CHAPTER 15: CONTRIBUTED CAPITAL
1. Accumulated other comprehensive income is not reported with shareholder’s equity.
a.
True
b.
False
False
1
Easy
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2. An open corporation does not allow the sale of their stock to the general public, only to investment capital brokers.
a.
True
b.
False
False
1
Easy
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3. Miscellaneous fees arising from the issuance of stock are charged to the organization expense account only if this is not
the company’s first issuance of stock.
a.
True
b.
False
False
1
Easy
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4. State laws established the concept of legal capital which is designed to protect the corporation’s creditors by restricting
the distribution of shareholder’s equity to shareholders.
a.
True
b.
False
True
1
Easy
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5. The ratio that shows how many dollars of net income were earned for every dollar invested by the owner is return on
equity.
a.
True
b.
False
True
1
Easy
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6. Under IFRS companies are allowed to revalue their property, plant, and equipment as well as intangible assets.The
revaluation is based upon market value and can be either adjusted up or down.
a.
True
b.
False
True
1
Moderate
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7. Noncompensatory share purchase plans are utilized to increase employee ownership.
a.
True
b.
False
True
1
Easy
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8. There are three criteria that must be met in order for a share purchase plan to be considered noncompensatory. If
all three criteria are not met then the plan is considered compensatory.
a.
True
b.
False
True
1
Easy
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9. The intrinsic value method of measuring options based compensation is no longer supported by FASB and the IASB.
a.
True
b.
False
True
1
Easy
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10. Under a restricted share plan, the employees can sell the stock at their discretion.
a.
True
b.
False
False
1
Easy
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11. Noncumulative preferred stock is entitled to all dividends, even if they are in the arrears.
a.
True
b.
False
False
1
Easy
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12. Fully participating preferred shareholders receive extra dividends equally with the rate of common shareholders.
a.
True
b.
False
True
1
Easy
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13. Companies can reacquire their own stock to reduce the likelihood of a hostile takeover.
a.
True
b.
False
True
1
Easy
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14. Treasury stock does not vote, has no preemptive rights, cannot participate in dividends, and has no liquidation rights.
a.
True
b.
False
True
1
Easy
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15. Contributed capital does not include subscribed stock because it has not been issued yet.
a.
True
b.
False
False
1
Easy
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16. FASB requires companies to provide disclosure regarding the preferred stock characteristics.
a.
True
b.
False
True
1
Easy
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17. The corporate form of organization is important to the U.S. economy because
a.
there are more corporations than sole proprietorships.
b.
there are more corporations than partnerships.
c.
there are more sales of goods and services by corporations than any other business forms.
d.
corporations provide more donations to the economy than other business forms due to the many tax incentives
geared toward corporations.
c
1
Easy
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18. Universities, hospitals, and churches are examples of which type of corporation?
a.
stock companies
b.
privately held companies
c.
nonstock companies
d.
publicly held companies
c
1
Easy
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19. Which of the following is not a characteristic of the corporate form of business entity?
a.
b.
c.
d.
b
1
Easy
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20. All of the following are true statements about a corporation except that it
a.
must pay state and federal income taxes.
b.
may engage in any legal activity.
c.
can enter into legal contracts.
d.
can continue in perpetuity.
b
1
Easy
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21. Which of the following types of corporations is owned or operated by a government unit?
a.
domestic
b.
private
c.
closed
d.
Public
d
1
Easy
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22. A corporation whose stock is traded on a stock exchange is called a(n)
a.
foreign corporation.
b.
open corporation.
c.
domestic corporation.
d.
closed corporation.
b
1
Easy
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23. Smith Corp. has both Class A and Class B shares of common stock. The difference between the two classes of stock is
most likely related to
a.
Class A stock being worth more than Class B stock.
b.
Class A shareholders having greater voting rights than Class B shareholders.
c.
Class A shareholders receiving dividends while Class B shareholders do not.
d.
Class A shareholders having better preemptive rights than Class B shareholders.
b
1
Moderate
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24. Shares of capital stock issued to and held by shareholders as of a specific date are
Authorized
Issued
Outstanding
Capital Stock
Capital Stock
Capital Stock
I.
Yes
Yes
No
II.
Yes
Yes
Yes
III.
No
No
Yes
IV.
No
No
No
a.
I
b.
II
c.
III
d.
IV
b
1
Easy
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25. Which one of the following equations is accurate?
a.
Treasury stock = Authorized stock − Issued stock
b.
Treasury stock = Outstanding stock − Subscribed stock
c.
Treasury stock = Authorized stock − Outstanding stock
d.
