Chapter 11 3 Advantages Corporation A Separate Legal Existence B

Document Type
Test Prep
Book Title
Financial Accounting-- Binder Ready Version: Tools for Business Decision Making 8th Edition
Authors
Donald E. Kieso, Jerry J. Weygandt, Paul D. Kimmel
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
11-41
201. The following information pertains to Marsh Company. Assume that all balance sheet
amounts represent average balance figures.
Total asset $400,000
Stockholders’ equity—common 200,000
Total stockholders’ equity 280,000
Sales 120,000
Net income 30,000
Number of shares of common stock 8,000
Common dividends 6,000
Preferred dividends 4,000
What is Marsh’s return on common stockholders’ equity?
a. 15%.
b. 13.0%.
c. 10.0%.
d. 9.3%.
202. Which of the following statements is true regarding corporate performance ratios?
a. A high payout ratio may indicate that a company is retaining earnings for future growth
investments.
b. As a company grows larger, it is easy to sustain a high return on common
stockholder's equity.
c. Return on common stockholder's equity is often higher under bond financing rather
than common stock financing.
d. Low growth rates are characterized by low payout ratios.
*203. John Jones Company has 20,000 shares of $100 par value common stock. Assuming that
the proper journal entry was made to record a 5% common stock dividend on the
declaration date when the market value of the stock was $135, which of the following
accounts would be debited when the stock dividend is distributed?
a. Retained Earnings.
b. Dividends Payable.
c. Common Stock Dividends Distributable.
d. Paid-in Capital in Excess of Par Value.
*204. On January 1, Hamblin Corporation had 120,000 shares of $10 par value common stock
outstanding. On March 17 the company declared a 10% stock dividend to stockholders of
record on March 20. Market value of the stock was $13 on March 17. The entry to record
the transaction of March 17 would include a
a. credit to Stock Dividends for $36,000.
b. credit to Cash for $156,000.
c. credit to Common Stock Dividends Distributable for $120,000.
d. debit to Common Stock Dividends Distributable for $120,000.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-42
*205. On January 1, Hamblin Corporation had 120,000 shares of $10 par value common stock
outstanding. On March 17 the company declared a 10% stock dividend to stockholders of
record on March 20. Market value of the stock was $13 on March 17. The stock was
distributed on March 30. The entry to record the transaction of March 30 would include a
a. credit to Cash for $120,000.
b. debit to Common Stock Dividends Distributable for $120,000.
c. credit to Paid-in Capital in Excess of Par Value for $36,000.
d. debit to Stock Dividends for $36,000.
*206. On January 1, Ripken Corporation had 80,000 shares of $10 par value common stock
outstanding. On March 17 the company declared a 10% stock dividend to stockholders of
record on March 20. Market value of the stock was $13 on March 17. The entry to record
the transaction of March 17 would include a
a. debit to Stock Dividends for $104,000.
b. credit to Cash for $104,000.
c. credit to Common Stock Dividends Distributable for $104,000.
d. credit to Common Stock Dividends Distributable for $24,000.
*207. On January 1, Ripken Corporation had 80,000 shares of $10 par value common stock
outstanding. On March 17 the company declared a 10% stock dividend to stockholders of
record on March 20. Market value of the stock was $13 on March 17. The stock was
distributed on March 30. The entry to record the transaction of March 30 would include a
a. credit to Common Stock for $80,000.
b. debit to Common Stock Dividends Distributable for $104,000.
c. credit to Paid-in Capital in Excess of Par Value for $24,000.
d. debit to Stock Dividends for $24,000.
*208. If a corporation declares a 10% stock dividend on its common stock, the account to be
debited on the date of declaration is
a. Common Stock Dividends Distributable.
b. Common Stock.
c. Paid-in Capital in Excess of Par.
d. Stock Dividends.
209. Which one of the following events would not require a journal entry on a corporation’s
books?
a. 2-for-1 stock split.
b. 100% stock dividend.
c. 2% stock dividend.
d. $1 per share cash dividend.
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
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210. Which of the following would not affect the balance of the Retained Earnings account?
a. Net income.
b. Stock dividend.
c. Stock split.
d. Gains and losses of a company.
*211. The declaration and distribution of a stock dividend will
a. increase total stockholders’ equity.
b. increase total assets.
c. decrease total assets.
d. have no effect on total assets.
