CHAPTER 11
CORPORATIONS: ORGANIZATION, STOCK TRANSACTIONS,
DIVIDENDS, AND RETAINED EARNINGS
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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True-False Statements
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a
41.
9
C
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3
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3
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sg48.
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a40.
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Multiple Choice Questions
51.
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103.
3
AN
129.
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105.
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131.
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132.
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107.
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133.
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159.
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134.
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57.
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109.
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135.
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58.
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110.
3
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136.
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59.
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85.
2
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111.
3
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137.
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163.
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AP
60.
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86.
2
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112.
3
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138.
5
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164.
5
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61.
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87.
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3
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139.
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165.
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62.
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2
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114.
3
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140.
5
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166.
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63.
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141.
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143.
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72.
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73.
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125.
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126.
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127.
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76.
1
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102.
2
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128.
4
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154.
5
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180.
5
AP
sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 2
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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Item
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Multiple Choice Questions (Cont.)
181.
5
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197.
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a229.
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st245.
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5
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st
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231.
1
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232.
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a
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a226.
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211.
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a227.
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Brief Exercises
259.
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Exercises
276.
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278.
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296.
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279.
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288.
3
AN
297.
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315.
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281.
1,3
C
290.
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3,4,7
AN
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5-7
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Completion Statements
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Matching Statements
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Short-Answer Essay Statements
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SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 3
Item
Type
Item
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Item
Type
Item
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Item
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Item
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Item
Type
Learning Objective 1
1.
TF
10.
TF
55.
MC
64.
MC
73.
MC
82.
MC
323.
C
2.
TF
11.
TF
56.
MC
65.
MC
74.
MC
231.
MC
324.
C
3.
TF
12.
TF
57.
MC
66.
MC
75.
MC
232.
MC
338.
SA
4.
TF
42.
TF
58.
MC
67.
MC
76.
MC
259.
BE
5.
TF
43.
TF
59.
MC
68.
MC
77.
MC
281.
Ex
6.
TF
51.
MC
60.
MC
69.
MC
78.
MC
319.
C
7.
TF
52.
MC
61.
MC
70.
MC
79.
MC
320.
C
8.
TF
53.
MC
62.
MC
71.
MC
80.
MC
321.
C
9.
TF
54.
MC
63.
MC
72.
MC
81.
MC
322.
C
Learning Objective 2
13.
TF
85.
MC
91.
MC
97.
MC
233.
MC
277.
Ex
337.
Mat
14.
TF
86.
MC
92.
MC
98.
MC
260.
BE
278.
Ex
340.
SA
44.
TF
87.
MC
93.
MC
99.
MC
261.
BE
279.
Ex
45.
TF
88.
MC
94.
MC
100.
MC
262.
BE
280.
Ex
83.
MC
89.
MC
95.
MC
101.
MC
264.
BE
282.
Ex
84.
MC
90.
MC
96.
MC
102.
MC
276.
Ex
325.
C
Learning Objective 3
15.
TF
104.
MC
111.
MC
118.
MC
262.
BE
286.
Ex
341.
SA
16.
TF
105.
MC
112.
MC
119.
MC
263.
BE
287.
Ex
17.
TF
106.
MC
113.
MC
120.
MC
281.
Ex
288.
Ex
18.
TF
107.
MC
114.
MC
234.
MC
282.
Ex
289.
Ex
19.
TF
108.
MC
115.
MC
235.
MC
283.
Ex
290.
Ex
46.
TF
109.
MC
116.
MC
236.
MC
284.
Ex
291.
Ex
103.
MC
110.
MC
117.
MC
261.
BE
285.
Ex
326.
C
Learning Objective 4
20.
TF
123.
MC
128.
MC
133.
MC
283.
Ex
295.
Ex
21.
TF
124.
MC
129.
MC
237.
MC
291.
Ex
296.
Ex
22.
TF
125.
MC
130.
MC
238.
MC
292.
Ex
327.
C
121.
MC
126.
MC
131.
MC
264.
BE
293.
Ex
328.
C
122.
MC
127.
MC
132.
MC
265.
BE
294.
Ex
339.
SA
Learning Objective 5
23.
TF
140.
MC
153.
MC
166.
MC
179.
MC
192.
MC
300.
Ex
24.
TF
141.
MC
154.
MC
167.
MC
180.
MC
193.
MC
301.
Ex
25.
TF
142.
MC
155.
MC
168.
MC
181.
MC
239.
MC
302.
Ex
26.
TF
143.
MC
156.
MC
169.
MC
182.
MC
240.
MC
303.
Ex
27.
TF
144.
MC
157.
MC
170.
MC
183.
MC
241.
MC
304.
Ex
47.
TF
145.
MC
158.
MC
171.
MC
184.
MC
266.
BE
305.
Ex
48.
TF
146.
MC
159.
MC
172.
MC
185.
MC
267.
BE
329.
C
134.
MC
147.
MC
160.
MC
173.
MC
186.
MC
268.
BE
330.
C
135.
MC
148.
MC
161.
MC
174.
MC
187.
MC
269.
BE
331.
C
136.
MC
149.
MC
162.
MC
175.
MC
188.
MC
270.
BE
342.
SA
137.
MC
150.
MC
163.
MC
176.
MC
189.
MC
297.
Ex
343.
SA
138.
MC
151.
MC
164.
MC
177.
MC
190.
MC
298.
Ex
347.
SA
139.
MC
152.
MC
165.
MC
178.
MC
191.
MC
299.
Ex
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 4
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 6
28.
TF
33.
TF
195.
MC
200.
MC
205.
MC
272.
BE
309.
Ex
29.
TF
34.
TF
196.
MC
201.
MC
206.
MC
302.
Ex
332.
C
30.
TF
35.
TF
197.
MC
202.
MC
242.
MC
306.
Ex
333.
C
31.
TF
49.
TF
198.
MC
203.
MC
243.
MC
307.
Ex
344.
SA
32.
TF
194.
MC
199.
MC
204.
MC
271.
BE
308.
Ex
Learning Objective 7
36.
TF
209.
TF
216.
MC
223.
MC
273.
BE
311.
Ex
335.
C
37.
TF
210.
TF
217.
MC
224.
MC
274.
BE
312.
Ex
336.
C
38.
TF
211.
TF
218.
MC
225.
MC
283.
Ex
313.
Ex
345.
SA
39.
TF
212.
TF
219.
MC
244.
MC
291.
Ex
314.
Ex
346.
SA
50.
TF
213.
MC
220.
MC
245.
MC
302.
Ex
315.
Ex
348.
SA
207.
TF
214.
MC
221.
MC
246.
MC
304.
Ex
316.
Ex
208.
TF
215.
MC
222.
MC
247.
MC
310.
Ex
334.
C
Learning Objective 8
40.
TF
226.
MC
227.
MC
aLearning Objective 9
41.
TF
229.
MC
248.
MC
317.
Ex
228.
MC
230.
MC
275.
BE
318.
Ex
Learning Objective 10
249.
MC
251.
MC
253.
MC
255.
MC
257.
MC
250.
MC
252.
MC
254.
MC
256.
MC
258.
MC
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise
The chapter also contains one set of eighteen Matching questions and eleven Short-Answer
Essay questions.
CHAPTER LEARNING OBJECTIVES
1. Identify the major characteristics of a corporation. The major characteristics of a
corporation are separate legal existence, limited liability of stockholders, transferable
ownership rights, ability to acquire capital, continuous life, corporation management,
government regulations, and additional taxes.
2. Record the issuance of common stock. When companies record the issuance of common
stock for cash, they credit the par value of the shares to Common Stock. They record in a
separate paid-in capital account the portion of the proceeds that is above or below par value .
When no-par common stock has a stated value, the entries are similar to those for par value
stock. When no-par stock does not have a stated value, companies credit the entire proceeds
to Common Stock.
3. Explain the accounting for treasury stock. The cost method is generally used in
accounting for treasury stock. Under this approach, companies debit Treasury Stock at the
price paid to reacquire the shares. They credit the same amount to Treasury Stock when they
sell the shares. The difference between the sales price and cost is recorded in stockholders’
equity accounts, not in income statement accounts.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
11 – 5
4. Differentiate preferred stock from common stock. Preferred stock has contractual
provisions that give it priority over common stock in certain areas. Typically, preferred
stockholders have a preference (1) to dividends and (2) to assets in liquidation. They usually
do not have voting rights.
5. Prepare the entries for cash dividends and stock dividends. Companies make entries for
both cash and stock dividends at the declaration date and the payment date. At the
declaration date, the entries are cash dividend—debit Cash Dividends and credit Dividends
Payable; small stock dividend—debit Stock Dividends, credit Paid-in Capital in Excess of Par
(or Stated) Value—Common Stock, and credit Common Stock Dividends Distributable. On the
payment date, the entries for cash and stock dividends are: cash dividend—debit Dividends
Payable and credit Cash; small stock dividend—debit Common Stock Dividends Distributable
and credit Common Stock.
6. Identify the items reported in a retained earnings statement. Companies report each of
the individual debits and credits to retained earnings in the retained earnings statement.
Additions consist of net income and prior period adjustments to correct understatements of
prior years’ net income. Deductions consist of net loss, adjustments to correct overstatements
of prior years’ net income, cash and stock dividends, and some disposals of treasury stock.
7. Prepare and analyze a comprehensive stockholders’ equity section. In the stockholders
equity section, paid-in capital and retained earnings are reported and specific sources of paid–
in capital are identified. Within paid-in capital, two classifications are shown: capital stock and
additional paid-in capital. If a corporation has treasury stock, the cost of treasury stock is
deducted from total paid-in capital and retained earnings to obtain total stockholders’ equity.
One measure of profitability is the return on common stockholders’ equity. It is calculated by
dividing net income minus preferred dividends by average common stockholders’ equity.
a8. Describe the use and content of the stockholders’ equity statement. Corporations must
disclose changes in stockholders’ equity accounts and may choose to do so by issuing a
separate stockholders’ equity statement. This statement, prepared in columnar form, shows
changes in each stockholders’ equity account and in total stockholders’ equity during the
accounting period. When this statement is presented, a retained earnings statement is not
necessary.
a9. Compute book value per share. Book value per share represents the equity a common
stockholder has in the net assets of a corporation from owning one share of stock. When
there is only common stock outstanding, the formula for computing book value is: Total
stockholders’ equity Number of common shares outstanding = Book value per share.
TRUE-FALSE STATEMENTS
1. A corporation is not an entity which is separate and distinct from its owners.
2. A corporation can be organized for the purpose of making a profit or it may be not-for-
profit.
3. A corporation acts under its own name rather than in the name of its stockholders.
Test Bank for Financial Accounting, Ninth Edition
11 – 6
4. If a corporation pays taxes on its income, then stockholders will not have to pay taxes on
the dividends received from that corporation.
FSA
5. A corporation must be incorporated in each state in which it does business.
FSA
6. A stockholder has the right to vote in the election of the board of directors.
7. A proxy is a legal document that instructs a stockholder’s agent how to vote shares of
stock for the stockholder.
8. As soon as a corporation is authorized to issue stock, an accounting journal entry should
be made recording the total value of the shares authorized.
9. The par value of common stock must always be equal to its market value on the date the
stock is issued.
10. When no-par value stock does not have a stated value, the entire proceeds from the
issuance of the stock becomes legal capital.
11. A corporation can issue more shares than it is authorized in its charter, if the board of
directors approves of an increase in the number of authorized shares.
12. The market value of a corporation’s stock is determined by the number of shares that the
corporation has been authorized to issue.
13. Stock can be issued only in exchange for cash.
14. The par value of stock issued for noncash assets is never a factor in determining the cost
of the assets received.
15. The acquisition of treasury stock by a corporation increases total assets and total
stockholders’ equity.
16. Treasury stock should not be classified as a current asset.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
11 – 7
17. Treasury stock purchased for $25 per share that is reissued at $20 per share, results in a
Loss on Sale of Treasury Stock being recognized on the income statement.
18. Treasury stock is a contra stockholders’ equity account.
19. The number of common shares outstanding can never be greater than the number of
shares issued.
20. Preferred stock has contractual preference over common stock in certain areas.
21. Preferred stockholders generally do not have the right to vote for the board of directors.
22. Dividends in arrears on cumulative preferred stock are considered a liability.
23. Dividends may be declared and paid in cash or stock.
24. Cash dividends are not a liability of the corporation until they are declared by the board of
directors.
25. The amount of a cash dividend liability is recorded on the date of record because it is on
that date that the persons or entities who will receive the dividend are identified.
FSA
26. A 10% stock dividend will increase the number of shares outstanding but the book value
per share will decrease.
FSA
27. A 3-for-1 common stock split will increase total stockholders’ equity but reduce the par or
stated value per share of common stock.
FSA
28. Retained earnings represents the amount of cash available for dividends.
29. Net income of a corporation should be closed to retained earnings and net losses should
be closed to paid-in capital accounts.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 8
30. A debit balance in the Retained Earnings account is identified as a deficit.
31. A correction in income of a prior period involves either a debit or credit to the Retained
Earnings account.
FSA
32. Prior period adjustments to income are reported in the current year’s income statement.
FSA
33. Retained earnings that are restricted are unavailable for dividends.
FSA
34. Restricted retained earnings are available for preferred stock dividends but unavailable for
common stock dividends.
FSA
35. A retained earnings statement shows the same information as a corporation income
statement.
36. A detailed stockholders’ equity section in the balance sheet will list the names of
individuals who are eligible to receive dividends on the date of record.
37. Common Stock Dividends Distributable is shown within the Paid-in Capital subdivision of
the stockholders’ equity section of the balance sheet.
38. Return on common stockholders’ equity is computed by dividing net income by ending
stockholders’ equity.
