289
Chapter 9—Financing Activities
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Multiple
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290 ♦ Chapter 9
Matching
L.O.’s
Level of
Difficulty
Matching
L.O.’s
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Difficulty
Matching
L.O.’s
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Problem
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EASY
Financing Activities ♦ 291
TRUE/FALSE
1. One essential attribute of a liability is that the obligation will require in a future outflow of cash.
2. The issue price of bonds is equal to the present value of the principal plus the present value of the
interest.
3. A contingency must be reported as a liability if it possibly will result in a loss and the amount of
the loss can be reasonably estimated.
4. When a firm leases a resource for most of its useful life and controls the resource as though it had
been purchased, the lease is treated as an operating lease.
5. The direct investment made by stockholders in a corporation is contributed capital.
6. Par value is a nominal value assigned to each share of stock by a corporation.
7. The number of shares actually held by the stockholders are known as authorized shares.
8. Stock splits and stock dividends will result in a reduction of total stockholders’ equity.
9. Dividends are a distribution of earnings, not an expense.
292 ♦ Chapter 9
10. Preferred stock has a higher claim on dividends and assets than common stock.
MULTIPLE CHOICE
1. Which of the following is NOT an attribute of a liability?
a.
present responsibility to transfer resources to another entity
b.
the transfer is unavoidable by the organization
c.
the entity to which a future transfer must be made is known in advance
d.
the event creating the responsibility has already occurred
2. The issue price of bonds is equal to
a.
the present value of the principal
b.
the present value of the interest
c.
the present value of the principal minus the present value of the interest
d.
the present value of the principal plus the present value of the interest
3. Which of the following is a characteristic of a liability?
There is an obligation
to transfer resources to The event causing the
another entity in the future obligation has already occurred
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
4. Which of the following should be classified on the balance sheet as short-term (current) liabilities?
That portion of a 5-year
30-year bonds due within one insurance policy to be
year of the balance sheet date consumed in the coming year
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
Financing Activities ♦ 293
5. Debentures have which one of the following characteristics?
a.
they have no specific due date on which they must be repaid
b.
they are more like common stock than like debt
c.
they have no specific collateral backing them up
d.
they are issued by very small firms in an industry
6. Northside Hospital Corp. issued bonds payable that were backed only by the general credit
worthiness of the organization. Which term below best describes the category of these bonds?
a.
convertible
b.
callable
c.
debenture
d.
serial
7. Striker Gold Mine issued bonds that will all be outstanding for a period of five years and then will
mature on a series of specified dates over the next ten years. Which term below best describes the
bonds issued by Striker Gold Mine?
a.
secured
b.
registered
c.
callable
d.
serial
8. Asian Trading Company issued 20-year bonds having a coupon rate of 15%. At any time after the
third year, the company may notify up to 10% of the bondholders per year that their bonds could
be redeemed. Which term below best described the bonds issued by Asian Trading Company?
a.
registered
b.
callable
c.
serial
d.
debentures
9. Renoir Enterprises called 400 of its $1,000 face value bonds that had been outstanding for 7 years
of the scheduled 30-year life. The bonds were recorded on the books, when called, at $400,000
and had a market value of $417,500. The company paid $1,020 for each called bond. What amount
of gain or loss should the company report from this transaction?
a.
$18,500 loss
b.
$8,000 loss
c.
$17,500 loss
d.
$9,500 gain
294 ♦ Chapter 9
10. After calling 3,000 of its $1,000 face value bonds, Donovan Enterprises reported a loss from the
event of $63,000. The book value of the bonds at the call date was $1,477,500 and the market
value was $1,515,000. What total amount was paid by the company to call the bonds?
a.
$1,452,000
b.
$1,489,500
c.
$1,503,000
d.
$1,540,500
11. Donaldson Company issued $5,000 of 10-year bonds paying 10% annual interest. The current
market rate of interest on comparable issues is 12%. What is the issue price of the bonds?
a.
$4,435
b.
$4,253
c.
$5,615
d.
$5,000
12. Upbeat Music Stores issued $500,000 face value of zero coupon bonds having a life of 10 years.
(Zero coupon bonds pay zero percent interest.) If the market rate of interest is 8 percent, at what
price did these bonds sell?
a.
$135,761
b.
$157,600
c.
$158,610
d.
$231,595
13. General Toys, Inc. sold five year bonds having a face value of $100,000 and a coupon rate of 7%
when the market rate was 9%. The present value of $1 at 9% for five periods is $0.6499. The
present value of a $1 annuity for 5 periods at 9% is $3.8897. At what price did these bonds sell?
a.
$92,218
b.
$93,690
c.
$99,248
d.