*212. The declaration of a small stock dividend will
a. increase paid-in capital.
b. change the total of stockholders’ equity.
c. increase total liabilities.
d. increase total assets.
Answers to Multiple Choice Questions
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-44
BRIEF EXERCISES
Be. 213
1. Name at least three advantages of a corporation.
2. Corporations acquire treasury stock for a variety of purposes. Name three reasons why a
corporation may acquire treasury stock.
Reporting and Analyzing Stockholders’ Equity
11-45
Be. 214
Identify (by letter) each of the following characteristics as being an advantage or a disadvantage
of the corporate form of business or not applicable to the corporate form of business organization.
A = Advantage
D = Disadvantage
N = Not Applicable
Characteristics
_____ 1. Separate legal entity
_____ 2. Taxable entity resulting in additional taxes
_____ 3. Continuous life
_____ 4. Unlimited liability of owners
_____ 5. Government regulation
_____ 6. Separation of ownership and management
_____ 7. Ability to acquire capital
_____ 8. Ease of transfer of ownership
Be. 215
Patrick Corporation is authorized to issue 1,000,000 shares of $1 par value common stock.
During 2016, the company has the following stock transactions.
Jan. 15 Issued 700,000 shares of stock at $7 per share.
Sept. 5 Purchased 20,000 shares of common stock for the treasury at $8 per share.
Dec. 6 Declared a $0.50 per share dividend to stockholders of record on December 20,
payable January 3, 2017.
Instructions
Journalize the transactions for Patrick Corporation.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-46
Be. 216
An inexperienced accountant for Teahan Corporation made the following entries.
July 1 Cash ................................................................................... 170,000
Common Stock ........................................................... 170,000
(Issued 20,000 shares of no-par common stock,
stated value $5 per share)
Sept. 1 Common Stock ................................................................... 36,000
Retained Earnings .............................................................. 24,000
Cash ........................................................................... 60,000
(Purchased 4,000 shares issued on July 1 for the
treasury at $15 per share)
Instructions
On the basis of the explanation for each entry, prepare the entry that should have been made for
the transactions. (Omit explanations.)
Be. 217
On January 1, 2017, Wooden Company issued 16,000 shares of $2 par value common stock for
$120,000. On March 1, 2017, the company purchased 2,000 shares of its common stock for $15
per share for the treasury.
Instructions
Journalize the stock transactions of Wooden Company in 2017.
Reporting and Analyzing Stockholders’ Equity
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Solution 217 (5 min.)
Be. 218
Samson Company had the following transactions.
1. Issued 5,000 shares of $100 par preferred stock at $107 for cash.
2. Issued 8,000 share of common stock with a par value of $10 for $120,000.
3. Purchased 500 shares of treasury common stock for $12,000.
Instructions
Prepare the journal entries to record the above stock transactions.
Be. 219
In its first year of operations, Martinez Corporation had the following transactions pertaining to its
$10 par value preferred stock.
Feb. 1 Issued 8,000 shares for cash at $24 per share.
July 1 Issued 6,000 shares for cash at $25 per share.
Instructions
(a) Journalize the transactions.
(b) Indicate the amount to be reported for (1) preferred stock, and (2) paid-in capital in excess
of par valuepreferred stock at the end of the year.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-48
Solution 219 (610 min.)
Be. 220
The Huntsman Corporation has the following stockholders’ equity accounts:
Preferred Stock
Paid-in Capital in Excess of Par ValuePreferred Stock
Common Stock
Paid-in Capital in Excess of Stated ValueCommon Stock
Retained Earnings
Treasury StockCommon
Instructions
Classify each account using the following tabular alignment.
Paid-in Capital Retained
Account Capital Stock Additional Earnings Other
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
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Be. 221
Lindy Corporation has 1,000,000 authorized shares of $20 par value common stock. As of June
30, 2017, there were 600,000 shares issued and outstanding. On June 30, 2017, the board of
directors declared a $0.50 per share cash dividend to be paid on August 1, 2017.
Instructions
Prepare the necessary journal entries to be recorded on (a) the date of declaration, (b) the date of
record, and (c) the date of payment.
Be. 222
On November 1, 2017, Kalen Corporation’s stockholders’ equity section is as follows:
Common stock, $10 par value $600,000
Paid-in capital in excess of par valueCommon Stock 180,000
Retained earnings 200,000
Total stockholders’ equity $980,000
On November 1, Kalen declares and distributes a 15% stock dividend when the fair value of the
stock is $16 per share.