39. Many companies prepare a stockholders’ equity statement instead of presenting a
detailed stockholders’ equity section in the balance sheet.
a40. The stockholders’ equity statement shows the changes in each stockholders’ equity
account and in total stockholders’ equity during the year.
a41. Book value per share of common stock is the same amount as the market value per
share.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 9
42. A successful corporation can have a continuous and perpetual life.
43. Organizational costs are capitalized by debiting an intangible asset entitled Organization
Costs.
44. The cash proceeds from issuing par value stock may be equal to or greater than, but not
less than par value.
45. The cost of a noncash asset acquired in exchange for common stock should be either the
fair value of the consideration given up or the consideration received, whichever is more
clearly determinable.
46. Under the cost method, Treasury Stock is debited at the price paid to reacquire the
shares, and the same amount is credited to Treasury Stock when the shares are sold.
47. A dividend based on paid-in capital is termed a liquidating dividend.
48. Common Stock Dividends Distributable is reported as additional paid-in capital in the
stockholders’ equity section.
49. A prior period adjustment is reported as an adjustment of the beginning balance of
Retained Earnings.
50. In the stockholders’ equity section, paid-in capital and retained earnings are reported and
the specific sources of paid-in capital are identified.
Answers to True-False Statements
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Test Bank for Financial Accounting, Ninth Edition
11 – 10
MULTIPLE CHOICE QUESTIONS
51. Which one of the following is a privately held corporation?
a. Intel
b. General Electric
c. Caterpillar Inc.
d. Cargill Inc.
52. The dominant form of business organization in the United States in terms of dollar sales
volume, earnings, and employees is
a. the sole proprietorship.
b. the partnership.
c. the corporation.
d. not known.
53. Under the corporate form of business organization
a. a stockholder is personally liable for the debts of the corporation.
b. stockholders’ acts can bind the corporation even though the stockholders have not
been appointed as agents of the corporation.
c. the corporation’s life is stipulated in its charter.
d. stockholders wishing to sell their corporation shares must get the approval of other
stockholders.
54. Stockholders of a corporation directly elect
a. the president of the corporation.
b. the board of directors.
c. the treasurer of the corporation.
d. all of the employees of the corporation.
55. The person responsible for maintaining the company’s cash position is the
a. controller.
b. treasurer.
c. vice-president.
d. president.
56. A factor which distinguishes the corporate form of organization from a sole proprietorship
or partnership is that a
a. corporation is organized for the purpose of making a profit.
b. corporation is subject to more federal and state government regulations.
c. corporation is an accounting economic entity.
d. corporation’s temporary accounts are closed at the end of the accounting period.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
11 – 11
57. Which one of the following would not be considered an advantage of the corporate form
of organization?
a. Limited liability of owners
b. Separate legal existence
c. Continuous life
d. Government regulation
58. The concept of an “artificial being” refers to which form of business organization?
a. Partnership
b. Sole proprietorship
c. Corporation
d. Limited partnership
59. The two ways that a corporation can be classified by purpose are
a. general and limited.
b. profit and not-for-profit.
c. state and federal.
d. publicly held and privately held.
60. The two ways that a corporation can be classified by ownership are
a. publicly held and privately held.
b. stock and non-stock.
c. inside and outside.
d. majority and minority.
61. Which of the following would not be true of a privately held corporation?
a. It is sometimes called a closely held corporation.
b. Its shares are regularly traded on the New York Stock Exchange.
c. It does not offer its shares for sale to the general public.
d. It is usually smaller than a publicly held company.
62. Which of the following is not true of a corporation?
a. It may buy, own, and sell property.
b. It may sue and be sued.
c. The acts of its owners bind the corporation.
d. It may enter into binding legal contracts in its own name.
63. Jason Thomas has invested $200,000 in a privately held family corporation. The
corporation does not do well and must declare bankruptcy. What amount does Thomas
stand to lose?
a. Up to his total investment of $200,000.
b. Zero.
c. The $200,000 plus any personal assets the creditors demand.
d. $100,000.
Test Bank for Financial Accounting, Ninth Edition
11 – 12
64. Which of the following statements reflects the transferability of ownership rights in a
corporation?
a. If a stockholder decides to transfer ownership, he must transfer all of his shares.
b. A stockholder may dispose of part or all of his shares.
c. A stockholder must obtain permission from the board of directors before selling shares.
d. A stockholder must obtain permission from at least three other stockholders before
selling shares.
65. A corporate board of directors does not generally
a. select officers.
b. formulate operating policies.
c. declare dividends.
d. execute policy.
66. A typical organization chart showing delegation of authority would show
a. stockholders delegating to the board of directors.
b. the board of directors delegating to stockholders.
c. the chief executive officer delegating to the board of directors.
d. the controller delegating to the chief executive officer.
67. The officer who is generally responsible for maintaining the cash position of the
corporation is the
a. controller.
b. treasurer.
c. cashier.
d. internal auditor.
68. The chief accounting officer in a corporation is the
a. treasurer.
b. president.
c. controller.
d. vice-president of finance.
69. The ability of a corporation to obtain capital is
a. enhanced because of limited liability and ease of share transferability.
b. less than a partnership.
c. restricted because of the limited life of the corporation.
d. about the same as a partnership.
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70. Which of the following statements concerning taxation is accurate?
a. Partnerships pay state income taxes but not federal income taxes.
b. Corporations pay federal income taxes but not state income taxes.
c. Corporations pay federal and state income taxes.
d. Only the owners must pay taxes on corporate income.
FSA
71. Which of the following statements is not considered a disadvantage of the corporate form
of organization?
a. Additional taxes
b. Government regulations
c. Limited liability of stockholders
d. Separation of ownership and management
72. What is ordinarily the first step in the formation of a corporation?
a. Development of by-laws for the corporation
b. Issuance of the corporate charter
c. Application for incorporation to the appropriate Secretary of State
d. Registration with the SEC
73. Which one of the following is not an ownership right of a stockholder in a corporation?
a. To vote in the election of directors
b. To declare dividends on the common stock
c. To share in assets upon liquidation
d. To share in corporate earnings
74. If no-par stock is issued without a stated value, then
a. the par value is automatically $1 per share.
b. the entire proceeds are considered to be legal capital.
c. there is no legal capital.
d. the corporation is automatically in violation of its state charter.
75. If a stockholder cannot attend a stockholder’s meeting, he may delegate his voting rights
by means of
a. an absentee ballot.
b. a proxy.
c. a certified letter.
d. a telegram.
Test Bank for Financial Accounting, Ninth Edition
11 – 14
76. If a corporation has only one class of stock, it is referred to as
a. classless stock.
b. preferred stock.
c. solitary stock.
d. common stock.
77. The term residual claim refers to a stockholders’ right to
a. receive dividends.
b. share in assets upon liquidation.
c. acquire additional shares when offered.
d. exercise a proxy vote.
78. Which of the following factors does not affect the initial market price of a stock?
a. The company’s anticipated future earnings
b. The par value of the stock
c. The current state of the economy
d. The expected dividend rate per share
79. If an investment firm underwrites a stock issue, the
a. risk of being unable to sell the shares stays with the issuing corporation.
b. corporation obtains cash immediately from the investment firm.
c. investment firm has guaranteed profits on the sale of the stock.
d. issuance of stock is likely to be directly to creditors.
80. The par value of a stock
a. is legally significant.
b. reflects the most recent market price.
c. is selected by the SEC.
d. is indicative of the worth of the stock.
81. A corporation has the following account balances: Common stock, $1 par value, $60,000;
Paid-in Capital in Excess of Par, $1,300,000. Based on this information, the
a. legal capital is $1,360,000.
b. number of shares issued are 60,000.
c. number of shares outstanding are 1,360,000.
d. average price per share issued is $22.50.
82. The authorized stock of a corporation
a. only reflects the initial capital needs of the company.
b. is indicated in its by-laws.
c. is indicated in its charter.
d. must be recorded in a formal accounting entry.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
11 – 15
83. When stock is issued for legal services, the transaction is recorded by debiting
Organization Expense for the
a. stated value of the stock.
b. par value of the stock.
c. market value of the stock.
d. book value of the stock.
84. If Vickers Company issues 5,000 shares of $5 par value common stock for $175,000,
a. Common Stock will be credited for $175,000.
b. Paid-In Capital in Excess of Par will be credited for $25,000.
c. Paid-In Capital in Excess of Par will be credited for $150,000.
d. Cash will be debited for $150,000.
85. If common stock is issued for an amount greater than par value, the excess should be
credited to
a. Cash.
b. Retained Earnings.
c. Paid-in Capital in Excess of Par.
d. Legal Capital.
86. If stock is issued for a noncash asset, the asset should be recorded on the books of the
corporation at
a. fair value.
b. cost.
c. zero.
d. a nominal amount.
87. If stock is issued for less than par value, the account
a. Paid-In Capital in Excess of Par is credited.
b. Paid-In Capital in Excess of Par is debited if a debit balance exists in the account.
c. Paid-In Capital in Excess of Par is debited if a credit balance exists in the account.
d. Retained Earnings is credited.
88. The sale of common stock below par
a. is a common occurrence in most states.
b. is not permitted in most states.
c. is a practice that most stockholders encourage.
d. requires that a liability be recorded for the difference between the sales price and the
par value of the shares.
89. Paid-In Capital in Excess of Stated Value
a. is credited when no-par stock does not have a stated value.
b. is reported as part of paid-in capital on the balance sheet.
c. represents the amount of legal capital.
d. normally has a debit balance.
Test Bank for Financial Accounting, Ninth Edition
11 – 16
90. A separate paid-in capital account is used to record each of the following except the
issuance of
a. no-par stock.
b. par value stock.
c. stated value stock.
d. treasury stock above cost.
91. Barton Company is a publicly held corporation whose $1 par value stock is actively traded
at $31 per share. The company issued 3,000 shares of stock to acquire land recently
advertised at $100,000. When recording this transaction, Barton Company will
a. debit Land for $100,000.
b. credit Common Stock for $93,000.
c. debit Land for $93,000.
d. credit Paid-In Capital in Excess of Par for $93,000.
92. Crain Company issued 2,000 shares of its $5 par value common stock in payment of its
attorney’s bill of $30,000. The bill was for services performed in helping the company
incorporate. Crain should record this transaction by debiting
a. Legal Expense for $10,000.
b. Legal Expense for $30,000.
c. Organization Expense for $10,000.
d. Organization Expense for $30,000.
93. In the financial statements, organization costs appears
a. immediately below Retained Earnings in the stockholders’ equity section.
b. in the income statement.
c. as part of paid-in capital in the stockholders’ equity section.
d. as an intangible asset.
94. Which of the following represents the largest number of common shares?
a. Treasury shares
b. Issued shares
c. Outstanding shares
d. Authorized shares
95. New Corp. issues 2,000 shares of $10 par value common stock at $16 per share. When
the transaction is recorded, credits are made to
a. Common Stock $20,000 and Paid-in Capital in Excess of Stated Value $12,000.
b. Common Stock $32,000.
c. Common Stock $20,000 and Paid-in Capital in Excess of Par $12,000.
d. Common Stock $20,000 and Retained Earnings $12,000.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
11 – 17
96. If Keene Company issues 9,000 shares of $5 par value common stock for $160,000, the
account
a. Common Stock will be credited for $45,000.
b. Paid-in Capital in Excess of Par will be credited for $45,000.
c. Paid-in Capital in Excess of Par will be credited for $160,000.
d. Cash will be debited for $115,000.
97. Carson Packaging Corporation began business in 2015 by issuing 30,000 shares of $3
par common stock for $8 per share and 12,000 shares of 6%, $10 par preferred stock for
par. At year end, the common stock had a market value of $12. On its December 31, 2015
balance sheet, Carson Packaging would report
a. Common Stock of $360,000.
b. Common Stock of $90,000.
c. Common Stock of $240,000.
d. Paid-In Capital of $90,000.
98. Hsu, Inc. issued 10,000 shares of stock at a stated value of $8/share. The total issue of
stock sold for $15 per share. The journal entry to record this transaction would include a
a. debit to Cash for $80,000.
b. credit to Common Stock for $80,000.
c. credit to Paid-in Capital in Excess of Par for $150,000.
d. credit to Common Stock for $150,000.
99. S. Lamar performed legal services for E. Garr. Due to a cash shortage, an agreement was
reached whereby E. Garr. would pay S. Lamar a legal fee of approximately $12,000 by
issuing 3,000 shares of its common stock (par $1). The stock trades on a daily basis and
the market price of the stock on the day the debt was settled is $4.50 per share. Given
this information, the journal entry for E. Garr. to record this transaction is:
a. Legal Expense 12,000
Common Stock 12,000
b. Legal Expense 12,000
Common Stock 12,000
c. Legal Expense 12,000
Common Stock 3,000
Paid-in Capital in Excess of Par – Common 9,000
d. Legal Expense 13,500
Common Stock 3,000
Paid-in Capital in Excess of Par – Common 10,500
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 18
100. Jarrett Company issued 900 shares of no-par common stock for $13,200. Which of the
following journal entries would be made if the stock has no stated value?
a. Cash 13,200
Common Stock 13,200
b. Cash 13,200
Common Stock 900
Paid-in Capital in Excess of Par 8,200
c. Cash 13,200
Common Stock 900
Paid-in Capital in Excess of Stated Value 12,300
d. Common Stock 13,200
Cash 13,200
101. Darman Company issued 700 shares of no-par common stock for $7,700. Which of the
following journal entries would be made if the stock has a stated value of $2 per share?
a. Cash 7,700
Common Stock 7,700
b. Cash 7,700
Common Stock 1,400
Paid-in Capital in Excess of Par 6,300
c. Cash 7,700
Common Stock 1,400
Paid-in Capital in Excess of Stated Value 6,300
d. Common Stock 7,700
Cash 7,700
102. Ralston Company is authorized to issue 10,000 shares of 8%, $100 par value preferred
stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If
Ralston issues 9,000 shares of common stock to pay its recent attorney’s bill of $37,500
for legal services on a land access dispute, which of the following would be the journal
entry for Ralston to record?
a. Legal Expense 9,000
Common Stock 9,000
b. Legal Expense 37,500
Common Stock 37,500
c. Legal Expense 37,500
Common Stock 9,000
Paid-in Capital in Excess of Stated Value – Common 28,500
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
11 – 19
MC. 102 (Cont.)
d. Legal Expense 37,500
Common Stock 9,000
Paid-in Capital in Excess of Par – Preferred 28,500
103. The following data is available for Blaine Corporation at December 31, 2015:
Common stock, par $10 (authorized 30,000 shares) $250,000
Treasury Stock (at cost $15 per share) 900
Based on the data, how many shares of common stock are outstanding?
a. 30,000
b. 25,000
c. 29,940
d. 24,940
104. The following data is available for Blaine Corporation at December 31, 2015:
Common stock, par $10 (authorized 30,000 shares) $250,000
Treasury Stock (at cost $15 per share) $ 900
Based on the data, how many shares of common stock have been issued?
a. 30,000
b. 25,000
c. 29,940
d. 24,940
105. Aaron, Inc. paid $120,000 to buy back 10,000 shares of its $1 par value common stock.
This stock was sold later at a selling price of $8 per share. The entry to record the sale
includes a
a. debit to Retained Earnings for $40,000.
b. credit to Retained Earnings for $10,000.
c. debit to Paid-in Capital from Treasury Stock for $120,000.
d. credit to Paid-in Capital from Treasury Stock for $10,000.
