Chapter 15: Shareholders’ Equity: Capital Contributions and
Distributions Key
1. Shareholders’ equity is a residual interest. It represents the shareholders’ claim on the assets of a firm after
the firm satisfies all higher-priority claims.
2. All corporations must issue preferred stock.
3. Common and preferred stock usually do not have a par or stated value.
4. Firms may periodically distribute net assets generated by earnings to shareholders as a dividend. Firms
reduce net assets and retained earnings for the distribution.
5. Retained earnings on the balance sheet provides a measure of the cumulative net assets generated by earnings
in excess of dividends declared.
6. Only the corporate form of business organization provides the owner with limited liability.
7. If a corporation becomes insolvent, creditors can claim the assets of the individual owners.
8. To settle debts of general partnerships and sole proprietorships, creditors have a claim on the owners’
business and personal assets.
9. In recent years, many partnerships and sole proprietorships have become limited liability companies (LLCs),
or limited liability partnerships (LLPs), to limit their owners’ personal liability for business debts and other
obligations.
10. Both U.S. GAAP and IFRS require the disclosure of information about the rights of each type of capital
stock outstanding.
11. Convertible preferred shares require the holder of preferred shares to convert the preferred shares into a
specified number of common shares under certain specified conditions.
12. The issuing firm benefits from issuing convertible preferred shares, because these shares carry a lower
dividend rate than purchasers otherwise would have required to buy the shares for a given price.
13. U.S. GAAP and IFRS do not classify preferred stock subject to redemption only at the option of the issuing
firm as shareholders’ equity.
14. Preferred stock subject to redemption at the option of the preferred shareholders appears between liabilities
and shareholders’ equity in U.S. GAAP and as a liability in IFRS.
15. The annual reports to shareholders must explain the changes in all shareholders’ equity accounts.
16. In most cases U.S. GAAP requires firms to allocate the full issue price of Convertible Bonds or Convertible
Preferred Stock to the bonds or preferred stock and none of the price to the conversion feature.
17. IFRS does not require firms to allocate a portion of the issue price of convertible bonds and convertible
preferred stock to the conversion feature.
18. When firms issue common stock for assets other than cash, the firm records the shares exchanged for
noncash assets at the fair value of the shares given or, if the firm cannot make a reasonable estimate, at the fair
value of the assets received.
19. If a firm issues common stock in return for services other than from employees, the firm records the
transaction at the fair value of the services received if it can more reliably measure this amount. Otherwise, the
firm records the transaction at the fair value of the shares issued.
20. Financial statement notes must disclose significant limitations on dividend declarations.
21. Stock dividends have little economic substance for shareholders.
22. Usually firms treat small-percentage distributions, say less than a 25% increase in the number of shares, as
stock dividends and larger ones as stock splits.
23. U.S. GAAP and IFRS on accounting for repurchases and reissuances of treasury shares follow the principle
that treasury stock purchases and sales are operating transactions and therefore debits Cash (for economic gains)
or credits Cash (for economic losses).
24. U.S. GAAP provides several approaches to the accounting for treasury shares which include cost, par value,
and constructive retirement methods.
25. Firms use the par value method when management and the governing board do not intend to reissue shares
within a reasonable amount of time or when jurisdiction-specific corporation laws define reacquired shares as
retired shares.
26. U.S. GAAP and IFRS do not require the firm to measure the fair value of the stock warrants separately from
27. Holders of a bond or preferred stock with common stock warrants attached cannot detach and redeem the
warrants separately from the bond or preferred stock.
28. The value of a stock option results from the benefit element and the time value element.
29. Both U.S. GAAP and IFRS do not require firms to recognize the fair value of employee stock options in
30. Corporations often sell, or exchange for goods and services, various call options on their shares. The excess
of the exercise price over the market price is the option’s intrinsic value.
31. Lakeside Company has not declared nor paid dividends on its cumulative preferred stock in the last three
years. These dividends should be reported
32. The par value of common stock represents the
33. Earnings per share equals
34. Which of the following shareholder rights is most commonly enhanced in an issue of preferred stock?
35. Book value per common share equals
36. Earnings per share tells the shareholder the amount of
37. A firm with securities outstanding that holders can convert into, or exchange for, shares of common stock
may report two earnings-per-share amounts:
38. Firms with convertible preferred stock or other potentially dilutive securities outstanding
39. The shareholders’ equity section of the balance sheet reports the sources of financing provided by preferred
and common shareholders and their claims on the net assets of the firm. Which of the following is/are true?