Treasury stock = Issued stock − Outstanding stock
d
1
Easy
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26. In most states, it is illegal to sell stock
a.
at a discount.
b.
with no par value.
c.
at a premium.
d.
in excess of par value.
a
1
Easy
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27. Which of the following is not part of the shareholders’ equity section of the balance sheet?
a.
working capital
b.
contributed capital
c.
treasury stock
d.
retained earnings
a
1
Easy
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28. The legal capital of a corporation may be any of the following except
a.
the stated value of the stock.
b.
the par value of the stock.
c.
the market value of the stock at the balance sheet date (assuming the market value differs from the par or
stated value).
d.
the entire proceeds from the stock issuance.
c
1
Easy
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29. A preemptive right is
a.
the right to vote in the election of directors and to establish corporate policies.
b.
the right to share in the profits when a dividend is declared.
c.
the right to maintain a proportionate interest in the ownership of the corporation by purchasing a proportionate
share of additional capital stock should such stock be issued.
d.
the right to share in the distribution of the assets of the corporation should it be liquidated.
c
1
Easy
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30. Which one of the following statements is false?
a.
When stock is issued, legal capital is usually the total amount received.
b.
Par value has no direct relationship to market value.
c.
The accounting for stated value, no-par stock parallels accounting for par-value stock.
d.
Capital shareholders have limited liability.
a
1
Easy
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31. Which one of the following phrases is least desirable when describing an amount received from a sale of stock in
excess of the par value of the stock?
a.
paid-in capital in excess of par value
b.
capital surplus
c.
additional paid-in capital on preferred stock
d.
contributed capital in excess of par value
b
1
Easy
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32. The authorized shares of capital stock is the number of shares
a.
outstanding.
b.
acquired.
c.
that may be issued.
d.
reacquired.
c
1
Easy
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33. If a company has 75,000 shares of treasury stock, 520,000 shares outstanding, and 1,500,000 shares authorized, how
many shares are issued?
a.
500,000
b.
75,000
c.
520,000
d.
595,000
d
1
Easy
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34. Which of the following represents shares of stock that will be issued upon completion of an installment purchase
contract?
a.
subscribed capital stock
b.
outstanding capital stock
c.
treasury stock
d.
contracted capital stock
a
1
Easy
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35. A corporation is a legal entity
a.
held jointly by its owners and management.
b.
separate from its owners.
c.
formed by the laws of the U.S. Department of Commerce.
d.
under the laws established by the SEC.
b
1
Easy
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36. A corporation’s legal capital
a.
is established to protect the corporation’s creditors.
b.
is a requirement established by the SEC to aid in enforcement of regulations.
c.
is the amount of cash received by the corporation from its shareholders when it originally issues stock.
d.
allows a corporation to declare dividends of any amount.
a
1
Moderate
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Chapter 15: Contributed Capital
Exhibit 15-1
Hanson Co. issued 10,000 shares of its $5 par common stock for $15 a share. In addition, it incurred legal and
accounting fees, stock certificate costs, and other related expenses totaling $18,500.
37. Refer to Exhibit 15-1. Assume the sale was the initial issuance of stock at incorporation for Hanson Co. The entry to
record the sale would include a
a.
credit to Cash for $150,000.
b.
credit to Common Stock for $150,000.
c.
debit to Organization Expense for $18,500.
d.
credit to Additional Paid-in Capital on Common Stock for $81,500.
c
1
Moderate
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38. Refer to Exhibit 15-1. Assume the sale occurred after the initial issuance at incorporation. The entry to record the sale
and related expenses would include a
a.
credit to Additional Paid-in Capital on Common Stock for $81,500.
b.
credit to Organization Expense for $18,500.
c.
credit to Common Stock for $150,000.
d.
debit to Cash for $150,000.
a
1
Moderate
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39. The Securities and Exchange Commission requires that Subscriptions Receivable be disclosed on the financial
statements filed with it as a(n)
a.
current asset as long as collection is to be made within one year or the normal operating cycle, whichever is
longer.
b.
other asset if collection is to be made beyond one year from the date of the financial statements.
c.
contra-accounts receivable account.
d.
d
1
Moderate
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contra-shareholders’ equity account.
Exhibit 15-2
Lawrence, Inc., entered into a subscription contract with several subscribers that calls for the purchase of 2,000 shares
of $5 par common stock for $15 a share. The contract calls for a 20% down payment and specifies that any amounts
not paid within the contract period will be forfeited in full.