$100,000
Financing Activities ♦ 295
14. Styles Ventures sold a $50,000 issue of bonds. The coupon rate was 10% and the market rate was
8%. The present value of a $1 annuity for ten periods at 8% is $6.7101. The present value of $1
for ten periods at 8% is $0.4632. The selling price of these bonds should be
a.
$47,740
b.
$50,000
c.
$52,830
d.
$56,710
15. A 10% bond is sold at a price that will result in a 9% effective yield. Therefore, we can conclude
that the price at which the bond was sold was
a.
greater than face value
b.
less than face value
c.
equal to face value
d.
not determinable from above information
16. At the date of a bond issue, the effective rate of interest is significantly above the stated rate of
interest. If the bond has a $1,000 face value, the proceeds from the issue would be
a.
more than $1,000
b.
less than $1,000
c.
$1,000
d.
$0
17. When the market rate for a bond is higher than the stated (or coupon) rate, the bond
a.
will sell at a premium
b.
will sell at par
c.
will sell at a discount
d.
cannot be sold until the market and stated rates are equal
18. If the market rate of the interest for bonds is less than the rate printed on the face of the bonds,
then the bonds will be issued at
a.
a discount
b.
a premium
c.
their face value
d.
their face value less the interest rate printed on the face of the bonds
296 ♦ Chapter 9
19. Javelin Sports sold $50,000 face value of ten-year, 8% bonds payable for $61,583 on January 1,
2007 when the market interest rate was 5%. What amount of interest expense will Javelin report
for calendar year 2007?
a.
$4,927
b.
$4,000
c.
$3,500
d.
$3,079
20. On January 1, 2007, Beta Company issued 5-year bonds having a face value of $100,000. The
bonds pay 7% interest annually and were sold for $94,706 to yield 8.34% interest. Beta’s 2007
income statement should report what amount for interest expense on these bonds?
a.
$6,630
b.
$7,000
c.
$7,898
d.
$8,340
21. Five-year, annual bonds having a face value of $120,000 and a coupon interest rate of 8% were
sold for $110,900. This yielded the buyer 11%. What amount of interest expense should be
recognized by the seller during the first year?
a.
$13,200
b.
$12,199
c.
$8,872
d.
$9,600
e.
$9,100
22. Under what conditions must a contingency be reported as a liability?
a.
it probably will result in a loss and the amount of the loss can be reasonably estimated
b.
it possibly will result in a loss and the amount of the loss can be reasonably estimated
c.
it is remotely possibly it will result in a loss and the amount of the loss can be reasonably
estimated
d.
it probably will result in a loss, whether or not the amount of the loss can be reasonably
estimated
23. FJ Company leases a machine for most of its useful life and then can purchase the asset at the end
of the lease for $10. The lease should be treated as
a.
an operating lease
b.
a capital lease
c.
a primary lease
d.
a producing lease
Financing Activities ♦ 297
24. Identify the correct statement below:
a.
contingencies are always reported in the liability section of the balance sheet
b.
commitments are disclosed on the income statement because they affect net income but
not cash flow
c.
capital leases are accounted for as if the leased assets had been purchased
d.
the expense associated with operating leases is reported on the cash flow statement under
the category of investing activities
25. GAAP does NOT require companies to report which of the following:
a.
contingencies that could result in future obligations
b.
contingencies that may result in gains
c.
commitments to engage in the purchase or sale of something in the future
d.
capital lease agreements for the use of equipment
26. If a company enters into a capital lease agreement, it will record
a.
an asset only
b.
a liability only
c.
an asset and a liability
d.
an expense only
27. Which of the following situations is NOT consistent with the circumstances of a capital lease?
a.
a company is using a resource for most of its useful life
b.
a company controls the resource as if it had been purchased
c.
a company records a liability equal to the present value of the lease payments
d.
a company records a rental expense every time a lease payment is made
28. The direct investment made by stockholders in a corporation is known as
a.
retained earnings
b.
donated capital
c.
contributed capital
d.
charter capital
298 ♦ Chapter 9
29. The par value of stock is
a.
the same as market value
b.
always greater than market value
c.
no longer required
d.
the nominal value assigned to each share by a corporation
30. Which of the following is the number of shares actually in the hands of stockholders?
a.
authorized shares
b.
delivered shares
c.
outstanding shares
d.
issued shares
31. The term “contributed capital” includes
a.
amounts received in excess of par value
b.
retained earnings
c.
amounts borrowed from banks
d.
authorized but unissued shares
32. Which of the following represent capital that has been earned by the profitable operation of the
firm?
