Chapter 11: Stockholders’ Equity
True / False
1. Under IFRS, an item such as a convertible bond must be separated into two parts, showing one part in the Liability
category and the other part in the Stockholders’ Equity category.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Remembering
2. All issued stock is outstanding.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Remembering
3. Stockholders’ equity is composed of three parts: contributed capital, earnings retained in the business, and dividends
paid.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Remembering
4. The participating feature of stock allows stockholders to sell stock back to the company.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-02 – LO: 11-02
KEYWORDS:
Bloom’s: Remembering
5. Preferred stock receives first preference on voting rights.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-02 – LO: 11-02
KEYWORDS:
Bloom’s: Remembering
6. The cumulative feature of stock allows the firm to eliminate a class of stock by paying the stockholders a specified
amount.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-02 – LO: 11-02
KEYWORDS:
Bloom’s: Remembering
7. When stock is issued for cash, only the par value of the stock should be reported in the stock account.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Remembering
8. When stock is issued for a noncash asset, the par value of the stock is the best indicator of the value of the asset.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Remembering
9. Treasury stock is stock that has been issued, but not currently outstanding.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-04 – LO: 11-04
KEYWORDS:
Bloom’s: Remembering
10. When treasury stock is reissued and the cost is less than the reissue price, the difference increases additional paid-in
capital.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-04 – LO: 11-04
KEYWORDS:
Bloom’s: Remembering
11. Treasury stock is reported as a reduction in stockholders’ equity.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-04 – LO: 11-04
KEYWORDS:
Bloom’s: Remembering
12. The Treasury Stock account should be considered an asset account.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-04 – LO: 11-04
KEYWORDS:
Bloom’s: Remembering
13. When treasury stock is resold for an amount less than its cost, the difference between the sales price and the cost is
deducted from the Additional Paid-In Capital—Treasury Stock account or the Retained Earnings account (if the
Additional Paid-In Capital—Treasury Stock account does not exist).
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-04 – LO: 11-04
KEYWORDS:
Bloom’s: Remembering
14. If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of
$1 per share would amount to $15,000.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-05 – LO: 11-05
KEYWORDS:
Bloom’s: Analyzing
15. Cash dividends become a liability to a corporation on the date of record.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-05 – LO: 11-05
KEYWORDS:
Bloom’s: Remembering
16. When the board of director’s declares a cash or stock dividend, this action decreases Retained Earnings.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-05 – LO: 11-05
KEYWORDS:
Bloom’s: Remembering
17. Stock dividends involve the issuance of additional shares of stock.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-06 – LO: 11-06
KEYWORDS:
Bloom’s: Remembering
18. Stock dividends reduce the par value of the stock.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
REFERENCES:
pp. 569-572
LEARNING OBJECTIVES:
FACC.PONO.13.11-06 – LO: 11-06
KEYWORDS:
Bloom’s: Remembering
19. A 15% stock dividend will increase the number of shares outstanding but the book value per share will decrease.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-06 – LO: 11-06
KEYWORDS:
Bloom’s: Remembering
20. A stock split is similar to a stock dividend in that it results in additional shares of stock outstanding and is nontaxable.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-07 – LO: 11-07
KEYWORDS:
Bloom’s: Remembering
21. Stock dividends affect the par value per share of the stock.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-07 – LO: 11-07
KEYWORDS:
Bloom’s: Remembering
22. A 2-for-1 stock split increases the par value per share.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-07 – LO: 11-07
KEYWORDS:
Bloom’s: Remembering
23. An accounting transaction is not recorded when a corporation declares and executes a stock split.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-07 – LO: 11-07
KEYWORDS:
Bloom’s: Remembering
24. None of the Stockholders’ Equity accounts are affected by the stock split.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-07 – LO: 11-07
KEYWORDS:
Bloom’s: Remembering
25. All changes in all stockholders’ equity accounts must be shown in the Stockholders’ Equity section of the balance
sheet.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-08 – LO: 11-08
KEYWORDS:
Bloom’s: Remembering
26. The statement of stockholders’ equity is useful in evaluating a company’s liquidity.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-08 – LO: 11-08
KEYWORDS:
Bloom’s: Remembering
27. The all-inclusive income approach requires that all events and transactions that affect income should be reported on
the income statement to help prevent the manipulation of income.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-08 – LO: 11-08
KEYWORDS:
Bloom’s: Remembering
28. The FASB has allowed certain items to be reported directly to stockholders’ equity in an effort to mitigate the
possibility of income fluctuating widely from period to period.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-08 – LO: 11-08
KEYWORDS:
Bloom’s: Remembering
29. Comprehensive income is the increase in net assets resulting from all transactions occurring during an accounting
period except stockholders’ investments and dividends.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-08 – LO: 11-08
KEYWORDS:
Bloom’s: Remembering
30. A company may prepare a statement of retained earnings instead of a statement of stockholders’ equity if the only
changes in the stockholders‘ equity accounts that occurred during the year are earnings and dividends.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-08 – LO: 11-08
KEYWORDS:
Bloom’s: Remembering
31. Book value is a measure of the market value of the stock.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-09 – LO: 11-09
KEYWORDS:
Bloom’s: Remembering
32. Book value indicates the rights that stockholders have, based on recorded values, to the net assets in the event of
liquidation.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-09 – LO: 11-09
KEYWORDS:
Bloom’s: Remembering
33. The issuance of stock is reported as a financing activity.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-10 – LO: 11-10
KEYWORDS:
Bloom’s: Remembering
34. The payment of dividends is a financing activity.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-10 – LO: 11-10
KEYWORDS:
Bloom’s: Remembering
35. [APPENDIX] A partnership can be owned by one or more entities or individuals.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-11 – LO: 11-11
KEYWORDS:
Bloom’s: Remembering
36. [APPENDIX] A balance sheet of a sole proprietorship includes only the business assets and liabilities, not the
personal assets of the owner.
a.
