FOR INSTRUCTOR USE ONLY
CHAPTER 11
REPORTING AND ANALYZING STOCKHOLDERS’ EQUITY
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY
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Brief Exercises
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Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
11-2
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Completion Statements
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Short Answer Essay
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*This topic is dealt with in an Appendix to the chapter.
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 1
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Learning Objective 2
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Learning Objective 3
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Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
11-3
Learning Objective 4
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Learning Objective 5
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Learning Objective 6
34.
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166.
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Learning Objective 7
40.
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Ex
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41.
TF
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MC
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Learning Objective 8
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Learning Objective 9
Item
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44.
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Ex
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MC
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Ex
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
11-4
Note: TF = True-False C = Completion
MC = Multiple Choice Ex = Exercise
Ma = Matching SA = Short Answer Essay
CHAPTER LEARNING OBJECTIVES
1. Identify and discuss 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 a company records issuance of common
stock for cash, it credits the par value of the shares to Common Stock. It records in a
separate paid-in capital account the portion of the proceeds that is above par value. When
no-par common stock has a stated value, the entries are similar to those for par value stock.
When no-par common stock does not have a stated value, the entire proceeds from the
issue are credited to Common Stock.
3. Explain the accounting for the purchase of treasury stock. Companies generally use the
cost method in accounting for treasury stock. Under this approach, a company debits
Treasury Stock at the price paid to reacquire the shares.
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 as to (1) dividends and (2) assets in the event of liquidation.
However, they sometimes do not have voting rights.
5. Prepare the entries for cash dividends and understand the effect of stock dividends
and stock splits. Companies make entries for dividends at the declaration date and the
payment date. At the declaration date, the entries for a cash dividend are debit Cash
Dividends and credit Dividends Payable. The effects of stock dividends and splits are as
follows. Small stock dividends transfer an amount equal to the fair value of the shares issued
from retained earnings to the paid-in capital accounts. Stock splits reduce the par value per
share of the common stock while increasing the number of shares so that the balance in the
Common Stock account remains the same.
6. Identify the items that affect retained earnings. Additions to retained earnings consist of
net income. Deductions consist of net loss and cash and stock dividends. In some instances,
portions of retained earnings are restricted, making that portion unavailable for the payment
of dividends.
7. Prepare a comprehensive stockholders’ equity section. In the stockholders’ equity
section of the balance sheet, companies report paid-in capital and retained earnings and
identify specific sources of paid-in capital. Within paid-in capital, companies show two
classifications: capital stock and additional paid-in capital. If a corporation has treasury stock,
it deducts the cost of treasury stock from total paid-in capital and retained earnings to
determine total stockholders’ equity.
8. Evaluate a corporation’s dividend and earnings performance from a stockholder’s
perspective. A company’s dividend record can be evaluated by looking at what percentage
of net income it chooses to pay out in dividends, as measured by the dividend payout ratio
(dividends divided by net income). Earnings performance is measured with the return on
common stockholders’ equity (income available to common stockholders divided by average
common stockholders’ equity.)
Reporting and Analyzing Stockholders’ Equity
11-5
*9. Prepare entries for stock dividends. To record the declaration of a small stock dividend
(less than 20%), debit Stock Dividends for an amount equal to the fair value of the shares
issued. Record a credit to a temporary stockholders’ equity account—Common Stock
Dividends Distributable—for the par value of the shares, and credit the balance to Paid-in
Capital in Excess of Par Value. When the shares are issued, debit Common Stock Dividends
Distributable and credit Common Stock.
TRUE-FALSE STATEMENTS
1. A corporation is not an entity that is separate and distinct from its owners.
2. The liability of a stockholder is usually limited to the stockholder’s investment in the
corporation.
3. The sale of shares in a corporation by one stockholder to another affects the total capital
of the corporation.
4. The tax laws can be a significant disadvantage of the corporate form of business.
5. A corporation can be organized for the purpose of making a profit or it may be nonprofit.
6. A corporation acts under its own name rather than in the name of its stockholders.
7. If a corporation pays taxes on its income, then stockholders will not have to pay taxes on
the dividends received from that corporation.
8. A corporation must be incorporated in each state in which it does business.
9. A stockholder has the right to vote in the election of the board of directors.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
11-6
10. When no-par value stock does not have a stated value, the entire proceeds from the
issuance of the stock become legal capital.
11. When no-par common stock with a stated value is issued for cash, the common stock
account is credited for an amount equal to the cash proceeds.
12. As soon as a corporation is authorized to sell stock, an accounting journal entry should be
made recording the total value of the shares authorized.
13. The par value of common stock must always be equal to its market value on the date the
stock is issued.
