b.
Retained earnings decreases.
c.
Contributed capital increases.
d.
Par value per share remains the same.
56. At the beginning of 20xx, Helms Corporation had 34,000 shares of $10 par value common stock
issued and outstanding. During January 20xx, Helms declared and distributed a 10 percent stock
dividend. The market value of Helms’s stock was $24 throughout the month of January. The entry to
be recorded for the declaration of stock dividend is :
a.
Stock Dividends 81,600
Common Stock Distributable 34,000
Additional Paid-in Capital 47,600
b.
Common Stock Distributable 81,600
Common Stock 81,600
c.
Common Stock Distributable 81,600
Common Stock 34,000
Retained Earnings 47,600
d.
Stock Dividends 68,000
Cash 68,000
57. On May 1, 20xx, Bryson Corporation had 200,000 shares of $100 par value common stock outstanding
with a market value of $160 per share. On May 2, 20xx, Bryson announced a 4-for-1 stock split. After
the split, the par value of the stock
a.
remained the same as before the split.
b.
was reduced to $25 per share.
c.
was reduced by $40 per share.
d.
was reduced by $25 per share.
58. Use this information to answer the following question.
Hernandez Corporation has 60,000 shares of $10 par value common stock outstanding. The following
transactions occurred during the year:
Mar.
17
Declared a 10 percent stock dividend to stockholders of record on March 20. Market
value of the stock was $13 on March 17.
30
Distributed the stock dividend.
The entry to record the transaction of March 17 would be:
a.
Stock Dividends 78,000
Common Stock Distributable 60,000
Additional Paid-in Capital 18,000
b.
Common Stock Distributable 60,000
Common Stock 60,000
c.
Common Stock Distributable 78,000
Common Stock 60,000
Retained Earnings 18,000
d.
Stock Dividends 78,000
Cash 78,000
59. Use this information to answer the following question.
Hernandez Corporation has 60,000 shares of $10 par value common stock outstanding. The following
transactions occurred during the year:
Mar.
17
Declared a 10 percent stock dividend to stockholders of record on March 20. Market
value of the stock was $13 on March 17.
30
Distributed the stock dividend.
The entry to record the transaction of March 30 would be:
a.
Common Stock Distributable 60,000
Common Stock 60,000
b.
Common Stock Distributable 60,000
Retained Earnings 18,000
Common Stock 78,000
c.
Common Stock Distributable 78,000
Common Stock 60,000
Additional Paid-in Capital 18,000
d.
Common Stock Distributable 60,000
Cash 60,000
60. How will the declaration and distribution of a 10 percent stock dividend affect the issuing corporation’s
balance of retained earnings and total stockholders’ equity, respectively?
a.
Decrease and no effect
b.
No effect and no effect
c.
Decrease and decrease
d.
No effect and decrease
61. Which of the following has an effect on total stockholders’ equity?
a.
Conversion of preferred stock into common stock
b.
Cash dividend
c.
Stock dividend
d.
Stock split
62. On which of the following dates involving stock dividends does a liability arise?
a.
Date of distribution
b.
Date of declaration
c.
Date of record
d.
On no date
63. A small stock dividend should be recorded on the basis of
a.
par or stated value.
b.
original issue price.
c.
market value.
d.
cost.
64. Which of the following transactions affects total retained earnings?
a.
Purchase of treasury stock
b.
Payment of previously declared cash dividend
c.
Declaration of a stock dividend
d.
Declaration of a stock split
65. If only common stock is outstanding, total stockholders’ equity divided by the number of shares of
common stock outstanding is called the
a.
par or stated value per share.
b.
call value per share.
c.
book value per share.
d.
market value per share.
66. The value at which one share of stock can be bought or sold is called
a.
book value.
b.
call value.
c.
par or stated value.
d.
market value.
67. Book value per share refers to the
a.
net assets represented by one share of a company’s stock.
b.
highest price that investors will pay for a share of stock.
c.
issue price of the stock, less any market decline since issuance.
d.
par or stated value of a share of stock.
68. Lemma Corporation has total contributed capital of $600,000 and retained earnings of $340,000. It has
1,000 shares of $100 par value preferred stock with no dividends in arrears and 5,000 shares of $100
par value common stock. The preferred stock is callable at 105. The book value of each share of
common stock is
a.
$168.
b.
$93.
c.
$167.
d.
$188.
69. Ballard Corporation has retained earnings of $200,000. It has 5,000 shares of 6 percent, $100 par value
preferred stock outstanding that is callable at 102. The preferred stock is cumulative, and one year of
dividends is in arrears. It also has 10,000 shares of $50 par value common stock outstanding. Assume
all stock is issued at par. The book value of each share of preferred stock is
a.
$105.
b.
$108.
c.
$102.
d.
$110.
70. Ballard Corporation has retained earnings of $200,000. It has 5,000 shares of 6 percent, $100 par value
preferred stock outstanding that is callable at 102. The preferred stock is cumulative, and one year of
dividends is in arrears. It also has 10,000 shares of $50 par value common stock outstanding. Assume
all stock is issued at par. The book value of each share of common stock is
a.
$66.
b.
$69.
c.
$51.
d.
$50.
SHORT ANSWER
1. Define the term quality of earnings, and discuss its significance in performing financial statement
analysis.
2. What is the basis of the statement “Accounting income is a useless measurement because it is based on
so many arbitrary decisions”? Is the statement true? Explain your answer.
3. How do the accounting conventions of full disclosure and consistency facilitate the interpretation of
the quality of earnings?
4. Why would a financial analyst consider the amount of income from continuing operations to be more
useful than the amount of net income?
