,000.
D) credit to Common Stock for $13,500.