Test Bank for Financial Accounting, Ninth Edition
11 – 20
106. Karl Corporation was organized on January 2, 2015. During 2015, Karl issued 40,000
shares at $24 per share, purchased 6,000 shares of treasury stock at $26 per share, and
had net income of $600,000. What is the total amount of stockholders’ equity at December
31, 2015?
a. $1,280,000
b. $1,404,000
c. $1,416,000
d. $1,440,000
107. Evergreen Manufacturing Corporation purchased 5,000 shares of its own previously
issued $10 par common stock for $115,000. As a result of this event,
a. Evergreen’s Common Stock account decreased $50,000.
b. Evergreen’s total stockholders’ equity decreased $115,000.
c. Evergreen’s Paid-in Capital in Excess of Par account decreased $65,000.
d. All of these answers are correct.
108. A corporation purchases 40,000 shares of its own $30 par common stock for $45 per
share, recording it at cost. What will be the effect on total stockholders’ equity?
a. Increase by $1,800,000
b. Decrease by $1,200,000
c. Decrease by $1,800,000
d. Increase by $1,200,000
109. A corporation purchases 30,000 shares of its own $15 par common stock for $30 per
share, recording it at cost. What will be the effect on total stockholders’ equity?
a. Increase by $450,000
b. Decrease by $900,000
c. Increase by $900,000
d. Decrease by $450,000
110. Ramos Corporation sold 400 shares of treasury stock for $45 per share. The cost for the
shares was $35. The entry to record the sale will include a
a. credit to Gain on Sale of Treasury Stock for $14,000.
b. credit to Paid-in Capital from Treasury Stock for $4,000.
c. debit to Paid-in Capital in Excess of Par for $4,000.
d. credit to Treasury Stock for $18,000.
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111. Each of the following is correct regarding treasury stock except that it has been
a. issued.
b. fully paid for.
c. reacquired.
d. retired.
112. Treasury stock is
a. stock issued by the U.S. Treasury Department.
b. stock purchased by a corporation and held as an investment in its treasury.
c. corporate stock issued by the treasurer of a company.
d. a corporation’s own stock which has been reacquired but not retired.
113. The acquisition of treasury stock by a corporation
a. increases its total assets and total stockholders’ equity.
b. decreases its total assets and total stockholders’ equity.
c. has no effect on total assets and total stockholders’ equity.
d. requires that a gain or loss be recognized on the income statement.
114. Treasury stock should be reported in the financial statements of a corporation as a(n)
a. investment.
b. liability.
c. deduction from total paid-in capital.
d. deduction from total paid-in capital and retained earnings.
115. A company would not acquire treasury stock
a. in order to reissue shares to officers.
b. as an asset investment.
c. in order to increase trading of the company’s stock.
d. to have additional shares available to use in acquisitions of other companies.
116. Accounting for treasury stock is done by the
a. FIFO method.
b. LIFO method.
c. cost method.
d. lower of cost or market method.
117. Treasury stock is generally accounted for by the
a. cost method.
b. market value method.
c. par value method.
d. stated value method.
Test Bank for Financial Accounting, Ninth Edition
11 – 22
118. Treasury Stock is a(n)
a. contra asset account.
b. retained earnings account.
c. asset account.
d. contra stockholders’ equity account.
119. Seven thousand shares of treasury stock of Marker, Inc., previously acquired at $14 per
share, are sold at $20 per share. The entry to record this transaction will include a
a. credit to Treasury Stock for $140,000.
b. debit to Paid-In Capital from Treasury Stock for $42,000.
c. debit to Treasury Stock for $98,000.
d. credit to Paid-In Capital from Treasury Stock for $42,000.
120. Salon Company originally issued 4,000 shares of $10 par value common stock for
$120,000 ($30 per share). Salon subsequently purchases 400 shares of treasury stock for
$27 per share and resells the 400 shares of treasury stock for $29 per share. In the entry
to record the sale of the treasury stock, there will be a
a. credit to Common Stock for $10,800.
b. credit to Treasury Stock for $4,000.
c. debit to Paid-In Capital in Excess of Par of $12,000.
d. credit to Paid-In Capital from Treasury Stock for $800.
121. Brown Company has 1,000 shares of 5%, $100 par cumulative preferred stock
outstanding at December 31, 2015. No dividends have been paid on this stock for 2014 or
2015. Dividends in arrears at December 31, 2015 total
a. $0.
b. $500.
c. $5,000.
d. $10,000.
122. Era Company has 3,000 shares of 6%, $100 par non-cumulative preferred stock
outstanding at December 31, 2015. No dividends have been paid on this stock for 2014 or
2015. Dividends in arrears at December 31, 2015 total
a. $0.
b. $1,800.
c. $18,000.
d. $36,000.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 23
123. Ranier Company is authorized to issue 10,000 shares of 8%, $100 par value preferred
stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If
Ranier issues 5,000 shares of preferred stock for land with an asking price of $575,000
and a market value of $550,000, which of the following would be the journal entry for
Ranier to record?
a. Land 500,000
Preferred Stock 500,000
b. Land 550,000
Preferred Stock 550,000
c. Land 575,000
Preferred Stock 500,000
Paid-in Capital in Excess of Par-Preferred 75,000
d. Land 550,000
Preferred Stock 500,000
Paid-in Capital Excess of Par-Preferred 50,000
124. Lakeland, Inc. has 25,000 shares of 6%, $100 par value, noncumulative preferred stock
and 50,000 shares of $1 par value common stock outstanding at December 31, 2015.
There were no dividends declared in 2014. The board of directors declares and pays a
$250,000 dividend in 2015. What is the amount of dividends received by the common
stockholders in 2015?
a. $0
b. $150,000
c. $250,000
d. $100,000
125. When preferred stock is cumulative, preferred dividends not declared in a period are
a. considered a liability.
b. called dividends in arrears.
c. distributions of earnings.
d. never paid.
126. Which of the following is not a right or preference associated with preferred stock?
a. The right to vote
b. First claim to dividends
c. Preference to corporate assets in case of liquidation
d. To receive dividends in arrears before common stockholders receive dividends
127. Cooke Corporation issues 10,000 shares of $50 par value preferred stock for cash at $80
per share. The entry to record the transaction will consist of a debit to Cash for $800,000
and a credit or credits to
a. Preferred Stock for $800,000.
b. Preferred Stock for $500,000 and Paid-in Capital in Excess of Par—Preferred Stock
for $300,000.
Test Bank for Financial Accounting, Ninth Edition
11 – 24
MC. 127 (Cont.)
c. Preferred Stock for $300,000 and Paid-in Capital from Preferred Stock for $500,000.
d. Paid-in Capital from Preferred Stock for $800,000.
128. Cooke Corporation issues 10,000 shares of $50 par value preferred stock for cash at $60
per share. In the stockholders’ equity section, the effects of the transaction above will be
reported
a. entirely within the capital stock section.
b. entirely within the additional paid-in capital section.
c. under both the capital stock and additional paid-in capital sections.
d. entirely under the retained earnings section.
129. Dividends in arrears on cumulative preferred stock
a. are shown in stockholders’ equity of the balance sheet.
b. must be paid before common stockholders can receive a dividend.
c. should be recorded as a current liability until they are paid.
d. enable the preferred stockholders to share equally in corporate earnings with the
common stockholders.
130. Dividends in arrears on cumulative preferred stock
a. are considered to be a non-current liability.
b. are considered to be a current liability.
c. only occur when preferred dividends have been declared.
d. should be disclosed in the notes to the financial statements.
131. If preferred stock is cumulative, the
a. preferred dividends not declared in a given year are called dividends in arrears.
b. preferred stockholders and the common stockholders receive equal dividends.
c. preferred stockholders and the common stockholders receive the same total dollar
amount of dividends.
d. common stockholders will share in the preferred dividends.
132. The Northern Corporation issues 7,000 shares of $100 par value preferred stock for cash
at $120 per share. The entry to record the transaction will consist of a debit to Cash for
$840,000 and a credit or credits to
a. Preferred Stock for $840,000.
b. Paid-in Capital from Preferred Stock for $840,000.
c. Preferred Stock for $700,000 and Retained Earnings for $140,000.
d. Preferred Stock for $700,000 and Paid-in Capital in Excess of Par—Preferred Stock
for $140,000.
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133. Vega Corporation’s December 31, 2015 balance sheet showed the following:
8% preferred stock, $20 par value, cumulative, 10,000 shares
authorized; 7,500 shares issued $ 150,000
Common stock, $10 par value, 1,000,000 shares authorized;
975,000 shares issued, 960,000 shares outstanding 9,750,000
Paid-in capital in excess of par—preferred stock 30,000
Paid-in capital in excess of par—common stock 13,500,000
Retained earnings 3,750,000
Treasury stock (15,000 shares) 315,000
Vega declared and paid a $58,000 cash dividend on December 15, 2015. If the
company’s dividends in arrears prior to that date were $10,000, Vega’s common
stockholders received
a. $48,000.
b. $22,000.
c. $36,000.
d. no dividend.
134. Each of the following decreases retained earnings except a
a. cash dividend.
b. liquidating dividend.
c. stock dividend.
d. All of these decrease retained earnings.
135. Each of the following decreases total stockholders’ equity except a
a. cash dividend.
b. liquidating dividend.
c. stock dividend.
d. All of these decrease total stockholders’ equity.
136. Which one of the following is not necessary in order for a corporation to pay a cash
dividend?
a. Adequate cash
b. Approval of stockholders
c. Declaration of dividends by the board of directors
d. Retained earnings
137. If a corporation declares a dividend based upon paid-in capital, it is known as a
a. scrip dividend.
b. property dividend.
c. paid dividend.
d. liquidating dividend.
Test Bank for Financial Accounting, Ninth Edition
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138. The date on which a cash dividend becomes a binding legal obligation is on the
a. declaration date.
b. date of record.
c. payment date.
d. last day of the fiscal year-end.
139. The effect of the declaration of a cash dividend by the board of directors is to
Increase Decrease
a. Stockholders’ equity Assets
b. Assets Liabilities
c. Liabilities Stockholders’ equity
d. Liabilities Assets
FSA
140. The cumulative effect of the declaration and payment of a cash dividend on a company’s
financial statements is to
a. decrease total liabilities and stockholders’ equity.
b. increase total expenses and total liabilities.
c. increase total assets and stockholders’ equity.
d. decrease total assets and stockholders’ equity.
141. Common Stock Dividends Distributable is classified as a(n)
a. asset account.
b. stockholders’ equity account.
c. expense account.
d. liability account.
142. The effect of a stock dividend is to
a. decrease total assets and stockholders’ equity.
b. change the composition of stockholders’ equity.
c. decrease total assets and total liabilities.
d. increase the book value per share of common stock.
143. 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. Retained Earnings.
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144. Which one of the following events would not require a formal 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
145. Stock dividends and stock splits have the following effects on retained earnings:
Stock Splits Stock Dividends
a. Increase No change
b. No change Decrease
c. Decrease Decrease
d. No change No change
146. Dividends are predominantly paid in
a. earnings.
b. property.
c. cash.
d. stock.
FSA
147. If a stockholder receives a dividend that reduces retained earnings by the fair value of the
stock, the stockholder has received a
a. large stock dividend.
b. cash dividend.
c. contingent dividend.
d. small stock dividend.
148. Of the various dividends types, the two most common types in practice are
a. cash and large stock.
b. cash and property.
c. cash and small stock.
d. property and small stock.
149. Regular dividends are declared out of
a. Paid-in Capital in Excess of Par.
b. Treasury Stock.
c. Common Stock.
d. Retained Earnings.
Test Bank for Financial Accounting, Ninth Edition
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150. A corporation is not committed to a legal obligation when it declares
a. a cash dividend.
b. either a cash dividend or a stock dividend.
c. a stock dividend.
d. a distribution date.
151. Which of the following is not a significant date with respect to dividends?
a. The declaration date
b. The incorporation date
c. The record date
d. The payment date
152. On the dividend record date,
a. a dividend becomes a current obligation.
b. no entry is required.
c. an entry may be required if it is a stock dividend.
d. Dividends Payable is debited.
153. Which of the following statements regarding the date of a cash dividend declaration is not
accurate?
a. The dividend can be rescinded once it has been declared.
b. The corporation is committed to a legal, binding obligation.
c. The board of directors formally authorizes the cash dividend.
d. A liability account must be increased.