5. Specifically, what gives rise to the Deferred Income Taxes account?
6. Kappa Corporation had a taxable income of $69,000 for 20xx. Calculate the income taxes expense of
Kappa Corporation on the basis of the following tax schedule:
Tax Rate Schedule
Taxable Income
Tax Liability
Over
But Not Over
Of the Amount Over
—
$50,000
0 + 15%
—
$ 50,000
75,000
$ 7,500 + 25%
$ 50,000
75,000
100,000
13,750 + 34%
75,000
100,000
335,000
22,250 + 39%
100,000
On first $50,000
On next $19,000 at 25 percent
Income taxes expense
$12,250
7. Haskell, Inc., reported the following income before income taxes, income taxes expense, and net
income for 2009 and 2010:
2009
2010
Income before income taxes
$420,000
$420,000
Income taxes expense
240,000
240,000
Net income
$180,000
$180,000
In 2009, Haskell deducted a $35,000 item for income tax purposes that was not deducted for
accounting purposes until 2010. Haskell’s marginal tax rate is 40 percent. Prepare entries in journal
form without explanations to record Haskell’s income taxes expense and income taxes payable for each
year, assuming that income tax allocation procedures are used properly.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
8. Nagle Corporation computed its actual income taxes payable for 20xx to be $46,000. Because of
differences in accounting procedures and income tax rules, the income taxes expense to be reported for
20xx is $53,500. Prepare the entry in journal form without explanation to record the income taxes
expense and income taxes payable for 20xx.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
ANS:
Deferred Income Taxes ($35,000 0.40)
Deferred Income Taxes ($35,000 0.40)
9. Kagel Corporation computed its actual income taxes payable for 20xx to be $92,000. Because of
differences in accounting procedures and income tax rules, the income taxes expense to be reported for
20xx is $107,000. Prepare the entry in journal form without explanation to record the income taxes
expense and income taxes payable for 20xx.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
Income Taxes Expense
15,000
10. Why must certain income statement items be presented “net of taxes”?
ANS:
11. Listed below are some selected captions that might appear on a corporate income statement. Indicate
the order in which these captions should appear on the income statement. (The first one should be
assigned the number “1,” the second “2,” and so on.)
_____ a. Extraordinary Gain
_____ b. Income from Continuing Operations Before Income Taxes
_____ c. Discontinued Operations
_____ d. Net Income
_____ e. Income from Continuing Operations
_____ f. Income Taxes Expense
12. What issues must be considered when determining whether or not an uninsured loss from tornado
destruction should be treated as an extraordinary item?
13. Ricardo Corporation reported earnings per share of $2.50 for the year ended December 31, 2010. The
following facts pertain to Ricardo Corporation:
80,000 shares of common stock were issued and outstanding on December 31, 2009.
40,000 shares of common stock were issued for cash on July 1, 2010.
Net income for 2010 was $325,000.
There were 8,000 shares of nonconvertible preferred stock outstanding during 2010.
Dividends of $20,000 were declared and paid to common stockholders during 2010.
Calculate the amount of dividends declared during 2010 on the nonconvertible preferred stock.
14. Elmwood Corporation reported earnings per share of $5.00 for the year ended December 31, 2010.
The following facts pertain to Elmwood Corporation:
80,000 shares of common stock were issued and outstanding on December 31, 2009.
40,000 shares of common stock were issued for cash on July 1, 2010.
Net income for 2010 was $650,000.
There were 8,000 shares of nonconvertible preferred stock outstanding during 2010.
Dividends of $20,000 were declared and paid to common stockholders during 2010.
Calculate the amount of dividends declared during 2010 on the nonconvertible preferred stock.
15. What are potentially dilutive securities, and how do they relate to earnings per share calculations?
16. How is it possible for a company to show a net income for a given year yet be in a deficit position at
year end?
17. Distinguish between cash and retained earnings.
18. Indicate on the blanks below the effect (I = increase, D = decrease, NE = no effect) of a stock split on
each of the items listed.
_____ 1. Assets
_____ 2. Balance of Common Stock account
_____ 3. Total contributed capital
_____ 4. Total retained earnings
_____ 5. Total stockholders’ equity
_____ 6. Par value per share
_____ 7. Total number of shares outstanding
19. Elias Corporation has 40,000 shares of $10 par value common stock outstanding. Prepare entries in
journal form without explanations for the following transactions. (Market value of the stock was
$15.00 on December 16 and $15.50 on December 23.)
Dec.
16
Declared a 15 percent stock dividend.
23
Distributed the stock dividend.
30
Declared a 2-for-1 stock split.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
1. NE
5. NE
2. NE
6. D
3. NE
7. I
4. NE
20. The following facts pertain to the stockholders’ equity section of the balance sheet of Vanalden
Corporation:
December 31, 2010
December 31, 2009
Common Stock—$5 par value
$55,000
$50,000
Additional Paid-in Capital
32,000
30,000
Retained Earnings
105,000
100,000
During 2010, Vanalden declared and distributed a stock dividend. Also during 2010, Vanalden
declared and paid cash dividends of $10,000. There were no changes in the number of shares of stock
issued and outstanding during the period except for the change caused by the stock dividend. Calculate
the amount of net income reported by Vanalden for 2010.
21. The following facts pertain to the stockholders’ equity section of the balance sheet of Vanowen
Corporation:
December 31, 2010
December 31, 2009
Common Stock—$5 par value
$110,000
$100,000
Additional Paid-in Capital
64,000
60,000
Retained Earnings
210,000
200,000
During 2010, Vanowen declared and distributed a stock dividend. Also during 2010, Vanowen
declared and paid cash dividends of $20,000. There were no changes in the number of shares of stock
issued and outstanding during the period except for the change caused by the stock dividend. Calculate
the amount of net income reported by Vanowen for 2010.