Paid-In Capital Retained Earnings
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
33. A corporation’s contributed capital would include
a.
retained earnings
b.
loans received from a bank
c.
unrealized loss on long-term investments
d.
amounts received over and above the par value
Financing Activities ♦ 299
34. The maximum number of shares of stock that can be sold and issued as specified in the charter of
the corporation is known as
a.
outstanding shares
b.
subscribed shares
c.
issued shares
d.
authorized shares
35. Outstanding stock is
a.
stock that is in very high demand
b.
currently still held by shareholders
c.
the maximum number of shares that a corporation may sell
d.
cumulative
36. Treasury stock
a.
is issued by a firm to finance expansion of operations
b.
is more similar to preferred stock than to common stock
c.
has been issued, but is not currently outstanding
d.
will result in an increase stockholders’ equity
37. Which of the following is most descriptive of treasury stock?
a.
it is a special class of stock issued by the company’s treasurer
b.
it receives higher dividends than other types of stock
c.
it has extra voting privileges
d.
it is stock repurchased by the firm that issued it
38. Retained earnings can best be described as
a.
cash receipts minus expenses after adjustments
b.
net income minus expenses after adjustments
c.
undistributed profits
d.
net income minus cash disbursements after adjustments
300 ♦ Chapter 9
39. The term “retained earnings” is
a.
representative of the cash that the corporation has available to pay dividends as of the
balance sheet date
b.
found among the assets on the balance sheet of any profitable corporation
c.
always as large or larger than Cash on the balance sheet
d.
an account balance found on the balance sheet of a corporation that has represents
accumulated earnings of the corporation which could be used to pay dividends at some
future date.
40. Super Ram Computer Company has total liabilities of $40,000, total assets of $300,000 and
contributed capital of $120,000. What is the amount of retained earnings?
a.
$20,000
b.
$110,000
c.
$140,000
d.
$160,000
41. Blue Waters Sailing had a retained earnings account balance on January 1, 2007 of $120,000.
During 2007 the firm had net income of $72,000 and paid a $36,000 cash dividend. What is the
December 31, 2007 retained earnings balance?
a.
$122,000
b.
$156,000
c.
$196,000
d.
$212,000
e.
$228,000
42. A company sold $100,000 of common stock at par value. This transaction should be entered into
the accounting system as
Equity Assets
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
Financing Activities ♦ 301
43. Soft Rock, Inc. sold 4,000 shares of its treasury stock to a new investor. Which of the following
increased?
Authorized Stock Issued Stock
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
44. Sam and Dave each own common stock of the Sea Green Racing Company. If Sam sells his stock
directly to Dave, which of the following statements is true?
a.
Sea Green’s contributed capital increases
b.
Sea Green’s contributed capital decreases
c.
Sea Green’s contributed capital remains the same
d.
Sea Green’s cash account increases
45. Which of the following sometimes involves an adjustment to the par value of the stock involved?
a.
stock dividend
b.
cash dividend
c.
stock split
d.
purchase of stock as an investment
46. If a company has 500,000 shares of common stock authorized, 300,000 shares issued, and 50,000
shares held as treasury stock, how many shares are outstanding?
a.
500,000
b.
350,000
c.
300,000
d.
250,000
302 ♦ Chapter 9
47. Stacey Company has the following account balances in its stockholders’ equity:
Preferred Stock
$8,000
Common Stock
10,000
Paid-in Capital in excess of par value
16,000
Retained earnings
25,000
What is the amount of the company’s contributed capital?
a.
$59,000
b.
$34,000
c.
$18,000
d.
$16,000
48. Dividends on common stock are
a.
recorded as expense when paid
b.
recorded as expense when declared
c.
recorded as expense at year end
d.
recorded as a reduction of retained earnings
49. During 2008 Adelphi Company had reported net income but paid no dividends. Comparing the
balance sheet at the end of 2008 with the one at the beginning of the year, which of the following
would most likely be true?
a.
current assets would be higher
b.
fixed assets would be higher
c.
stockholders’ equity would be higher
d.
both assets and stockholders’ equity would be higher
e.
total liabilities would be lower
50. The Sleek Guitar Company declared a 10% stock dividend (10,000 shares to be distributed when
the par value was $10 per share, and the market value was $30 per share). When this transaction is
entered into the accounting system, how will it affect total stockholders’ equity?
a.
no effect
b.
$100,000 increase
c.
$100,000 decrease
d.
$300,000 increase
e.
$300,000 decrease
Financing Activities ♦ 303
51. When a company declares and distributes a 40% stock dividend, which of the following usually
occur?
Retained Earnings Contributed Capital
Increases Decreases
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
52. The effect of a stock dividend is that it
a.
reduces owner’s equity
b.
increases the number of outstanding shares
c.
increases retained earnings
d.
reduces liabilities of the corporation
e.
reduces assets of the corporation
53. The issuance of a common stock dividend
a.
reduces a company’s retained earnings balance
b.
brings new owners into a corporation
c.
decreases the number of shares of outstanding stock
d.
increases a company’s retained earnings balance
54. Winters Company has announced that it will distribute a 15% common stock dividend on its $10
par value common stock that is currently selling for $75 per share. Upon receiving the new shares,
a common stockholder will have increased his/her ownership value by
a.
zero
b.