40. Refer to Exhibit 15-2. The initial entry to record this subscription and the down payment would include:
a.
a credit to Common Stock Subscribed for $10,000.
b.
a credit to Additional Paid-in Capital from Subscribed Stock for $10,000.
c.
a debit to Subscriptions Receivable: Common Stock for $30,000.
d.
a debit to Cash for $2,000.
a
1
Moderate
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41. Refer to Exhibit 15-2. Lawrence received final payment (80%) on 1,800 shares and issued those shares. Subscribers
defaulted on 200 shares. The entries to record receipt of final payment and issuance of 1,800 shares would include a
a.
debit to Cash for $24,000.
b.
credit to Subscriptions Receivable: Common Stock for $24,000.
c.
debit to Common Stock Subscribed for $10,000.
d.
credit to Common Stock for $9,000.
d
1
Moderate
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42. Refer to Exhibit 15-2. Lawrence received final payment (80%) on 1,800 shares and issued those shares. Subscribers
defaulted on 200 shares. The entry to record the default on 200 shares would include a
a.
debit to Common Stock Subscribed for $3,000.
b.
credit to Subscriptions Receivable: Common Stock for $3,000.
c.
debit to Additional Paid-in Capital on Common Stock for $2,000.
d.
credit to Additional Paid-in Capital from Subscribed Stock for $600.
c
1
Moderate
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43. When common stock is issued at an amount greater than par value, the difference between the par value and the
proceeds from the sale is recorded by
a.
crediting the common stock account.
b.
debiting an additional paid-in capital account.
c.
crediting the retained earnings account.
d.
crediting an additional paid-in capital account.
d
1
Moderate
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44. A corporation acquired a copyright by issuing 1,000 shares of $5 par common stock. At the time of the exchange, the
stock was selling for $40 per share. The copyright had a carrying value of $18,000 to the author. The purchasing
corporation should assign to the copyright a value of
a.
$18,000.
b.
$5,000.
c.
$32,000.
d.
d
1
Moderate
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$40,000.
45. A corporation issues 50 “packages” of securities for $154 per package. Each package consists of three shares of $5 par
common stock and one share of $50 par preferred stock. If the market values of $40 per share for the common stock
and $100 per share for preferred stock are known, the journal entry to record the sale would assign a total value to the
preferred stock of
a.
$3,500.
b.
$4,200.
c.
$5,775.
d.
$6,000.
a
1
Moderate
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46. In the financial statements, dividends in arrears on cumulative preferred stock should be
a.
disclosed in the footnotes.
b.
classified as an offset to retained earnings.
c.
classified as a liability either current or long term.
d.
classified as an offset to net income.
a
1
Easy
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47. What account should be debited when stock issuance costs are associated with the initial issuance of stock at
incorporation?
a.
Organization Expense
b.
Additional Paid-in Capital
c.
Organization Costs
d.
Common stock
a
1
Easy
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48. When existing corporations issue stock, costs such as legal fees and underwriter’s fees are usually accounted for as
a.
organization expenses.
b.
reduction of Additional Paid-in Capital.
c.
organizational costs.
d.
reduction of Retained Earnings.
b
1
Easy
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49. Which one of the following entries would not be likely to be made by a corporation?
a.
Land XX
Common Stock, $10 stated value XX
Additional Paid-in Capital on Common Stock XX
b.
Cash XX
Common Stock, no-par XX
Additional Paid-in Capital on Common Stock XX
c.
Cash XX
Subscriptions Receivable: Common Stock XX
Common Stock Subscribed XX
Additional Paid-in Capital on Common Stock XX
d.
Building XX
Common Stock, no-par XX
b
1
Moderate
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50. A company is exchanging its common stock for land in a nonmonetary exchange. This transaction should be valued
based upon the
a.
fair value of the stock.
b.
book value of the land.
c.
fair value of the stock issued and the land received.
d.
fair value of the stock issued and the land received, whichever is more reliable.
d
1
Easy
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51. When a company carries out a stock split, the company usually
a.
receives less cash than market value.
b.
receives more cash than market value.
c.
issues more shares of stock.
d.
retires shares of stock.
c
1
Easy
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52. A noncompensatory share purchase plan is designed to
a.
provide additional compensation to key officers and employees within the corporation.
b.
obtain more widespread employee ownership of the corporate stock.
c.
raise additional capital for the firm.
d.
obtain more widespread employee ownership and raise additional capital for the firm.
d
1
Easy
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53. Assume common stock is issued to employees as a result of exercising stock purchase rights issued under a
noncompensatory share purchase plan. At what value does the company record that stock in its books?
a.
market price of the stock
b.
exercise price of the stock
c.
market price of the stock at the first date that the stock purchase right can be exercised
d.
option price of the stock plus the value assigned to the stock purchase right
b
1
Easy
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