154. Dividends Payable is classified as a
a. long-term liability.
b. contra stockholders’ equity account to Retained Earnings.
c. current liability.
d. stockholders’ equity account.
155. Indicate the respective effects of the declaration of a cash dividend on the following
balance sheet sections:
Total Assets Total Liabilities Total Stockholders’ Equity
a. Increase Decrease No change
b. No change Increase Decrease
c. Decrease Increase Decrease
d. Decrease No change Increase
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156. Which of the following statements about dividends is not accurate?
a. Many companies declare and pay cash quarterly dividends.
b. Low dividends may mean high stock returns.
c. The board of directors is obligated to declare dividends.
d. A legal dividend may not be a feasible one.
FSA
157. The cumulative effect of the declaration and payment of a cash dividend on a company’s
balance sheet is to
a. decrease current liabilities and stockholders’ equity.
b. increase total assets and stockholders’ equity.
c. increase current liabilities and stockholders’ equity.
d. decrease stockholders’ equity and total assets.
158. 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.
159. Xeris, Inc. has 1,000 shares of 6%, $10 par value, cumulative preferred stock and 50,000
shares of $1 par value common stock outstanding at December 31, 2015. What is the
annual dividend on the preferred stock?
a. $6 per share
b. $600 in total
c. $6,000 in total
d. $.06 per share
160. Win, Inc. has 10,000 shares of 7%, $100 par value, cumulative preferred stock and
100,000 shares of $1 par value common stock outstanding at December 31, 2015. If the
board of directors declares a $70,000 dividend, the
a. preferred shareholders will receive 1/10th of what the common shareholders will
receive.
b. preferred shareholders will receive the entire $70,000.
c. $70,000 will be held as restricted retained earnings and paid out at some future date.
d. preferred shareholders will receive $35,000 and the common shareholders will receive
$35,000.
Test Bank for Financial Accounting, Ninth Edition
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161. Marion, Inc. has 5,000 shares of 5%, $100 par value, noncumulative preferred stock and
20,000 shares of $1 par value common stock outstanding at December 31, 2015. There
were no dividends declared in 2014. The board of directors declares and pays a $65,000
dividend in 2015. What is the amount of dividends received by the common stockholders
in 2015?
a. $0
b. $25,000
c. $65,000
d. $40,000
162. Library, Inc. has 2,500 shares of 4%, $50 par value, cumulative preferred stock and
50,000 shares of $1 par value common stock outstanding at December 31, 2014, and
December 31, 2015. The board of directors declared and paid a $3,000 dividend in 2014.
In 2015, $18,000 of dividends are declared and paid. What are the dividends received by
the preferred and common shareholders in 2015?
Preferred Common
a. $11,000 $7,000
b. $9,000 $9,000
c. $7,000 $11,000
d. $5,000 $13,000
163. Township, Inc. has 10,000 shares of 5%, $100 par value, noncumulative preferred stock
and 100,000 shares of $1 par value common stock outstanding at December 31, 2014,
and December 31, 2015. The board of directors declared and paid a $50,000 dividend in
2014. In 2015, $110,000 of dividends are declared and paid. What are the dividends
received by the preferred and common shareholders in 2015?
Preferred Common
a. $0 $110,000
b. $50,000 $60,000
c. $55,000 $55,000
d. $70,000 $40,000
164. The board of directors must assign a per share value to a stock dividend declared that is
a. greater than the par or stated value.
b. less than the par or stated value.
c. equal to the par or stated value.
d. at least equal to the par or stated value.
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165. Corporations generally issue stock dividends in order to
a. increase the market price per share.
b. exceed stockholders’ dividend expectations.
c. increase the marketability of the stock.
d. decrease the amount of capital in the corporation.
166. A stockholder who receives a stock dividend would
a. expect the market price per share to increase.
b. own more shares of stock.
c. expect retained earnings to increase.
d. expect the par value of the stock to change.
167. When stock dividends are distributed,
a. Common Stock Dividends Distributable is decreased.
b. Retained Earnings is decreased.
c. Paid-in Capital in Excess of Par is debited if it is a small stock dividend.
d. no entry is necessary if it is a large stock dividend.
168. A small stock dividend is defined as
a. less than 30% but greater than 25% of the corporation’s issued stock.
b. between 50% and 100% of the corporation’s issued stock.
c. more than 30% of the corporation’s issued stock.
d. less than 20–25% of the corporation’s issued stock.
169. The per share amount normally assigned by the board of directors to a large stock
dividend is
a. the market value of the stock on the date of declaration.
b. the average price paid by stockholders on outstanding shares.
c. the par or stated value of the stock.
d. zero.
170. The per share amount normally assigned by the board of directors to a small stock
dividend is
a. the market value of the stock on the date of declaration.
b. the average price paid by stockholders on outstanding shares.
c. the par or stated value of the stock.
d. zero.
Test Bank for Financial Accounting, Ninth Edition
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171. Identify the effect the declaration and distribution of a stock dividend has on the par value
per share.
Par Value per Share
a. Increase
b. Decrease
c. Increase or decrease
d. No effect
172. The declaration of a stock dividend will
a. increase paid-in capital.
b. change the total of stockholders’ equity.
c. increase total liabilities.
d. increase total assets.
173. Which of the following show the proper effect of a stock split and a stock dividend?
Item Stock Split Stock Dividend
a. Total paid-in capital Increase Increase
b. Total retained earnings Decrease Decrease
c. Total par value (common) Decrease Increase
d. Par value per share Decrease No change
174. A stock split
a. may occur in the absence of retained earnings.
b. will increase total paid-in capital.
c. will increase the total par value of the stock.
d. will have no effect on the par value per share of stock.
175. Outstanding stock of the Zone Corporation included 20,000 shares of $5 par common
stock and 5,000 shares of 6%, $10 par noncumulative preferred stock. In 2014, Zone
declared and paid dividends of $2,000. In 2015, Zone declared and paid dividends of
$6,000. How much of the 2015 dividend was distributed to preferred shareholders?
a. $2,000
b. $4,000
c. $3,000
d. None of these answers are correct
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176. Outstanding stock of the Core Corporation included 20,000 shares of $5 par common
stock and 10,000 shares of 6%, $10 par noncumulative preferred stock. In 2014, Core
declared and paid dividends of $4,000. In 2015, Core declared and paid dividends of
$12,000. How much of the 2015 dividend was distributed to preferred shareholders?
a. $8,000
b. $4,000
c. $6,000
d. None of these answers are correct
177. On January 1, Collins Corporation had 800,000 shares of $10 par value common stock
outstanding. On March 31, the company declared a 10% stock dividend. Market value of
the stock was $15/share. As a result of this event,
a. Collins’ Paid-in Capital in Excess of Par account increased $400,000.
b. Collins’ total stockholders’ equity was unaffected.
c. Collins’ Stock Dividends account increased $1,200,000.
d. All of these answers are correct.
178. On January 1, Edison Corporation had 1,000,000 shares of $10 par value common stock
outstanding. On March 31, the company declared a 20% stock dividend. Market value of
the stock was $18/share. As a result of this event,
a. Edison’s Paid-in Capital in Excess of Par account increased $1,600,000.
b. Edison’s total stockholders’ equity was unaffected.
c. Edison’s Stock Dividends account increased $3,600,000.
d All of these answers are correct.
179. Start Inc. has 5,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000
shares of $1 par value common stock outstanding at December 31, 2015. What is the
annual dividend on the preferred stock?
a. $50 per share
b. $25,000 in total
c. $50,000 in total
d. $0.50 per share
Test Bank for Financial Accounting, Ninth Edition
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180. Arm, Inc., has 10,000 shares of 5%, $100 par value, noncumulative preferred stock and
100,000 shares of $1 par value common stock outstanding at December 31, 2015. If the
board of directors declares a $200,000 dividend, the
a. preferred stockholders will receive 1/10th of what the common stockholders will receive.
b. preferred stockholders will receive the entire $200,000.
c. $50,000 will be held as restricted retained earnings and paid out at some future date.
d. preferred stockholders will receive $50,000 and the common stockholders will receive
$150,000.
181. Aim, Inc., has 10,000 shares of 4%, $100 par value, noncumulative preferred stock and
40,000 shares of $1 par value common stock outstanding at December 31, 2015. There
were no dividends declared in 2014. The board of directors declares and pays a $120,000
dividend in 2015. What is the amount of dividends received by the common stockholders
in 2015?
a. $0
b. $40,000
c. $60,000
d. $80,000
182. Last Inc., has 2,000 shares of 6%, $50 par value, cumulative preferred stock and 100,000
shares of $1 par value common stock outstanding at December 31, 2015, and December
31, 2014. The board of directors declared and paid a $4,000 dividend in 2014. In 2015,
$24,000 of dividends are declared and paid. What are the dividends received by the
preferred stockholders in 2015?
a. $16,000
b. $12,000
c. $8,000
d. $6,000
183. Art, Inc., has 5,000 shares of 4%, $100 par value, cumulative preferred stock and 20,000
shares of $1 par value common stock outstanding at December 31, 2015. There were no
dividends declared in 2013. The board of directors declares and pays a $45,000 dividend
in 2014 and in 2015. What is the amount of dividends received by the common
stockholders in 2015?
a. $30,000
b. $20,000
c. $45,000
d. $0
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184. Crawl Inc., has 1,000 shares of 6%, $50 par value, cumulative preferred stock and 50,000
shares of $1 par value common stock outstanding at December 31, 2014, and December
31, 2015. The board of directors declared and paid a $2,000 dividend in 2014. In 2015,
$10,000 of dividends are declared and paid. What are the dividends received by the
common stockholders in 2015?
a. $6,000
b. $5,000
c. $4,000
d. $3,000
185. On January 1, Sway Corporation had 60,000 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 $18,000.
b. credit to Cash for $78,000.
c. credit to Common Stock Dividends Distributable for $60,000.
d. debit to Common Stock Dividends Distributable for $60,000.
186. On January 1, Sway Corporation had 60,000 shares of $10 par value common stock
outstanding. On March 17, the company declared a 15% 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 $90,000.
b. debit to Common Stock Dividends Distributable for $90,000.
c. credit to Paid-in Capital in Excess of Par for $27,000.
d. debit to Stock Dividends for $27,000.
187. On January 1, Soft Corporation had 80,000 shares of $10 par value common stock
outstanding. On June 17, the company declared a 10% stock dividend to stockholders of
record on June 20. Market value of the stock was $15 on June 17. The entry to record the
transaction of June 17 would include a
a. debit to Stock Dividends for $120,000.
b. credit to Cash for $120,000.
c. credit to Common Stock Dividends Distributable for $120,000.
d. credit to Common Stock Dividends Distributable for $40,000.
Test Bank for Financial Accounting, Ninth Edition
11 – 36
188. On January 1, Soft Corporation had 80,000 shares of $10 par value common stock
outstanding. On June 17, the company declared a 10% stock dividend to stockholders of
record on June 20. Market value of the stock was $15 on June 17. The stock was
distributed on June 30. The entry to record the transaction of June 30 would include a
a. credit to Common Stock for $80,000.
b. debit to Common Stock Dividends Distributable for $120,000.
c. credit to Paid-in Capital in Excess of Par for $40,000.
d. debit to Stock Dividends for $40,000.
189. Cork Inc. declared a $160,000 cash dividend. It currently has 6,000 shares of 6%, $100
par value cumulative preferred stock outstanding. It is one year in arrears on its preferred
stock. How much cash will Cork distribute to the common stockholders?
a. $88,000.
b. $72,000.
c. $124,000.
d. None of these answers are correct.
190. Land Inc. has retained earnings of $800,000 and total stockholders’ equity of $2,000,000.
It has 300,000 shares of $5 par value common stock outstanding, which is currently
selling for $30 per share. If Land declares a 10% stock dividend on its common stock:
a. net income will decrease by $150,000.
b. retained earnings will decrease by $150,000 and total stockholders’ equity will
increase by $150,000.
c. retained earnings will decrease by $900,000 and total stockholders’ equity will
increase by $900,000.
d. retained earnings will decrease by $900,000 and total paid-in capital will increase by
$900,000.
191. On December 31, 2015, Stock, Inc. has 4,000 shares of 6% $100 par value cumulative
preferred stock and 60,000 shares of $10 par value common stock outstanding. On
December 31, 2015, the directors declare a $20,000 cash dividend. The entry to record
the declaration of the dividend would include:
a. a credit of $4,000 to Cash Dividends.
b. a note in the financial statements that dividends of $4 per share are in arrears on
preferred stock for 2015.
c. a debit of $20,000 to Common Stock.
d. a credit of $20,000 to Dividends Payable.
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192. Saint, Inc. declares a 15% common stock dividend when it has 30,000 shares of $10 par
value common stock outstanding. If the market value of $24 per share is used, the
amounts debited to Stock Dividends and credited to Paid-in Capital in Excess of Par are:
Paid-in Capital in
Stock Dividends Excess of Par
a. $45,000 $0
b. $108,000 $63,000
c. $108,000 $45,000
d. $45,000 $63,000
193. Cloud Manufacturing declared a 10% stock dividend when it had 700,000 shares of $3 par
value common stock outstanding. The market price per common share was $12 per share
when the dividend was declared. The entry to record this dividend declaration includes a
credit to
a. Stock Dividends for $210,000.
b. Paid-in Capital in Excess of Par for $630,000.
c. Common Stock for $210,000.
d. Common Stock Dividends Distributable for $840,000.