Instructions
Indicate the balances in the stockholders’ equity accounts after the stock dividend has been
distributed.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-50
Be. 223
Listed below are items typically found in the stockholders' equity section of the balance sheet.
Common stock, $10 stated value
Retained earnings
8% Preferred stock, $100 par value
Paid-in capital in excess of par valuepreferred Stock
Paid-in capital in excess of stated valuecommon Stock
Treasury stockcommon
Stockholders’ equity
Paid-in capital
Capital stock
Additional paid-in capital
Total additional paid-in capital
Total paid-in capital
Retained earnings
Total paid-in capital and retained earnings
Total stockholders’ equity
Instructions
Place each of the items listed below in the appropriate subdivision of the stockholders’ equity
section of a balance sheet.
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
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Be. 224
The following information is available for Epstein Corporation
2017 2016
Average common stockholders’ equity $1,500,000 $1,000,000
Average total stockholders’ equity 2,000,000 1,500,000
Common dividends declared and paid 72,000 50,000
Preferred dividends declared and paid 30,000 30,000
Net income 180,000 150,000
Instructions
Compute the payout ratio and return on common stockholders’ equity for both years. Briefly
comment on your findings.
EXERCISES
Ex. 225
The corporate charter of Torres Corporation allows the issuance of a maximum of 4,000,000
shares of $1 par value common stock. During its first three years of operation, Torres issued
2,080,000 shares at $15 per share. It later acquired 80,000 of these shares as treasury stock for
$25 per share.
Instructions
Based on the above information, answer the following questions:
(a) How many shares were authorized?
(b) How many shares were issued?
(c) How many shares are outstanding?
(d) What is the balance of the Common Stock account?
(e) What is the balance of the Treasury Stock account?
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-52
Ex. 226
The following items were shown on the balance sheet of Martin Corporation on December 31,
2017:
Stockholders’ Equity
Paid-In Capital
Capital Stock
Common stock, $5 par value, 750,000 shares
authorized; ______ shares issued and ______ outstanding ....................... $3,000,000
Additional paid-in capital
In excess of par value ........................................................................... 180,000
Total paid-in capital ......................................................................... 3,180,000
Retained Earnings ............................................................................................ 500,000
Total paid-in capital and retained earnings ............................................ 3,680,000
Less: Treasury stock (20,000 shares) .............................................................. 280,000
Total stockholders’ equity ...................................................................... $3,400,000
Instructions
Complete the following statements and show your computations.
(a) The number of shares of common stock issued was _______________.
(b) The number of shares of common stock outstanding was ____________.
(c) The total sales price of the common stock when issued was $____________.
(d) How much did the treasury stock cost per share? $_______________
(e) What was the average issue price of the common stock? $______________
FOR INSTRUCTOR USE ONLY
Ex. 227
Miles Co. had these transactions during the current period.
June 12 Issued 50,000 shares of $3 stated value common stock for cash of $250,000.
July 11 Issued 2,000 shares of $100 par value preferred stock for cash at $108 per share.
Nov. 28 Purchased 2,000 shares of treasury stock for $10,000.
Instructions
Prepare the journal entries for the preceding transactions.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-54
Ex. 228
On January 1, 2017, Browning Corporation had 75,000 shares of $1 par value common stock
issued and outstanding. During the year, the following transactions occurred:
Mar. 1 Issued 90,000 shares of common stock for $675,000
June 1 Declared a cash dividend of $2.00 per share to stockholders of record on June 15
June 30 Paid the $2.00 cash dividend
Dec. 1 Purchased 5,000 shares of common stock for the treasury for $18 per share
Dec. 15 Declared a cash dividend on outstanding shares of $2.50 per share to stockholders
of record on December 31
Net income for 2017 amounted to $951,000.
Instructions
Prepare journal entries to record the above transactions.
Ex. 229
The stockholders’ equity section of Piper Corporation’s balance sheet at December 31, 2016,
appears below:
Stockholders’ equity
Paid-in capital
Common stock, $10 par value, 400,000 shares authorized;
300,000 issued and outstanding $3,000,000
Paid-in capital in excess of par 1,200,000
Total paid-in capital 4,200,000
Retained earnings 900,000
Total stockholders’ equity $5,100,000
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
11-55
Ex. 229 (Cont.)
During 2017, the following stock transactions occurred:
Jan. 18 Issued 80,000 shares of common stock at $23 per share.