15% of the par value of shares owned before the stock dividend
c.
15% of the market value of the shares owned before the stock dividend
d.
15% of the difference between par value and market value of the shares owned before the
stock dividend
304 ♦ Chapter 9
55. Fletcher Company commenced business on January 1, 2007 but has never declared or paid any
dividends. The following are account balances after closing the books at December 31, 2009:
Cash
$18,000
Common stock, $1 par
1,000
Paid-in capital in excess of par value
49,000
Preferred stock, $100 par, 10%, cumulative
50,000
Retained earnings
75,000
Net income during 2009 totaled $30,000 and the Board of Directors wishes to distribute a total of
$15,000 in cash dividends. The common stockholders will receive what amount per share?
a.
$15
b.
$11
c.
$ 3
d.
$ 0
56. Which of the following will decrease stockholders’ equity?
a.
an issuance of stock
b.
the transfer of net income to retained earnings
c.
the distribution of dividends
d.
the issuance of callable bonds
57. Stock with a higher claim on dividends and assets than common stock is called
a.
Voting stock
b.
Preferred stock
c.
Senior stock
d.
Treasury stock
58. The term “cumulative” is used to describe a feature of which of the following?
a.
common stock
b.
preferred stock
c.
stock splits
d.
stock dividends
Financing Activities ♦ 305
59. Frostbite Cold Storage Company was incorporated early in 2007 Since then, the following stock
has been outstanding:
Preferred stock, 5%, $25 par
8,000 shares
Common stock, $20 par
10,000 shares
On December 31, 2009, the company declared and paid a total of $50,000 in dividends. This was
the first dividend declared by the business. That is, until this date no dividends had been declared
or paid during the first two years of operations.
If the preferred stock is cumulative, what is the most that will be available out of the $50,000
dividend for payment to the COMMON shareholders?
a.
$50,000
b.
$42,500
c.
$30,000
d.
$20,000
60. When a holder of preferred stock has the right to receive all previously omitted dividends before
common stockholders receive any dividends, the preferred stock is known as
a.
participating preferred
b.
cumulative preferred
c.
compensating preferred
d.
ex post rights preferred
61. Which of the following is a FALSE statement?
a.
common stock can be issued at a price greater than its par value
b.
treasury stock can be sold at a price less than its cost
c.
the claims of owners are honored before those of creditors
d.
retained earnings is profit reinvested in a corporation
62. Preferred stock
a.
has a higher claim on dividends and assets than common stock
b.
is preferred by stockholders as a potentially better investment
c.
stockholders have more voting rights than common shareholders
d.
has a higher claim on assets in liquidation than creditors do
306 ♦ Chapter 9
MATCHING
Match each term with the correct definition.
a.
Contingency
b.
Discount
c.
Premium
d.
Capital lease
e.
Stated rate
f.
Effective rate
g.
Operating lease
1. Another name for the real rate
2. The annual interest rate paid to the bondholders
3. A lease that is for most of the useful life of the lease resource and which gives the firm control of
the resource as if it had been purchased.
4. An existing condition that may result in an economic effect if a future event occurs
5. When the real rate is higher than the stated rate, bonds will sell at this
6. When the real rate is lower than the stated rate, bonds will sell at this
Financing Activities ♦ 307
Match each term with the correct definition.
a.
Authorized stock
b.
Common stock
c.
Issued stock
d.
Preferred stock
e.
Outstanding stock
f.
Cumulative preferred stock
g.
Redeemable preferred stock
h.
Treasury stock
7. Shares currently held by investors
8. Dividends not paid in prior years must be paid on this stock before any dividends are paid to
common shareholders
9. Stock repurchased by a corporation from its stockholders
10. Represents the ownership rights of residual investors in a corporation
11. The maximum number of shares a corporation is allowed to issue
12. Stock which must be repurchased by the issuing company at a particular time
13. Stock with a higher claim on dividends and assets than common stock
14. Shares that have been sold by a corporation to investors
308 ♦ Chapter 9
Match each term with the correct definition.
a.
Preemptive right
b.
Stock right
c.
Stock dividend
d.
Stock split
e.
Convertible securities
f.
Stock options
15. Shares of stock distributed by a corporation that require a change in retained earnings but no
change to total equity.
16. Bonds or preferred stock which can be exchanged for common stock
17. Shares of stock distributed by a corporation that impact the par value per share.
18. The right to maintain the same percentage of ownership when new shares are issued
19. Rights to purchase shares of a company’s stock at a specified price
20. Authorize the recipient to purchase new shares