194. The following selected amounts are available for Clark Company.
Retained earnings (beginning) $900
Net loss 150
Cash dividends declared 100
Stock dividends declared 100
What is its ending retained earnings balance?
a. $750
b. $800
c. $550
d. $700
195. Car and Auto Sisters had retained earnings of $18,000 on the balance sheet but disclosed
in the footnotes that $3,000 of retained earnings was restricted for plant expansion and
$1,000 was restricted for bond repayments. Cash of $2,000 had been set aside for the
plant expansion. How much of retained earnings is available for dividends?
a. $14,000
b. $15,000
c. $18,000
d. $12,000
Test Bank for Financial Accounting, Ninth Edition
11 – 38
196. Moore, Inc. had 250,000 shares of common stock outstanding before a stock split
occurred, and 1,000,000 shares outstanding after the stock split. The stock split was
a. 2-for-4.
b. 5-for-1.
c. 1-for-4.
d. 4-for-1.
197. Restricting retained earnings for the cost of treasury stock purchased is a
a. contractual restriction.
b. legal restriction.
c. stock restriction.
d. voluntary restriction.
198. A prior period adjustment that corrects income of a prior period requires that an entry be
made to
a. an income statement account.
b. a current year revenue or expense account.
c. the retained earnings account.
d. an asset account.
199. If the board of directors authorizes a $100,000 restriction of retained earnings for a future
plant expansion, the effect of this action is to
a. decrease total assets and total stockholders’ equity.
b. increase stockholders’ equity and decrease total liabilities.
c. decrease total retained earnings and increase total liabilities.
d. reduce the amount of retained earnings available for dividend declarations.
200. A credit balance in retained earnings represents
a. the amount of cash retained in the business.
b. a claim on specific assets of the corporation.
c. a claim on the aggregate assets of the corporation.
d. the amount of stockholders’ equity exempted from the stockholders’ claim on total
assets.
201. A net loss
a. occurs if operating expenses exceed cost of goods sold.
b. is not closed to Retained Earnings if it would result in a debit balance.
c. is closed to Retained Earnings even if it would result in a debit balance.
d. is closed to the paid-in capital account of the stockholders’ equity section of the
balance sheet.
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202. Prior period adjustments are reported
a. in the footnotes of the current year’s financial statements.
b. on the current year’s balance sheet.
c. on the current year’s income statement.
d. on the current year’s retained earnings statement.
203. Retained earnings are occasionally restricted
a. to set aside cash for dividends.
b. to keep the legal capital associated with paid-in capital intact.
c. due to contractual loan restrictions.
d. if preferred dividends are in arrears.
204. Retained earnings is increased by each of the following except
a. net income.
b. some prior period adjustments.
c. some disposals of treasury stock.
d. All of these increase retained earnings.
205. A prior period adjustment for understatement of net income will
a. be credited to the Retained Earnings account.
b. be debited to the Retained Earnings account.
c. show as a gain on the current year’s Income Statement.
d. show as an asset on the current year’s Balance Sheet.
206. The retained earnings statement
a. is the owners’ equity statement for a corporation.
b. will show an addition to the beginning retained earnings balance for an
understatement of net income in a prior year.
c. will not reflect net losses.
d. will, in some cases, fail to reconcile the beginning and ending retained earnings
balances.
207. In the stockholders’ equity section of the balance sheet,
a. Common Stock Dividends Distributable will be classified as part of additional paid-in
capital.
b. Common Stock Dividends Distributable will appear in its own subsection of the stock-
holders’ equity.
c. Additional Paid-in Capital appears under the subsection Paid-in Capital.
d. Dividends in arrears will appear as a restriction of Retained Earnings.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 40
208. The return on common stockholders’ equity is computed by dividing net income available
to common stockholders by
a. ending total stockholders’ equity.
b. ending common stockholders’ equity.
c. average total stockholders’ equity.
d. average common stockholders’ equity.
209. The return on common stockholders’ equity is computed by dividing
a. net income by ending common stockholders’ equity.
b. net income by average common stockholders’ equity.
c. net income less preferred dividends by ending common stockholders’ equity.
d. net income less preferred dividends by average common stockholders’ equity.
210. Kong Inc. reported net income of $298,000 during 2015 and paid dividends of $26,000 on
common stock. It also has 10,000 shares of 6%, $100 par value cumulative preferred
stock outstanding. Common stockholders’ equity was $1,200,000 on January 1, 2015, and
$1,600,000 on December 31, 2015. The company’s return on common stockholders’
equity for 2015 is:
a. 17.4%
b. 17.0%
c. 15.1%
d. 21.3%
211. King Corporation had net income of $260,000 and paid dividends of $40,000 to common
stockholders and $10,000 to preferred stockholders in 2015. King Corporation’s common
stockholders’ equity at the beginning and end of 2015 was $870,000 and $1,130,000,
respectively. There are 100,000 weighted-average shares of common stock outstanding.
King Corporation’s return on common stockholders’ equity was
a. 18.6%.
b. 25%.
c. 21%.
d. 22.1%.
212. Assume that all balance sheet amounts for Marley Company represent average balance
figures.
Stockholders’ equity—common $150,000
Total stockholders’ equity 200,000
Sales 100,000
Net income 29,000
Number of shares of common stock 10,000
Common stock dividends 10,000
Preferred stock dividends 4,000
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11 – 41
MC. 212 (Cont.)
What is the return on common stockholders’ equity ratio for Marley?
a. 19.3%
b. 16.7%
c. 12.5%
d. 10.0%
213. Vega Corporation’s December 31, 2015 balance sheet showed the following:
8% preferred stock, $20 par value, cumulative, 15,000 shares
authorized; 10,000 shares issued $ 200,000
Common stock, $10 par value, 1,000,000 shares authorized;
975,000 shares issued, 960,000 shares outstanding 9,750,000
Paid-in capital in excess of par—preferred stock 30,000
Paid-in capital in excess of par—common stock 11,500,000
Retained earnings 3,750,000
Treasury stock (15,000 shares) 315,000
Vega’s total paid-in capital was
a. $21,480,000.
b. $21,795,000.
c. $21,165,000.
d. $11,530,000.
214. Vega Corporation’s December 31, 2015 balance sheet showed the following:
8% preferred stock, $20 par value, cumulative, 10,000 shares
authorized; 8,500 shares issued $ 170,000
Common stock, $10 par value, 1,000,000 shares authorized;
950,000 shares issued, 940,000 shares outstanding 9,500,000
Paid-in capital in excess of par—preferred stock 34,000
Paid-in capital in excess of par—common stock 11,500,000
Retained earnings 3,750,000
Treasury stock (15,000 shares) 315,000
Vega’s total stockholders’ equity was
a. $24,669,000.
b. $24,690,000.
c. $25,269,000.
d. $24,639,000.
Test Bank for Financial Accounting, Ninth Edition
11 – 42
215. Bacon Corporation began business by issuing 180,000 shares of $5 par value common
stock for $25 per share. During its first year, the corporation sustained a net loss of
$30,000. The year-end balance sheet would show
a. Common stock of $900,000.
b. Common stock of $4,500,000.
c. Total paid-in capital of $4,470,000.
d. Total paid-in capital of $930,000.
216. Realistic Corporation’s December 31, 2015 balance sheet showed the following:
8% preferred stock, $20 par value, cumulative, 20,000 shares
authorized; 10,000 shares issued $ 200,000
Common stock, $10 par value, 2,000,000 shares authorized;
1,950,000 shares issued, 1,930,000 shares outstanding 19,500,000
Paid-in capital in excess of par—preferred stock 60,000
Paid-in capital in excess of par—common stock 24,000,000
Retained earnings 7,650,000
Treasury stock (20,000 shares) 630,000
Realistic’s total paid-in capital was
a. $43,760,000.
b. $44,390,000.
c. $43,130,000.
d. $24,060,000.
217. Rouse Corporation’s December 31, 2015 balance sheet showed the following:
8% preferred stock, $10 par value, cumulative, 20,000 shares
authorized; 15,000 shares issued $ 150,000
Common stock, $10 par value, 2,000,000 shares authorized;
1,950,000 shares issued, 1,930,000 shares outstanding 19,500,000
Paid-in capital in excess of par—preferred stock 60,000
Paid-in capital in excess of par—common stock 24,000,000
Retained earnings 7,650,000
Treasury stock (20,000 shares) 630,000
Rouse’s total stockholders’ equity was
a. $51,990,000.
b. $43,710,000.
c. $51,360,000.
d. $50,730,000.
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218. Adams Corporation began business by issuing 400,000 shares of $5 par value common
stock for $24 per share. During its first year, the corporation sustained a net loss of
$40,000. The year-end balance sheet would show
a. Common stock of $2,000,000.
b. Common stock of $9,600,000.
c. Total paid-in capital of $9,560,000.
d. Total paid-in capital of $7,600,000.
219. The trial balance of Houston Inc. includes the following balances: Common Stock,
$40,000; Paid-in Capital in Excess of Par, $64,000; Treasury Stock, $6,000; Preferred
Stock, $30,000. Capital stock totals
a. $70,000.
b. $104,000.
c. $134,000.
d. $140,000.
220. Each of the following is reported for common stock except the
a. par value.
b. shares issued.
c. shares outstanding.
d. liquidation value.
221. Paid-in capital from treasury stock would appear on a balance sheet under the category
a. capital stock.
b. treasury stock.
c. additional paid-in capital.
d. contra to stockholders’ equity.
222. Two classifications appearing in the paid-in capital section of the balance sheet are
a. preferred stock and common stock.
b. paid-in capital and retained earnings.
c. capital stock and additional paid-in capital.
d. capital stock and treasury stock.
223. Information that is not generally reported for each class of stock on the balance sheet is
a. the market value.
b. the par value.
c. shares authorized.
d. shares issued.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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224. In published annual reports
a. subdivisions within the stockholders’ equity section are routinely reported in detail.
b. capital surplus is used in place of retained earnings.
c. the individual sources of additional paid-in capital are often combined.
d. retained earnings is often not shown separately.
225. Additional paid-in capital includes all of the following except
a. paid-in capital from treasury stock.
b. paid-in capital in excess of par.
c. paid-in capital in excess of stated value.
d. paid-in capital in excess of book value.
226. A stockholders’ equity statement shows
a. the names of each stockholder.
b. how profits are distributed to the various classes of stockholders.
c. the number of shares owned by each of the stockholders.
d. the changes in each stockholders’ equity account and in total stockholders’ equity
during the period.
227. A statement of stockholders’ equity discloses all of the following except:
a. The cost of treasury stock owned at the end of the year.
b. Net income for the current year.
c. The amount of cash dividends declared during the current year.
d. The market value of the stockholders’ equity at the end of the year.
228. Book value per share is computed by dividing total
a. paid-in capital by the number of common shares outstanding.
b. paid-in capital by the number of common shares issued.
c. stockholders’ equity by the number of common shares outstanding.
d. stockholders’ equity by the number of common shares issued.
a229. Barr, Inc. reports $4,000,000 of common stock, and $6,000,000 of additional paid-in
capital on its balance sheet. The number of common shares issued and outstanding is
500,000 shares. The book value per share is
a. $20.
b. $12.
c. $8.
d. not determinable.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
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230. Book value per share is
a. the equity a common stockholder has in the net assets of the corporation from owning
one share of stock.
b. the equity a common stockholder has in the total assets of the corporation from
owning one share of stock.
c. always equal to the market value of the stock.
d. computed only for preferred stockholders.
231. Which of the following is an incorrect statement about a corporation?
a. A corporation is an entity separate and distinct from its owners.
b. Creditors ordinarily have recourse only to corporate assets in satisfaction of their
claims.
c. A corporation may be formed in writing, orally, or implied.
d. A corporation is subject to numerous state and federal regulations.
232. Legal capital per share cannot be equal to the
a. par value per share of par value stock.
b. total proceeds from the sale of par value stock above par value.
c. stated value per share of no-par value stock.
d. total proceeds from the sale of no-par value stock.
233. When common stock is issued for services or non-cash assets, cost should be
a. only the fair value of the consideration given up.
b. only the fair value of the consideration received.
c. the book value of the common stock issued.
d. either the fair value of the consideration given up or the consideration received,
whichever is more clearly evident.
234. When the selling price of treasury stock is greater than its cost, the company credits the
difference to
a. Gain on Sale of Treasury Stock.
b. Paid-in Capital from Treasury Stock.
c. Paid-in Capital in Excess of Par.
d. Treasury Stock.
235. Sandoz Corporation was organized on January 1, 2015, with authorized capital of 500,000
shares of $10 par value common stock. During 2015, Sandoz issued 30,000 shares at
$12 per share, purchased 3,000 shares of treasury stock at $13 per share, and sold 3,000
shares of treasury stock at $14 per share. What is the amount of additional paid-in capital
at December 31, 2015?
a. $0
b. $3,000
c. $60,000
d. $63,000
Test Bank for Financial Accounting, Ninth Edition
11 – 46
236. The purchase of treasury stock
a. decreases common stock authorized.
b. decreases common stock issued.
c. decreases common stock outstanding.
d. has no effect on common stock outstanding.
237. Preferred stockholders have a priority over common stockholders as to
a. dividends only.
b. assets in the event of liquidation only.
c. voting rights.
d. both dividends and assets in the event of liquidation.
238. On January 2, 2012, Porter Corporation issued 30,000 shares of 5% cumulative preferred
stock at $100 par value. On December 31, 2015, Porter Corporation declared and paid its
first dividend. What dividends are the preferred stockholders entitled to receive in the
current year before any distribution is made to common stockholders?
a. $0
b. $150,000
c. $450,000
d. $600,000
239. Which of the following statements about a cash dividend is incorrect?
a. The legality of a cash dividend depends on state corporation laws.
b. The legality of a dividend does not indicate a company’s ability to pay a dividend.
c. Dividends are not a liability until declared.
d. Shareholders usually vote to determine the amount of income to be distributed in the
form of a dividend.
240. The date a cash dividend becomes a binding legal obligation to a corporation is the
a. declaration date.
b. earnings date.
c. payment date.
d. record date.