14. For accounting purposes, stated value is treated the same way as par value.
15. Paid-in capital is the amount paid in to the corporation by stockholders in exchange for
shares of ownership.
16. The issuance of common stock affects both paid-in capital and retained earnings.
17. The acquisition of treasury stock by a corporation increases total assets and total
stockholders’ equity.
18. Treasury stock should not be classified as a current asset.
19. Treasury stock is reported as an asset on the balance sheet because treasury stock may
later be resold.
20. Treasury stock is a contra stockholders’ equity account.
21. The cost of treasury stock is deducted from total paid-in capital and retained earnings in
determining total stockholders’ equity.
Reporting and Analyzing Stockholders’ Equity
11-7
22. The journal entry to record the purchase of treasury stock will cause total stockholders’
equity to decrease by the amount of the cost of the treasury stock.
23. The number of common shares outstanding can never be greater than the number of
shares issued.
24. Preferred stock has contractual preference over common stock in certain areas.
25. Preferred stockholders generally do not have the right to vote for the board of directors.
26. When preferred stock is cumulative, preferred dividends not declared in a given period are
called dividends in arrears.
27. Dividends may be declared and paid in cash or stock.
28. Cash dividends are not a liability of the corporation until they are declared by the board of
directors.
29. 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.
30. A 10% stock dividend will increase the number of shares outstanding but the book value
per share will decrease.
31. A stock dividend does not affect the total amount of stockholders’ equity.
32. A stock split results in a transfer at market value from retained earnings to paid-in capital.
33. A 3-for–1 common stock split will increase total stockholders’ equity but reduce the par or
stated value per share of common stock.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
FOR INSTRUCTOR USE ONLY
11-8
34. Retained earnings represents the amount of cash available for dividends.
35. Dividends in arrears are liabilities of the corporation.
36. Net income of a corporation should be closed to retained earnings and net losses should
be closed to paid-in capital accounts.
37. A debit balance in the Retained Earnings account is identified as a deficit.
38. Retained earnings that are restricted are unavailable for dividends.
39. Restricted retained earnings are available for preferred stock dividends but unavailable for
common stock dividends.
40. 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.
41. The Common Stock Distributable account is classified as a current liability.
42. Return on common stockholders’ equity is computed by dividing net income by ending
stockholders’ equity.
43. The payout ratio is computed by dividing total cash dividends paid on common stock by
retained earnings.
*44. A liability arises when the board of directors declares a stock dividend.
*45. A stock dividend is a pro rata distribution of cash to a corporation’s stockholders.
*46. A stock dividend will cause an increase in total contributed capital at the date the dividend
is declared.
Reporting and Analyzing Stockholders’ Equity
11-9
Answers to True-False Statements
MULTIPLE CHOICE QUESTIONS
47. 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.
48. 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.
49. Those most responsible for the major policy decisions of a corporation are the
a. stockholders.
b. board of directors.
c. management.
d. employees.
50. The chief accounting officer in a company is known as the
a. controller.
b. treasurer.
c. vice-president.
d. president.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
11–10
51. Which one of the following would not be considered an advantage of the corporate form
of organization?
a. Limited liability of stockholders.
b. Separate legal existence.
c. Continuous life.
d. Government regulation.
52. 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.
53. 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.
54. 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.
55. 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.
56. Jason Hansen has invested $600,000 in a privately held family corporation. The
corporation does not do well and must declare bankruptcy. What amount does Hansen
stand to lose?
a. Up to his total investment of $600,000.
b. Zero.
c. The $600,000 plus any personal assets the creditors demand.
d. $400,000.
Reporting and Analyzing Stockholders’ Equity
11–11
57. 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 of the board of directors before selling shares.
d. A stockholder must obtain permission from at least three other stockholders before
selling shares.
58. A corporate board of directors does not generally
a. select officers.
b. formulate operating policies.
c. declare dividends.
d. execute policy.
59. The officer that is generally responsible for maintaining the cash position of the
corporation is the
a. controller.
b. treasurer.
c. cashier.
d. internal auditor.
60. 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.
61. 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.
62. 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.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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63. A disadvantage of the corporate form of organization is
a. professional management.
b. tax treatment.
c. ease of transfer of ownership.
d. lack of mutual agency.
64. A disadvantage of the corporate form of business is
a. its status as a separate legal entity.
b. continuous existence.
c. government regulation.
d. ease of transfer of ownership.
65. Which of the following phrases is not descriptive of the corporate form of business?
a. Professional management.
b. Double taxation on distributed earnings.
c. Unlimited liability.
d. Continuous existence.
66. 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.
67. 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.
68. If a stockholder cannot attend a stockholders’ meeting, he may delegate his voting rights
by means of a(n)
a. absentee ballot.
b. proxy.
c. certified letter.
d. telegram.