40. If the firm becomes insolvent, in order to settle debts creditors can claim
41. The usual entry to record the conversion of convertible bonds or preferred stock into common shares ignores
_____ and shows the swap of common shares for bonds or preferred stock at their _____.
42. Which of the following is/are true regarding firms use of net assets (assets minus liabilities)?
43. Which of the following is not true regarding firms use of net assets (assets minus liabilities)?
44. Which of the following is not true regarding firms use of net assets (assets minus liabilities)?
45. All corporations issue
46. Which of the following is/are not true?
47. Which of the following is/are not true?
48. Which of the following is/are not true?
49. The term capital can mean
50. Most publicly traded firms operate as corporations. The corporate form has which of the following
advantage(s)?
51. Most publicly traded firms operate as corporations. Which of the following is/are not true?
52. Most publicly traded firms operate as corporations. Which of the following is/are not true?
53. Most publicly traded firms operate as corporations. Which of the following is/are not true?
54. Most publicly traded firms operate as corporations. Which of the following is/are not true?
55. Various laws and contracts govern the rights and obligations of a shareholder. Which of the following
is/are not true?
56. Various laws and contracts govern the rights and obligations of a shareholder. Which of the following
is/are not true?
57. Various laws and contracts govern the rights and obligations of a shareholder. Which of the following
istrue?
58. Which of the following is not true?
59. Which of the following is not true?
60. Which of the following is/are not true?
61. Which of the following is not true?
62. Which of the following is not true?
63. Which of the following is/are not true?
64. Preferred shares may provide for redemption by the issuing firm in the future. Redeemable preferred shares
carry which of the following redemption rights or obligations?
65. Which of the following is/are not true?
66. Which of the following is not true?
67. Which of the following is/are not true?
68. Which of the following is not true?
69. Corporations often sell, or exchange for goods and services, various call options on their shares. Which of
the following is/are not true?
70. In U.S. GAAP, preferred stock subject to redemption at the option of the preferred shareholders appears
71. In IFRS, preferred stock subject to redemption at the option of the preferred shareholders appears
72. In IFRS, preferred stock subject to mandatory redemption is disclosed
73. In U.S. GAAP, preferred stock subject to mandatory redemption is disclosed
74. Which of the following is/are true?
75. In most cases, U.S. GAAP requires firms to allocate the full issue price of Convertible Bonds or Convertible
Preferred Stock
76. Which of the following is/are true concerning convertible bonds or convertible preferred stock?
77. Which of the following is/aretrue concerning convertible bonds or convertible preferred stock?
78. Evenrude Corporation is a new company about to issue stock. The corporation sells 2,000 shares of common
stock (par value $2) at $10 per share. The journal entry to record this transaction is:
79. A firm issues convertible bonds that pay 8% interest and receives $100,000. The firm could have issued
nonconvertible bonds that pay 8% interest but would have received only $80,000 in bond proceeds. What
journal entry is necessary under GAAP to record the issuance of the convertible bonds?
80. A firm decides to issue stock, pursuant to a stock split, on a 2-for-1 basis. What entry is necessary for this
issuance?
81. The _____ has the legal authority to declare dividends. When considering whether to declare dividends,
they must conclude that declaring a dividend is both legal (under law and contract) and financially desirable.
82. Which of the following is/are true?
83. Jurisdiction-specific corporate laws limit directors’ freedom to declare dividends. Which of the following
is/are true?
84. Jurisdiction-specific corporate laws limit directors’ freedom to declare dividends. Which of the following
is/are not true?
85. Jurisdiction-specific corporate laws limit directors’ freedom to declare dividends. Which of the following
is/are true?
86. Jurisdiction-specific corporate laws limit directors’ freedom to declare dividends. Without these limits,
directors might dissipate the firm’s assets for the benefit of
87. Contracts with bondholders, other lenders, and preferred shareholders often limit dividend payments and
thereby compel the retention of earnings. Which of the following is/are true?
88. Directors usually declare dividends less than the legal maximum and thereby allow retained earnings to
increase as a matter of corporate financial policy for what reason(s)?
89. Directors usually declare dividends less than the legal maximum and thereby allow retained earnings to
increase as a matter of corporate financial policy. Which of the following is not a valid reason for this
practice?
90. Corporations sometimes distribute assets other than cash when paying a dividend. Which of the following
is/are true?
91. Corporations sometimes distribute assets other than cash when paying a dividend. Which of the following
is not true?
92. Corporations sometimes distribute assets other than cash when paying a dividend. Which of the following
is not true?
93. The stock dividend relabels a portion of the retained earnings that had been legally available for dividend
declarations as a more permanent form of shareholders’ equity, because
94. Stock dividends
95. Which of the following is not true regarding the issuance of a stock dividend?
96. Distinguishing a stock dividend from a stock split can sometimes cause difficulties. Usually firms treat
small-percentage distributions, say less than a _____ increase in the number of shares, as stock dividends and
larger ones as stock splits.
97. Which of the following is/are true regarding stock splits?
98. A stock split accomplished by altering the par value in direct proportion to the number of new shares