241. Dillon Corporation splits its common stock 2 for 1, when the market value is $40 per
share. Prior to the split, Dillon had 50,000 shares of $10 par value common stock issued
and outstanding. After the split, the par value of the stock
a. remains the same.
b. is reduced to $2 per share.
c. is reduced to $5 per share.
d. is reduced to $20 per share.
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242. Which of the following statements about retained earnings restrictions is incorrect?
a. Many states require a corporation to restrict retained earnings for the cost of treasury
stock purchased.
b. Long-term debt contracts may impose a restriction on retained earnings as a condition
for the loan.
c. The board of directors of a corporation may voluntarily create retained earnings
restrictions for specific purposes.
d. Retained earnings restrictions are generally disclosed through a journal entry on the
books of a company.
243. Prior period adjustments
a. may only increase retained earnings.
b. may only decrease retained earnings.
c. may either increase or decrease retained earnings.
d. do not affect retained earnings.
244. Farmer Company reports the following amounts for 2015:
Net income $135,000
Average stockholders’ equity 500,000
Preferred dividends 15,000
Par value preferred stock 100,000
The 2015 rate of return on common stockholders’ equity is
a. 30.0%.
b. 24.0%.
c. 27.0%.
d. 33.8%.
245. The return on common stockholders’ equity is computed by dividing
a. net income by ending common stockholders’ equity.
b. net income by average common stockholders’ equity.
c. net income minus preferred dividends by ending common stockholders’ equity.
d. net income minus preferred dividends by average common stockholders’ equity.
246. Additional paid-in capital includes all of the following except the amounts paid in
a. over par value.
b. over stated value.
c. from treasury stock.
d. for the par value of common stock.
Test Bank for Financial Accounting, Ninth Edition
11 – 48
247. In the stockholders’ equity section of the balance sheet, the classification of capital stock
consists of
a. additional paid-in capital and common stock.
b. common stock and treasury stock.
c. common stock, preferred stock, and treasury stock.
d. common stock and preferred stock.
a248. At December 31, the stockholders’ equity of Smith Company was as follow:
Common stock, $5 par value: 1,100,000 shares issued
and 1,000,000 shares outstanding $5,500,000
Additional paid-in capital 1,400,000
Retained earnings 1,500,000
Treasury stock, (100,000 shares) (700,000)
Total stockholders’ equity $7,700,000
The book value per share of common stock is
a. $7.00
b. $7.20
c. $8.40
d. $7.70
249. Under IFRS, the term reserves relates to each of the following except
a. asset revaluations.
b. contributed (paid-in) capital.
c. fair value differences.
d. retained earnings.
250. IFRS uses each of the following terms to describe retained earnings except
a. accumulated profit or loss.
b. retained earnings.
c. retained profits.
d. share earnings.
251. A major difference between IFRS and GAAP relates to the
a. Retained Earnings account.
b. Revaluation Surplus account.
c. Share Capital account.
d. Share Premium account.
252. IFRS treats the purchase of treasury stock as any of the following except
a. an increase to a contra equity account.
b. a decrease to retained earnings.
c. a decrease to share capital.
d. a decrease to share premium.
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253. Under IFRS, Revaluation Surplus is part of
a. share premium.
b. retained earnings.
c. general reserves.
d. contributed capital.
254. Under IFRS, equity is described as each of the following except
a. retained equity.
b. shareholders’ funds.
c. owners’ equity.
d. capital and reserves.
255. Reserves include each of the following except
a. other comprehensive income items.
b. revaluation surplus.
c. share premium.
d. unrealized gains on available-for-sale securities.
256. Previously issued financial statements with errors are required to be restated under
a. GAAP only.
b. IFRS only.
c. Both GAAP and IFRS.
d. Neither GAAP or IFRS.
257. The accounting is essentially the same under IFRS and GAAP for
a. prior period adjustments.
b. revaluation surplus.
c. treasury stock.
d. All of these answers are correct.
258. A statement of comprehensive income is presented in
a. a single-statement format only.
b. a two-statement format only.
c. an operating format.
d. either a one- or two-statement format.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 50
Answers to Multiple Choice Questions
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
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BRIEF EXERCISES
BE 259
Identify (by letter) each of the following characteristics as being an advantage, a disadvantage, 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 260
On July 6, Clayton Corporation issued 3,000 shares of its $1.50 par common stock. The market
price of the stock on that date was $18 per share. Journalize the issuance of the stock.
Paid in Capital in Excess of Par ……………………………… 49,500
BE 261
Domaine Corporation is authorized to issue 1,000,000 shares of $1 par value common stock.
During 2015, the company has the following stock transactions.
Jan. 15 Issued 500,000 shares of stock at $7 per share.
Sept. 5 Purchased 30,000 shares of common stock for the treasury at $9 per share.
Instructions
Journalize the transactions for Domaine Corporation.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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BE 262
An inexperienced accountant for Douglas Corporation made the following entries.
July 1 Cash ……………………………………………………………………….. 180,000
Common Stock …………………………………………………. 180,000
(Issued 20,000 shares of common stock,
par value $6 per share)
Sept. 1 Common Stock …………………………………………………………. 24,000
Retained Earnings …………………………………………………….. 16,000
Cash ……………………………………………………………….. 40,000
(Purchased 4,000 shares issued on July 1 for the
treasury at $10 per share)
Instructions
On the basis of the explanation for each entry, prepare the entry that should have been made for
the transactions.
BE 263
On September 5, Borton Corporation acquired 2,500 shares of its own $1 par common stock for
$22 per share. On October 15, 1,000 shares of the treasury stock is sold for $25 per share.
Instructions
Journalize the purchase and sale of the treasury stock assuming that the company uses the cost
method.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
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BE 264
Wise Company had the following transactions.
1. Issued 7,000 shares of common stock with a stated value of $10 for $130,000.
2. Issued 2,000 shares of $100 par preferred stock at $108 for cash.
Instructions
Prepare the journal entries to record the above stock transactions.
BE 265
On February 1, Barton Corporation issued 5,000 shares of its $20 par value preferred stock for
$28 per share.
Instructions
Journalize the transaction.
BE 266
On November 27, the board of directors of Armstrong Company declared a $.50 per share
dividend. The dividend is payable to shareholders of record on December 7 on December 24.
Armstrong has 25,500 shares of $1 par common stock outstanding at November 27. Journalize
the entries needed on the declaration and payment dates.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 54
BE 267
On October 10, the board of directors of Pattern Corporation declared a 15% stock dividend. On
October 10, the company had 10,000 shares of $1 par common stock issued and outstanding
with a market price of $16 per share. The stock dividend will be distributed on October 31 to
shareholders of record on October 25. Journalize the entries needed for the declaration and
distribution of the stock dividend.
BE 268
Parker Company has 24,000 shares of $1 par common stock issued and outstanding. The
company also has 2,000 shares of $100 par 5% cumulative preferred stock outstanding. The
company did not pay the preferred dividends in 2014 or 2015. What amount of dividends must the
company pay the preferred shareholders in 2016 if they wish to pay the common stockholders a
dividend?
BE 269
On November 1, 2015, Nate Corporation’s stockholders’ equity section is as follows:
Common stock, $10 par value $600,000
Paid-in capital in excess of par 180,000
Retained earnings 200,000
Total stockholders’ equity $980,000
On November 1, Nate declares and distributes a 15% stock dividend when the market value of
the stock is $14 per share.
Instructions
Indicate the balances in the stockholders’ equity accounts after the stock dividend has been
distributed.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
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***$200,000 – (60,000 × .15 × $14)
BE 270
Match each item/event pair below with the indicated change in the item. An individual
classification may be used more than once, or not at all. For each dividend, assume that both
declaration and payment or distribution has occurred.
Classifications
A. Item increases
B. Item decreases
C. Item is unchanged
D. Direction of change cannot be determined
Item Event
____ 1. Par value per share Stock split
____ 2. Total retained earnings Stock dividend
____ 3. Total stockholders’ equity Prior period adjustment increases last year’s
net income
____ 4. Earnings per common share Restriction of Retained Earnings
____ 5. Total retained earnings Cash dividend
____ 6. Total paid-in capital Stock dividend (small)
BE 271
Identify which of the following items would be reported as additions (A) or deductions (D) in a
Retained Earnings Statement.
1. Net Income
2. Net Loss
3. Cash Dividends
4. Stock Dividends
5. Prior period adjustments to correct for overstatement of prior years’ net income
6. Prior period adjustments to correct for understatement of prior years’ net income
Test Bank for Financial Accounting, Ninth Edition
11 – 56
BE 272
The balance in retained earnings on January 1, 2015, for Booker Inc., was $575,000. During the
year, the corporation paid cash dividends of $70,000 and distributed a stock dividend of $25,000.
In addition, the company determined that it had overstated its depreciation expense in prior years
by $50,000. Net income for 2015 was $120,000.
Instructions
Prepare the retained earnings statement for 2015.
BE 273
The following information is available for Evans Corporation:
2015 2014
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 360,000 300,000
Instructions
Compute the return on common stockholders’ equity ratio for both years. Briefly comment on your
findings.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
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BE 274
James Corporation has the following accounts at December 31: Common Stock, $10 par 7,000
shares issued, $70,000; Paid-in Capital in Excess of Par $10,000; Retained Earnings $55,000;
and Treasury Stock, 500 shares, $10,000. Prepare the stockholders’ equity section of the balance
sheet.
aBE 275
Bellingham Corporation has the following stockholders’ equity balances at December 31, 2015.
Common Stock, $1 par $ 3,500
Paid in Capital in Excess of par 28,500
Retained Earnings 62,500
Total Stockholders’ Equity $94,500
Calculate book value per share.
EXERCISES
Ex. 276
The following selected transactions pertain to Sinclair Corporation:
Jan. 3 Issued 100,000 shares, $5 par value, common stock for $25 per share.
Feb. 10 Issued 6,000 shares, $5 par value, common stock in exchange for special purpose
equipment. Sinclair Corporation’s common stock has been actively traded on the stock
exchange at $30 per share.
Instructions
Journalize the transactions.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 58
Solution 276 (8–10 min.)
Ex. 277
The corporate charter of Martin 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, Martin issued
3,200,000 shares at $15 per share. It later acquired 30,000 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?
Ex. 278
Halpern Corporation is authorized to issue 1,000,000 shares of $3 par value common stock.
During 2015, its first year of operation, the company has the following stock transactions.
Jan. 1 Paid the state $5,000 for incorporation fees.
Jan. 15 Issued 500,000 shares of stock at $6 per share.
Jan. 30 Attorneys for the company accepted 500 shares of common stock as payment for
legal services rendered in helping the company incorporate. The legal services are
estimated to have a value of $7,000.
July 2 Issued 100,000 shares of stock for land. The land had an asking price of $900,000.
The stock is currently selling on a national exchange at $8 per share.
Sept. 5 Purchased 15,000 shares of common stock for the treasury at $8 per share.
Dec. 6 Sold 11,000 shares of the treasury stock at $11 per share.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
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Ex. 278 (Cont.)
Instructions
Journalize the transactions for Halpern Corporation.
Ex. 279
Prepare the necessary journal entry for each of the following transactions for Zenia Corporation.
(a) Issued 2,000 shares of its $5 par value common stock for $20 per share.
(b) Issued 5,000 shares of its stock for land advertised for sale at $90,000. Zenia’s stock is
actively traded at a market price of $16 per share.
Ex. 280
Lange Corporation issued 5,000 shares of stock.
Instructions
Prepare the entry for the issuance under the following assumptions.
(a) The stock had a par value of $10 per share and was issued for a total of $65,000.
(b) The stock had a stated value of $10 per share and was issued for a total of $65,000.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 60
Ex. 280 (Cont.)
(c) The stock had a par value of $10 per share and was issued to attorneys for services during
in-corporation valued at $65,000.
(d) The stock had a par value of $10 per share and was issued for land worth $65,000.
Ex. 281
1. Name at least three factors that influence the market value of stock.
2. Corporations acquire treasury stock for a variety of purposes. Name three reasons why
treasury stock may be acquired by a corporation.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
11 – 61
Ex. 282
The following items were shown on the balance sheet of Easton Corporation on December 31,
2015:
Stockholders’ equity
Paid-in capital
Capital stock
Common stock, $10 par value, 400,000 shares
authorized; ______ shares issued and ______ outstanding ……………… $1,850,000
Additional paid-in capital
In excess of par …………………………………………………………………………. 165,000
Total paid-in capital ……………………………………………………………….. 2,015,000
Retained earnings ………………………………………………………………………………… 750,000
Total paid-in capital and retained earnings …………………………………….. 2,765,000
Less: Treasury stock (18,000 shares) ……………………………………………………… (270,000)
Total stockholders’ equity ……………………………………………………………. $2,495,000
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 sales price of the common stock when issued was $____________.
(d) The cost per share of the treasury stock was $_______________.
(e) The average issue price of the common stock was $______________.
(f) Assuming that 25% of the treasury stock is sold at $20 per share, the balance in the
Treasury Stock account would be $_______________.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 62
Ex. 283
The stockholders’ equity section of Morton Corporation at December 31 is as follows.
MORTON CORPORATION
Balance Sheet (partial)
Paid-in capital
Preferred stock, cumulative, 10,000 shares authorized,
5,000 shares issued and outstanding $ 300,000
Common Stock, no par, 750,000 shares authorized, 150,000 shares issued 1,500,000
Total paid-in capital 1,800,000
Retained earnings 2,050,000
Total paid-in capital and retained earnings 3,850,000
Less: Treasury stock (5,000 common shares) (64,000)
Total stockholders’ equity $3,786,000
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 $15,000, what is the dividend rate on preferred
stock?
(e) If dividends of $30,000 were in arrears on preferred stock, what would be the balance in
Retained Earnings?