Reporting and Analyzing Stockholders’ Equity
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69. 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.
70. 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.
71. 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.
72. 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.
FSA
73. Par value
a. represents what a share of stock is worth.
b. represents the original selling price for a share of stock.
c. is established for a share of stock after it is issued.
d. is the value assigned per share in the corporate charter.
FSA
74. The term legal capital is a descriptive term for
a. stockholders’ equity.
b. par value.
c. residual equity.
d. market value.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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75. A corporation has the following account balances: Common Stock, $1 par value, $80,000;
Paid-in Capital in Excess of Par Value, $2,700,000. Based on this information, the
a. legal capital is $2,780,000.
b. number of shares issued is 80,000.
c. number of shares outstanding is 2,780,000.
d. average price per share issued is $3.48.
76. 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.
77. The amount of stock that may be issued according to the corporation’s charter is referred
to as the
a. authorized stock.
b. issued stock.
c. unissued stock.
d. outstanding stock.
78. If Norben Company issues 4,000 shares of $5 par value common stock for $140,000, the
account
a. Common Stock will be credited for $140,000.
b. Paid-in Capital in Excess of Par Value will be credited for $20,000.
c. Paid-in Capital in Excess of Par Value will be credited for $120,000.
d. Cash will be debited for $120,000.
79. Alt Corp. issues 3,000 shares of $10 par value common stock at $14 per share. When the
transaction is recorded, credits are made to:
a. Common Stock $30,000 and Paid-in Capital in Excess of Stated Value $12,000.
b. Common Stock $28,000.
c. Common Stock $30,000 and Paid-in Capital in Excess of Par Value $12,000.
d. Common Stock $30,000 and Retained Earnings $12,000.
Reporting and Analyzing Stockholders’ Equity
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80. If Lantz Company issues 5,000 shares of $5 par value common stock for $210,000, the
account
a. Common Stock will be credited for $25,000.
b. Paid-in Capital in Excess of Par Value will be credited for $25,000.
c. Paid-in Capital in Excess of Par Value will be credited for $210,000.
d. Cash will be debited for $185,000.
81. If Pratt Company issues 5,000 shares of $5 par value common stock for $210,000, the
account
a. Common Stock will be credited for $185,000.
b. Paid-in Capital in Excess of Par Value will be credited for $210,000.
c. Paid-in Capital in Excess of Par Value will be credited for $235,000.
d. Cash will be debited for $210,000.
82. 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 Value.
d. Legal Capital.
83. Paid-in Capital in Excess of Par 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.
84. The Paid-in Capital in Excess of Par Value is increased in the accounting records when
a. the number of shares issued exceeds par value.
b. the stated value of capital stock is greater than the par value.
c. the market value of the stock rises above par value.
d. capital stock is issued at an amount greater than par value.
85. Which of the following represents the largest number of common shares?
a. Treasury shares.
b. Issued shares.
c. Outstanding shares.
d. Authorized shares.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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86. Tomlinson Packaging Corporation began business in 2014 by issuing 30,000 shares of $5
par common stock for $8 per share and 5,000 shares of 6%, $10 par preferred stock for
par. At year end, the common stock had a market value of $10. On its December 31, 2014
balance sheet, Tomlinson Packaging would report
a. Common Stock of $300,000.
b. Common Stock of $150,000.
c. Common Stock of $240,000.
d. Paid-in Capital of $200,000.
87. Holden Packaging Corporation began business in 2014 by issuing 80,000 shares of $5
par common stock for $8 per share and 20,000 shares of 6%, $10 par preferred stock for
par. At year end, the common stock had a market value of $10. On its December 31, 2014
balance sheet, Holden Packaging would report
a. Common Stock of $800,000.
b. Common Stock of $400,000.
c. Common Stock of $640,000.
d. Paid-In Capital of $600,000.
88. Cey, Inc. issued 8,000 shares of stock at a stated value of $10/share. The total issue of
stock sold for $15/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 Value for $40,000.
d. credit to Common Stock for $120,000.
89. When stock is issued in exchange for a noncash asset, the value recorded for the shares
issued is best determined by
a. the book value of the noncash asset.
b. the market value of the shares.
c. the par value of the shares.
d. the contributed capital of the shares.
Reporting and Analyzing Stockholders’ Equity
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90. S. Lawyer performed legal services for E. Corp. Due to a cash shortage, an agreement
was reached whereby E. Corp. would pay S. Lawyer a legal fee of approximately $15,000
by issuing 8,000 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 $1.80 per share.