Aug. 20 Purchased 20,000 shares of Piper Corporation’s common stock at $25 per share to
be held in the treasury.
Instructions
(a) Prepare the journal entries to record the above stock transactions.
(b) Prepare the stockholders’ equity section of the balance sheet for Piper Corporation at
December 31, 2017. Assume that net income for the year was $150,000 and that no
dividends were declared.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-56
Ex. 230
The stockholders' equity section of Patrick Corporation's balance sheet at December 31 is
presented here:
PATRICK CORPORATION
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Preferred stock, cumulative, 10,000 shares authorized,
6,000 shares issued and outstanding $ 600,000
Common stock, no par, 750,000 shares authorized,
600,000 shares issued 6,000,000
Total paid-in capital 6,600,000
Retained earnings 1,358,000
Total paid-in capital and retained earnings 7,958,000
Less: Treasury stock (4,000 common shares) 32,000
Total stockholders' equity $7,926,000
Instructions
From a review of the stockholders' equity section, answer the following questions.
(a) How many shares of common stock are outstanding?
(b) Assuming there is a stated value, what is the stated value of the common stock?
(c) What is the par value of the preferred stock?
(d) If the annual dividend on preferred stock is $30,000, what is the dividend rate on preferred
stock?
(e) If dividends of $60,000 were in arrears on preferred stock, what would be the balance
reported for retained earnings?
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
11-57
Ex. 231
Ritchey Corporation has the following capital stock outstanding at December 31, 2017:
9% Preferred stock, $100 par value, cumulative
12,000 shares issued and outstanding ................................................... $1,200,000
Common stock, no par, $10 stated value, 500,000 shares authorized,
300,000 shares issued and outstanding ................................................. 3,000,000
The preferred stock was issued at $125 per share. The common stock was issued at an average
per share price of $14.
Instructions
Prepare the paid-in capital section of the balance sheet at December 31, 2017.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-58
Ex. 232
During 2017 Kenton Corporation had the following transactions and events:
1. Issued par value preferred stock for cash at par value
2. Issued par value common stock for cash at an amount greater than par value
3. Completed a 2 for 1 stock split in which the $10 par value common stock was changed to $5
par value stock
*4. Declared a small stock dividend when the market value was higher than the par value
5. Declared a cash dividend
*6. Issued the shares of common stock required by the stock dividend declaration in 4. above
7. Issued par value common stock for cash at par value
8. Paid the cash dividend
Instructions
Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders’ equity.
Present your answers in tabular form with the following columns. Use (I) for increase, (D) for
decrease, and (NE) for no effect.
Paid-in Capital
Capital Additional Retained
Item Stock Paid-in Capital Earnings
Reporting and Analyzing Stockholders’ Equity
11-59
*Ex. 233
On January 1, 2017, the Black Corporation had $2,000,000 of $10 par value common stock
outstanding that was issued at par and Retained Earnings of $1,000,000. The company issued
140,000 shares of common stock at $15 per share on July 1. On December 15, the board of
directors declared a 10% stock dividend to stockholders of record on December 31, 2017,
payable on January 15, 2018. The market value of Black Corporation stock was $17 per share on
December 15 and $16 per share on December 31. Net income for 2017 was $500,000.
Instructions
(1) Journalize the issuance of stock on July 1 and the declaration of the stock dividend on
December 15.
(2) Prepare the stockholders’ equity section of the balance sheet for Black Corporation at
December 31, 2017.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-60
Ex. 234
The stockholders’ equity section of Fleming Corporation at December 31, 2016, included the
following:
4% preferred stock, $100 par value, cumulative,
15,000 shares authorized, 10,000 shares issued and outstanding ..... $1,000,000
Common stock, $10 par value, 250,000 shares authorized,
200,000 shares issued and outstanding ............................................ $2,000,000
Dividends were not declared on the preferred stock in 2016 and are in arrears.
On September 15, 2017, the board of directors of Fleming Corporation declared dividends on the
preferred stock to stockholders of record on October 1, 2017, payable on October 15, 2017.
On November 1, 2017, the board of directors declared a $1 per share dividend on the common
stock, payable November 30, 2017, to stockholders of record on November 15, 2017.
Instructions
Prepare the journal entries that should be made by Fleming Corporation on the dates indicated
below:
September 15, 2017 November 1, 2017
October 1, 2017 November 15, 2017
October 15, 2017 November 30, 2017

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