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
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Ex. 284
On January 1, 2015, the stockholders’ equity section of Nance Corporation shows: Common
stock ($5 par value) $1,500,000; paid-in capital in excess of par value $1,000,000; and retained
earnings $1,200,000. During the year, the following treasury stock transactions occurred.
Mar. 1 Purchased 30,000 shares for cash at $22 per share.
July 1 Sold 6,000 treasury shares for cash at $27 per share.
Sept. 1 Sold 5,000 treasury shares for cash at $19 per share.
Instructions
(a) Journalize the treasury stock transactions.
(b) Restate the entry for September 1, assuming the treasury shares were sold at $12 per share.
Ex. 285
On May 1, Howard Corporation purchased 2,000 shares of its $10 par value common stock at a
cash price of $15/share. On July 15, 900 shares of the treasury stock were sold for cash at
$17/share.
Instructions
Journalize the two transactions.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 64
Ex. 286
Yates Corporation has the following stockholders’ equity accounts on January 1, 2015:
Common Stock, $10 par value …………………………………… $1,500,000
Paid-in Capital in Excess of Par…………………………………… 200,000
Retained Earnings …………………………………………………….. 500,000
Total Stockholders’ Equity …………………………………….. $2,200,000
The company uses the cost method to account for treasury stock transactions. During 2015, the
following treasury stock transactions occurred:
April 1 Purchased 10,000 shares at $19 per share.
August 1 Sold 4,000 shares at $22 per share.
October 1 Sold 2,000 shares at $15 per share.
Instructions
(a) Journalize the treasury stock transactions for 2015.
(b) Prepare the Stockholders’ Equity section of the balance sheet for Yates Corporation at
December 31, 2015. Assume net income was $110,000 for 2015.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
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Ex. 287
Arens Corporation purchased 4,000 shares of its $5 par value common stock for a cash price of
$10 per share. Two months later, Arens sold the treasury stock for a cash price of $8 per share.
Instructions
Prepare the journal entry to record the sale of the treasury stock assuming
(a) No balance in Paid-in Capital from Treasury Stock.
(b) A $3,000 balance in Paid-in Capital from Treasury Stock.
Treasury Stock ……………………………………………………….… 40,000
Ex. 288
An inexperienced accountant for Olsen Corporation made the following entries.
July 1 Cash ……………………………………………………………………….. 240,000
Common Stock …………………………………………………. 240,000
(Issued 16,000 shares of no-par common stock, stated value $10 per share)
Sept. 1 Common Stock …………………………………………………………. 30,000
Retained Earnings …………………………………………………….. 6,000
Cash ……………………………………………………………….. 36,000
(Purchased 2,000 shares issued on July 1 for the treasury at $18 per share)
Dec. 1 Cash …………………………..…………………………………………… 20,000
Common Stock …………………………………………………. 15,000
Gain on Sale of Stock ………………………………………… 5,000
(Sold 1,000 shares of the treasury stock at $20 per share)
Instructions
(a) On the basis of the explanation for each entry, prepare the entry that should have been
made for the transactions. (Omit explanations.)
(b) Prepare the correcting entries that should be made to correct the accounts of Olsen
Corporation. (Do not reverse the original entry.)
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 66
Solution 288 (Cont.)
Ex. 289
On January 1, 2015, Dreamy Company issued 30,000 shares of $2 par value common stock for
$150,000. On March 1, 2015, the company purchased 6,000 shares of its common stock for $7
per share for the treasury. On June 1, 2015, 1,500 of the treasury shares are sold for $10 per
share. On September 1, 2015, 3,000 treasury shares are sold at $5 per share.
Instructions
Journalize the stock transactions of Dreamy Company in 2015.
Ex. 290
Wave Company originally issued 30,000 shares of $5 par common stock for $210,000 on January
3, 2015. Wave purchased 1,500 shares of treasury stock for $12,000 on November 2, 2015. On
December 6, 2015, 600 shares of the treasury stock are sold for $7,200.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
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Ex. 290 (Cont.)
Instructions
Prepare journal entries to record these stock transactions.
Ex. 291
The stockholders’ equity section of Barrel Corporation’s balance sheet at December 31, 2014,
appears below:
Stockholders’ equity
Paid-in capital
Common stock, $10 par value, 400,000 shares authorized;
250,000 issued and outstanding $2,500,000
Paid-in capital in excess of par 1,200,000
Total paid-in capital 3,700,000
Retained earnings 600,000
Total stockholders’ equity $4,300,000
During 2015, the following stock transactions occurred:
Jan. 18 Issued 50,000 shares of common stock at $32 per share.
Aug. 20 Purchased 25,000 shares of Barrel Corporation’s common stock at $24 per share to
be held in the treasury.
Nov. 5 Reissued 9,000 shares of treasury stock for $28 per share.
Instructions
(a) Prepare the journal entries to record the above stock transactions.
(b) Prepare the stockholders’ equity section of the balance sheet for Barrel Corporation at
December 31, 2015. Assume that net income for the year was $150,000 and that no
dividends were declared.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 68
Solution 291 (Cont.)
Ex. 292
Sloman Corporation has 100,000 shares of $50 par value preferred stock authorized. During the
year, it had the following transactions related to its preferred stock.
(a) Issued 20,000 shares at $55 per share.
(b) Issued 10,000 shares for equipment having a $700,000 asking price. The stock had a market
value of $75 per share
Instructions
Journalize the transactions.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 69
Ex. 293
Desert Corporation has the following capital stock outstanding at December 31, 2015:
7% Preferred stock, $100 par value, cumulative
15,000 shares issued and outstanding …………………………………………… $1,500,000
Common stock, no par, $10 stated value, 500,000 shares authorized,
350,000 shares issued and outstanding …………………………………………. 3,500,000
The preferred stock was issued at $130 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, 2015.
Ex. 294
In its first year of operations, Arid Corporation had the following transactions pertaining to its $20
par value preferred stock.
Feb. 1 Issued 6,000 shares for cash at $43 per share.
Nov. 1 Issued 3,000 shares for cash at $45 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 — preferred stock at the end of the year.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 70
Solution 294 (8–12 min.)
Ex. 295
Trane Corporation has the following stockholders’ equity accounts:
Preferred Stock
Paid-in Capital in Excess of Par—Preferred Stock
Common Stock
Paid-in Capital in Excess of Stated Value—Common Stock
Paid-in Capital from Treasury Stock—Common
Retained Earnings
Treasury Stock—Common
Instructions
Classify each account using the following tabular alignment.
Paid-in Capital Retained
Account Capital Stock Additional Earnings Other
Ans: N/A, LO: 4, Bloom: C, Difficulty: Medium, Min: 5, AACSB: Analytic, AICPA BB: Industry/Sector, AICPA FN: Reporting, AICPA PC: Problem Solving,
IMA: Reporting
Solution 295 (5–9 min.)
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 71
Ex. 296
Darling Corporation issued 200,000 shares of $20 par value, cumulative, 5% preferred stock on
January 1, 2013, for $4,500,000. In December 2015, Darling declared its first dividend of
$800,000.
Instructions
(a) Prepare Darling’s journal entry to record the issuance of the preferred stock.
(b) If the preferred stock is not cumulative, how much of the $800,000 would be paid to
common stockholders?
(c) If the preferred stock is cumulative, how much of the $800,000 would be paid to common
stockholders?
Ex. 297
The stockholders’ equity section of Maria Corporation at December 31, 2014, included the
following:
6% preferred stock, $100 par value, cumulative,
10,000 shares authorized, 8,000 shares issued and outstanding …… $ 800,000
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 2014 and are in arrears.
On September 15, 2015, the board of directors of Maria Corporation declared dividends on the
preferred stock for 2014 and 2015, to stockholders of record on October 1, 2015, payable on
October 15, 2015.
On November 1, 2015, the board of directors declared a $.50 per share dividend on the common
stock, payable November 30, 2015, to stockholders of record on November 15, 2015.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 72
Ex. 297 (Cont.)
Instructions
Prepare the journal entries that should be made by Maria Corporation on the dates indicated
below:
September 15, 2015 November 1, 2015
October 1, 2015 November 15, 2015
October 15, 2015 November 30, 2015
Ex. 298
Stockton Corporation has 160,000 shares of $5 par value common stock outstanding. It declared
a 15% stock dividend on June 1 when the market price per share was $13. The shares were
issued on June 30.
Instructions
Prepare the necessary entries for the declaration and payment of the stock dividend.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 73
Ex. 299
Jungle Corporation’s stockholders’ equity section at December 31, 2014 appears below:
Stockholders’ equity
Paid-in capital
Common stock, $10 par, 60,000 outstanding $600,000
Paid-in capital in excess of par 150,000
Total paid-in capital $750,000
Retained earnings 150,000
Total stockholders’ equity $900,000
On June 30, 2015, the board of directors of Kenner Corporation declared a 15% stock dividend,
payable on July 31, 2015, to stockholders of record on July 15, 2015. The fair value of Kenner
Corporation’s stock on June 30, 2015, was $15.
On December 1, 2015, the board of directors declared a 2 for 1 stock split effective December 15,
2015. Jungle Corporation’s stock was selling for $20 on December 1, 2015, before the stock split
was declared. Par value of the stock was adjusted. Net income for 2015 was $190,000 and there
were no cash dividends declared.
Instructions
(a) Prepare the journal entries on the appropriate dates to record the stock dividend and the
stock split.
(b) Fill in the amount that would appear in the stockholders’ equity section for Jungle
Corporation at December 31, 2015, for the following items:
1. Common stock $____________
2. Number of shares outstanding _____________
3. Par value per share $____________
4. Paid-in capital in excess of par $____________
5. Retained earnings $____________
6. Total stockholders’ equity $____________
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 74
Solution 299 (Cont.)
Ex. 300
Sleep Corporation was organized on January 1, 2014. During its first year, the corporation issued
40,000 shares of $5 par value preferred stock and 400,000 shares of $1 par value common stock.
At December 31, the company declared the following cash dividends:
2014 $ 6,000
2015 $30,000
2016 $60,000
Instructions
(a) Show the allocation of dividends to each class of stock, assuming the preferred stock
dividend is 4% and not cumulative.
(b) Show the allocation of dividends to each class of stock, assuming the preferred stock
dividend is 6% and cumulative.
(c) Journalize the declaration of the cash dividend at December 31, 2016 using the assumption
of part (b).
Ex. 301
On November 1, 2015, Tech Corporation’s stockholders’ equity section is as follows:
Common stock, $10 par value $ 600,000
Paid-in capital in excess of par 205,000
Retained earnings 240,000
Total stockholders’ equity $1,045,000
On November 1, Tech declares and distributes a 15% stock dividend when the market value of
the stock is $16 per share.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 75
Ex. 301 (Cont.)
Instructions
Indicate the balances in the stockholders’ equity accounts after the stock dividend has been
distributed.
Ex. 302
During 2015, Pink 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. Made a prior period adjustment for understatement of net income.
7. Issued par value common stock for cash at par value.
8. Paid the cash dividend.
9. Issued the shares of common stock required by the stock dividend declaration in 4. above.
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
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 76
Ex. 303
The following information is available for Pencil Corporation:
Common Stock ($5 par) $1,600,000
Retained Earnings 1,300,000
A 20% stock dividend is declared and paid when the market value was $16 per share.
Instructions
Compute each of the following after the stock dividend.
(a) Total stockholders’ equity.
(b) Number of shares outstanding.
Ex. 304
On January 1, 2015, Ralph 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
200,000 shares of common stock at $12 per share on July 1. On December 15, the board of
directors declared a 15% stock dividend to stockholders of record on December 31, 2015,
payable on January 15, 2016. The market value of Ralph Corporation stock was $14 per share on
December 15 and $16 per share on December 31. Net income for 2015 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 Ralph Corporation at
December 31, 2015.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
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Solution 304 (Cont.)
Ex. 305
On January 1, 2015, Magnus Corporation had 60,000 shares of $1 par value common stock
issued and outstanding. During the year, the following transactions occurred:
Mar. 1 Issued 35,000 shares of common stock for $550,000.
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 $22 per share.
Dec. 15 Declared a cash dividend on outstanding shares of $2.20 per share to stockholders
of record on December 31.
Instructions
Prepare journal entries to record the above transactions.
Test Bank for Financial Accounting, Ninth Edition
11 – 78
Ex. 306
Record the following transactions for Quik Corporation on the dates indicated.
1. On March 31, 2015, Quik Corporation discovered that Depreciation Expense on equipment
for the year ended December 31, 2014, had been recorded twice, for a total amount of
$84,000 instead of the correct amount of $42,000.
2. On June 30, 2015, the company’s internal auditors discovered that the April 2015 telephone
bill for $2,400 had erroneously been charged to the Interest Expense account.
3. On August 14, 2015, cash dividends on preferred stock of $150,000 declared on July 1, 2015,
were paid.
Ex. 307
The following information is available for Zip Corporation:
Retained Earnings, December 31, 2014 $1,500,000
Net Income for the year ended December 31, 2015 $ 200,000
The company accountant, in preparing financial statements for the year ending December 31,
2015, has discovered the following information:
The company’s previous bookkeeper, who has been fired, had recorded depreciation expense on
equipment in 2013 and 2014 using the double-declining-balance method of depreciation. The
bookkeeper neglected to use the straight-line method of depreciation which is the company’s
policy. The cumulative effects of the error on prior years was $35,000, ignoring income taxes.
Depreciation was computed by the straight-line method in 2015.
Instructions
(a) Prepare the entry for the prior period adjustment.
(b) Prepare the retained earnings statement for 2015.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
11 – 79
Ex. 308
The following information is available for Matlin Inc.:
Beginning retained earnings $600,000
Cash dividends declared 60,000
Net income for 2015 120,000
Stock dividend declared 35,000
Understatement of last year’s depreciation expense 30,000
Instructions
Based on the preceding information, prepare a retained earnings statement for 2015.