Given this information, the best journal entry for E. Corp. to record for this transaction is
a. Legal Expense 14,400
Common Stock 14,400
b. Legal Expense 15,000
Common Stock 15,000
c. Legal Expense 15,000
Common Stock 8,000
Paid-in Capital in Excess of Par – Common 7,000
d. Legal Expense 14,400
Common Stock 8,000
Paid-in Capital in Excess of Par – Common 6,400
91. If the market value of the assets received and the market value of the stock issued are
both available, then what amount should be used to value the assets?
a. Market value of the stock.
b. Market value of the assets.
c. Par value of the stock.
d. The more clearly determinable market value.
92. Johnson Company issued 900 shares of no-par common stock for $15,300. Which of the
following journal entries would be made if the stock has no stated value?
a. Cash 15,300
Common Stock – No-Par Value 15,300
b. Cash 15,300
Common Stock – No-Par Value 900
Paid-in Capital in Excess of Par 14,400
c. Cash 15,300
Common Stock – No-Par Value 900
Paid-in Capital in Excess of Stated Value 14,400
d. Common Stock – No-Par Value 15,300
Cash 15,300
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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93. Dawson Company issued 600 shares of no-par common stock for $5,400. Which of the
following journal entries would be made if the stock has stated value of $2 per share?
a. Cash 5,400
Common Stock 5,400
b. Cash 5,400
Common Stock 1,200
Paid-in Capital in Excess of Par 4,200
c. Cash 5,400
Common Stock 1,200
Paid-in Capital in Excess of Stated Value 4,200
d. Common Stock 5,400
Cash 5,400
94. Retro 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
Retro issues 5,000 shares of common stock to pay its recent attorney’s bill of $25,000 for
legal services on a land access dispute, which of the following would be the best journal
entry for Retro to record?
a. Legal Expense 5,000
Common Stock 5,000
b. Legal Expense 25,000
Common Stock 25,000
c. Legal Expense 25,000
Common Stock 5,000
Paid-in Capital in Excess of Stated Value – Common 20,000
d. Legal Expense 25,000
Common Stock 5,000
Paid-in Capital in Excess of Par value – Common 20,000
95. Which of the following statements about treasury stock is true?
a. Few corporations have treasury stock.
b. Purchasing treasury stock is done to eliminate hostile shareholder buyouts.
c. Companies acquire treasury stock to increase the number of shares outstanding.
d. Companies acquire treasury stock to decrease earnings per share.
96. The following data is available for BOX Corporation at December 31, 2014:
Common stock, par $10 (authorized 30,000 shares) $250,000
Treasury stock (at cost $15 per share) $ 1,200
Based on the data, how many shares of common stock are outstanding?
a. 30,000.
b. 25,000.
c. 29,920.
d. 24,920.
Reporting and Analyzing Stockholders’ Equity
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97. The following data is available for BOX Corporation at December 31, 2014:
Common stock, par $10 (authorized 30,000 shares) $250,000
Treasury stock (at cost $15 per share) $ 1,200
Based on the data, how many shares of common stock are issued?
a. 30,000.
b. 25,000.
c. 29,920.
d. 24,920.
98. Kaplan Manufacturing Corporation purchased 2,500 shares of its own previously issued
$10 par common stock for $57,500. As a result of this event,
a. Kaplan’s Common Stock account decreased $25,000.
b. Kaplan’s total stockholders’ equity decreased $57,500.
c. Kaplan’s Paid-in Capital in Excess of Par Value account decreased $32,500.
d. All of these answer choices are correct.
99. Leary 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. Leary’s Common Stock account decreased $50,000.
b. Leary’s total stockholders’ equity decreased $115,000.
c. Leary’s Paid-in Capital in Excess of Par Value account decreased $65,000.
d. All of these answer choices are correct.
100. 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 and held for future use.
101. 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.
Test Bank for Accounting: Tools for Business Decision Making, Fifth Edition
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102. A corporation purchases 15,000 shares of its own $20 par common stock for $35 per
share, recording it at cost. What will be the effect on total stockholders’ equity?
a. Increase by $525,000.
b. Decrease by $300,000.
c. Decrease by $525,000.
d. Decrease by $225,000.
103. A corporation purchases 20,000 shares of its own $10 par common stock for $25 per
share, recording it at cost. What will be the effect on total stockholders’ equity?
a. Increase by $200,000.
b. Decrease by $500,000.
c. Increase by $500,000.
d. Decrease by $200,000.
104. 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.
105. 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.
106. Treasury Stock is a(n)
a. contra asset account.
b. retained earnings account.
c. asset account.
d. contra stockholders’ equity account.
107. The number of shares of issued stock equals
a. unissued shares minus authorized shares.
b. outstanding shares plus treasury shares.
c. authorized shares minus treasury shares.
d. outstanding shares plus authorized shares.