Ex. 309
Rex Company reported retained earnings at December 31, 2014, of $410,000. Reese had
180,000 shares of common stock outstanding throughout 2015.
The following transactions occurred during 2015.
1. An error was discovered in 2013, depreciation expense was recorded at $60,000, but the
correct amount was $50,000.
2. A cash dividend of $0.50 per share was declared and paid.
3. A 5% stock dividend was declared and distributed when the market price per share was $15
per share.
4. Net income was $295,000.
Instructions
Prepare a retained earnings statement for 2015.
Test Bank for Financial Accounting, Ninth Edition
11 – 80
Ex. 310
Morgan Company reported the following balances at December 31, 2014: common stock
$500,000; paid-in capital in excess of par value $100,000; retained earnings $350,000. During
2015, the following transactions affected stockholders’ equity.
1. Issued preferred stock with a par value of $150,000 for $200,000.
2. Purchased treasury stock (common) for $50,000.
3. Earned net income of $140,000.
4. Declared and paid cash dividends of $75,000.
Instructions
Prepare the stockholders’ equity section of Morgan Company’s December 31, 2015, balance
sheet.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 81
Ex. 311
On January 1, 2015, Catlin Corporation had Retained Earnings of $400,000. During the year,
Catlin had the following selected transactions:
1. Declared stock dividends of $50,000.
2. Declared cash dividends of $80,000.
3. A 2 for 1 stock split involving the issuance of 200,000 shares of $5 par value common stock
for 100,000 shares of $10 par value common stock.
4. Suffered a net loss of $60,000.
5. Corrected understatement of 2014 net income because of an inventory error of $48,000.
Instructions
Prepare a retained earnings statement for the year.
Ex. 312
The following accounts appear in the ledger of Fall Inc. after the books are closed at December
31, 2015.
Common Stock, $1 par value, 500,000 shares authorized, 400,000 shares
issued $400,000
Common Stock Dividends Distributable 60,000
Paid-in Capital in Excess of Par—Common Stock 550,000
Preferred Stock, $100 par value, 6%, 10,000 shares authorized; 2,000 shares
issued 200,000
Retained Earnings 920,000
Treasury Stock (10,000 common shares) 75,000
Paid-in Capital in Excess of Par—Preferred Stock 310,000
Instructions
Prepare the stockholders’ equity section at December 31, 2015, assuming that retained earnings
is restricted for plant expansion in the amount of $200,000.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 82
Solution 312 (15–20 min.) FALL INC.
Ex. 313
The following information is available for Gaynor Corporation:
Beginning common stockholders’ equity $700,000
Dividends paid to common stockholders 50,000
Dividends paid to preferred stockholders 30,000
Ending common stockholders’ equity 1,000,000
Net income 217,000
Instructions
Based on the preceding information, calculate return on common stockholders’ equity.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 83
Ex. 314
The following stockholders’ equity accounts, arranged alphabetically, are in the ledger of Star
Corporation at December 31, 2015.
Common Stock ($5 stated value) $2,200,000
Paid-in Capital in Excess of Par—Preferred Stock 280,000
Paid-in Capital in Excess of Stated Value—Common Stock 800,000
Preferred Stock (8%, $100 par, noncumulative) 500,000
Retained Earnings 1,434,000
Treasury Stock—Common (10,000 shares) 130,000
Instructions
Prepare the stockholders’ equity section of the balance sheet at December 31, 2015.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 84
Ex. 315
The following information is available for Macon Corporation:
Common Stock ($10 par) $1,700,000
Paid-in Capital in Excess of Par—Preferred 200,000
Paid-in Capital in Excess of Stated Value—Common 750,000
Preferred Stock 450,000
Retained Earnings 800,000
Treasury Stock—Common 50,000
Instructions
Based on the preceding information, calculate each of the following:
(a) Total paid-in capital.
(b) Total stockholders’ equity.
Ex. 316
Place each of the items listed below in the appropriate subdivision of the stockholders’ equity
section of a balance sheet.
Common stock, $10 stated value
Retained earnings
8% Preferred stock, $100 par value
Paid-in capital in excess of par
Paid-in capital in excess of stated value
Treasury stock—Common
Paid-in capital from treasury stock
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
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 85
aEx. 317
The following information is available for Gordon Corporation:
Common stock ($5 par) $600,000
Paid-in capital in excess of par–common 200,000
Retained earnings 180,000
Treasury stock 80,000
Common shares issued 100,000 shares
Common shares outstanding 90,000
Instructions
Based on the preceding information, calculate the book value per share.
aEx. 318
On December 31, 2015, Colaw Company reports the following amounts in its stockholder’ equity
section:
Common stock ($10 par) $2,400,000
Paid-in capital in excess of stated value–common 900,000
Retained earnings 1,980,000
Treasury stock–common 180,000
The common stock has a stated value of $10 per share. One million shares of common stock are
authorized and 40,000 shares are held in the treasury.
Instructions
Compute the book value per share of common stock
Test Bank for Financial Accounting, Ninth Edition
11 – 86
COMPLETION STATEMENTS
319. A corporation has a separate __________________________ apart from its owners.
320. The major advantages of the corporate form of organization include (1) limited
_________________ of owners, (2) continuous ____________________ and (3) ease of
transferring ___________________.
321. Stockholders elect the _______________, who in turn hire the ______________ of the
company who have day to day responsibility for running the corporation.
322. If a corporation’s stock is traded on the major stock exchanges, the corporation must
generally report periodically to a federal agency known as the ____________________.
323. Stockholders generally have the right to share in corporate _______________ and in
______________ upon liquidation.
324. Par value of stock represents the __________________ per share that must be retained
in the business for the protection of corporate ___________________.
325. If stock is issued in exchange for noncash assets, the assets should be valued at the
____________________ of the consideration ___________________ or the assets
____________________, whichever is more clearly evident.
326. A corporation’s own stock that has been reacquired by the corporation but not canceled is
called ___________________ and is deducted from total _______________________ on
the balance sheet.
327. The _______________ feature of preferred stock gives the preferred stockholders the
right to receive current-year dividends and unpaid prior-year dividends before common
stockholders receive any dividends.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
11 – 87
328. Preferred stock has contractual provisions that give it a preference over common stock as
to ___________________ and to ___________________ in the event of liquidation.
329. Three important dates associated with dividends are the: (1)__________________,
(2)__________________, and (3)__________________.
330. The entry to record the declaration of a stock dividend increases _______________, and
decreases ________________.
331. Both a stock split and a stock dividend will _________________ the number of shares
outstanding and have _________________ on total stockholders’ equity.
332. Corporations sometimes segregate retained earnings into two categories: (1)__________
retained earnings and (2)________________ retained earnings.
333. The correction of an error in previously issued financial statements is known as a
_________________.
334. The return on ________________ shows how many dollars of net income were earned for
each dollar invested by owners.
335. The return on common stockholders’ equity is computed by dividing _____________
minus _______________ dividends by average common stockholders’ equity.
336. The paid-in capital section of the balance sheet consists of two classifications:
______________________ and ______________________.
Test Bank for Financial Accounting, Ninth Edition
11 – 88
Answers to Completion Statements
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 89
MATCHING
337. Match the items below by entering the appropriate code letter in the space provided.
A. Limited liability J. Cumulative feature
B. Capital stock K. Deficit
C. Board of directors L. Liquidating dividend
D. Paid-in capital M. Earnings per share
E. Retained earnings N. Return on common stockholders’ equity
F. Preemptive right O. Cash dividend
G. Par value P. Declaration date
H. Legal capital Q. Stock dividend
I. Treasury stock R. Stock split
____ 1. Net income retained in the corporation.
____ 2. The amount that must be retained in the business for the protection of creditors.
____ 3. Preferred stockholders have a right to receive current and unpaid prior-year dividends
before common stockholders receive any dividends.
____ 4. Creditors only have corporate assets to satisfy their claims.
____ 5. Responsible to stockholders for corporate activity.
____ 6. The amount assigned to each share of stock in the corporate charter.
____ 7. Unit of ownership in a corporation.
____ 8. Enables stockholders to maintain their same percentage ownership when new shares
are issued.
____ 9. Corporation’s own stock that has been reacquired by the corporation but not retired.
____ 10. Total amount paid-in on capital stock.
____ 11. A dividend declared out of paid-in capital.
____ 12. A pro rata distribution of cash to stockholders.
____ 13. A debit balance in retained earnings.
____ 14. A pro rata distribution of the corporation’s own stock to stockholders.
____ 15. Shows how many dollars of net income were earned for each dollar invested by the
owners.
____ 16. The date the board of directors formally declares the dividend and announces it to
stockholders.
____ 17. The issuance of additional shares of stock to stockholders accompanied by a
reduction in the par or stated value per share.
____ 18. Widely used by stockholders and potential investors in evaluating the profitability of a
company.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 90
SHORT-ANSWER ESSAY QUESTIONS
S-A E 338
Identify at least six characteristics of the corporate form of business organization. Contrast each
one with the partnership form of organization.
S-A E 339
Companies frequently issue both preferred stock and common stock. What are the major
differences in the rights of stockholders between these two classes of stock?
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 91
Solution 339
S-A E 340
Define par value, and discuss its significance in accounting.
S-A E 341
Lang, Inc. purchases 1,000 shares of its own previously issued $5 par common stock for
$15,000. The treasury stock is resold by Lang, Inc. for $20,000. What effect does this transaction
have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?
S-A E 342
Why must a corporation have sufficient retained earnings before it may declare cash dividends?
S-A E 343
Three dates are important in connection with cash dividends. Identify these dates, and explain
their significance to the corporation and its stockholders.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 92
Solution 343
S-A E 344
A prior period adjustment is occasionally reported in company financial statements. What is a
prior period adjustment, and how is it reported in the financial statements?
S-A E 345
The ultimate effect of incurring an expense is to reduce stockholders’ equity. The declaration of a
cash dividend also reduces stockholders’ equity. Explain the difference between an expense and
a cash dividend and explain why they have the same effect on stockholders’ equity.
S-A E 346
A large stock dividend and stock split can frequently have the same effect on the market price of
a corporation’s stock. Explain how stock dividends and stock splits affect the market price of a
corporation’s stock.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
11 – 93
S-A E 347 (Ethics)
Mike Stephenson, the president and CEO of Earth Systems, Inc., a waste management firm, was
recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his
hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading
activity became almost nonexistent. The primary reason for this was concern expressed in the
media over a new untested waste management system implemented by the company. Mr.
Stephenson had been unwilling to submit the procedure to testing before implementation, but he
reluctantly agreed to limited tests after the system was operational. No problems have been
identified by the tests to date.
The other members of management called a meeting to determine what they should do. Roger
Carlson, the marketing manager, suggested that the company purchase a large number of shares
of treasury stock. In that way, investors might notice that activity had picked up, and might decide
to buy some more shares. This plan would use up most of the company’s available cash, so that
there will be no money available for a cash dividend. Earth Systems has paid cash dividends
every quarter for over ten years.
Required:
1. Is Mr. Carlson’s suggestion ethical? Explain.
2. Is it ethical to discontinue the cash dividend? Explain.
S-A E 348 (Communication)
As part of a Careers in Accounting program sponsored by accounting organizations and
supported by your company, you will be taking a group of high-school students through the
accounting department in your company. You will also provide them with various materials to
explain the work of an accountant. One of the materials you will provide is the Stockholders’
Equity section of a recent balance sheet.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
11 – 94
Required:
Prepare a sentence or two explaining each major section: Common Stock, Additional Paid-in
Capital, and Retained Earnings. You should try to be brief but clear.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
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CHALLENGE EXERCISES
CE 1
On January 1, 2015, the stockholders’ equity section of Kingman Corporation shows: common
stock ($5 par value) $2,000,000; paid-in capital in excess of par value $1,200,000; and retained
earnings $1,500,000. During the year, the following treasury stock transactions occurred.
Mar. 1 Purchased 60,000 shares for cash at $13 per share.
July 1 Sold 15,000 treasury shares for cash at $15 per share.
Sept. 1 Sold 10,000 treasury shares for cash at $11 per share.
Instructions
(a) Journalize the treasury stock transactions.
(b) Prepare the stockholders’ equity section after the entries in (a) are recorded.
(c) Prepare the entry for September 1, assuming the treasury shares were sold at $8 per share.
Test Bank for Financial Accounting, Ninth Edition
FOR INSTRUCTOR USE ONLY
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CE 2
On January 1, Staley Corporation had 90,000 shares of no-par common stock issued. 5,000
shares are held as treasury stock. The stock has a stated value of $5 per share. During the year,
the following transactions occurred.
Apr. 1 Issued 12,000 additional shares of common stock for $18 per share.
June 15 Declared a cash dividend of $1 per share to stockholders of record on June 30.
July 10 Paid the $1 cash dividend.
Dec. 1 Purchased 7,000 additional shares of common stock for $17 per share.
15 Declared a cash dividend on outstanding shares of $1.20 per share to stockholder
of record on December 31.
Instructions
(a) Prepare the entries, if any, on each of the three dividend dates.
(b) How are dividends and dividends payable reported in the financial statements prepared at
December 31?
CE 3
Kennedy Company reported the following balances at December 31, 2014: common stock
$500,000; paid-in capital in excess of par value $200,000; retained earnings $450,000. During
2015, the following transactions affected stockholders’ equity.
1. Issued preferred stock with a par value of $250,000 for $290,000.
2. Purchased treasury stock (common) for $80,000.
3. Earned net income of $220,000.
4. Declared and paid cash dividends of $86,000 ($16,000 preferred).
Instructions
(a) Prepare the stockholders’ equity section of Kennedy Company’s December 31, 2015,
balance sheet.
(b) Compute Kennedy’s 2015 return on common stockholders’ equity.
Corporations: Organization, Stock Transactions, Dividends, And Retained Earnings
FOR INSTRUCTOR USE ONLY
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