True
b.
False
ANSWER:
True
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-11 – LO: 11-11
KEYWORDS:
Bloom’s: Remembering
37. [APPENDIX] A sole proprietorship is a separate entity for legal purposes.
a.
True
b.
False
ANSWER:
False
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-11 – LO: 11-11
KEYWORDS:
Bloom’s: Remembering
Multiple Choice
38. Use the incomplete stockholders’ equity section of Wilmerding Company’s balance sheet as of December 31, 2016, to
answer the following question.
Common stock, $7 par, 100,000 shares authorized
$ 700,000
Additional paid-in capital—common
160,000
Retained earnings
?
Treasury stock (2,000 shares at cost)
(16,000)
Total stockholders’ equity
974,000
What is the amount of Wilmerding’s retained earnings?
a.
$130,000
b.
$98,000
c.
$860,000
d.
$114,000
ANSWER:
RATIONALE:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
39. Which of the following is false regarding the issue of stock versus the issue of bonds to raise capital?
a.
The payment of dividends is at the discretion of the board of directors.
b.
The payment of interest on bonds payable is required by law.
c.
Interest accrues, whereas dividends do not accrue.
d.
The declaration of dividends reduces the amount of income taxes the corporation must pay.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Understanding
40. Which of the following is false regarding the issue of stock versus the issue of bonds to raise capital?
a.
The issuance of stock decreases several important financial ratios.
b.
Issuing bonds dilutes the voting power of the stockholders.
c.
Corporations are not required to return the investment to the stockholders.
d.
Investors expect to earn a higher rate of return on stocks than bonds.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Understanding
41. If Idaho Company has paid out more in dividends than it has had in net income, over the lifetime of the company, then
the balances in the Stockholders’ Equity should show:
a.
a credit balance in the common stock account.
b.
a credit balance in the Retained Earnings account.
c.
a debit balance in the Common Stock account.
d.
a debit balance in the Retained Earnings account.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Applying
42. Dali Company has 15,000 shares of stock authorized at January 1. Dali issues 4,500 shares to the stockholders during
the year and then the company repurchases 1,500 shares as treasury stock. Based on this information, how many shares
are outstanding at December 31?
a.
15,000
b.
18,000
c.
4,500
d.
3,000
ANSWER:
d
RATIONALE:
15,000 + 4,500 – 1,500 = 18,000 shares
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Analyzing
43. Venture Enterprises’ accountant determined the following:
Common stock, $0.01 par value
$50,000
Where would this item be reported on Venture’s financial statements?
a.
In the Stockholders’ Equity section of the balance sheet
b.
In the Treasury Stock section of the balance sheet
c.
On the statement of retained earnings
d.
On both the balance sheet and statement of retained earnings
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Analyzing
44. Which of the following is an account in stockholders’ equity?
a.
Dividends Payable
b.
Loss on Sale of Equipment
c.
Retained Earnings
d.
Net income
ANSWER:
c
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Understanding
45. Which of the following statements is true with regard to contributed capital?
a.
Preferred stock is stock that has been retired.
b.
It is very unlikely corporations may have more than one class of stock outstanding.
c.
The outstanding number of shares is the maximum number of shares that can be issued by a corporation.
d.
The shares that are in the hands of the stockholders are said to be outstanding.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Understanding
46. Authorized stock represents the
a.
maximum number of shares that can be issued.
b.
number of shares that have been sold.
c.
number of shares that are currently held by stockholders.
d.
number of shares that have been repurchased by the corporation.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Remembering
47. With regard to a corporation’s stock, par value is
a.
the current market price of the stock.
b.
an arbitrary amount that exists to fulfill legal requirements.
c.
the amount at which the stock has been repurchased.
d.
the amount at which treasury stock can be sold.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Remembering
48. Mendes Charters reported the following information at December 31, 2016:
Preferred stock, $100 par, 500 shares authorized, and outstanding;
cumulative; nonparticipating; callable at par value
$ 50,000
Common stock, $12 par, 50,000 shares authorized and outstanding
600,000
Additional paid-in capital—Common
25,000
Retained earnings
825,000
Mendes’ total contributed capital is
a.
$650,000
b.
$675,000
c.
$1,500,000
d.
$625,000
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
FACC.PONO.13.11-02 – LO: 11-02
KEYWORDS:
Bloom’s: Analyzing
49. Use the incomplete stockholders’ equity section of Box Company’s balance sheet as of December 31, 2016, to answer
the following question.
Common stock, $7 par, 100,000 shares authorized
$ 700,000
Additional paid-in capital—common
160,000
Retained earnings
?
Treasury stock (2,000 shares at cost)
(16,000)
Total stockholders’ equity
974,000
How many shares of common stock are outstanding?
a.
100,000
b.
98,000
c.
78,000
d.
68,000
ANSWER:
b
RATIONALE:
$700,000 (Common stock) / $7 par value = 100,000 shares
100,000 shares – 2,000 (Treasury stock shares) = 98,000 (Shares outstanding)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
50. Walton Corporation shows the following in the stockholders’ equity section of its balance sheet: The stated value of its
common stock is $0.50 and the total balance in the common stock account is $37,500. Also noted is that 5,000 shares are
currently designated as treasury stock. The number of shares outstanding is
a.
80,000.
b.
75,000.
c.
72,500.
d.
70,000.
ANSWER:
d
RATIONALE:
$37,500 (Common Stock Account Balance) / $0.50 (Stated Value per Share) = 75,000 Shares
75,000 Shares – 5,000 (Treasury Stock Shares) = 70,000 (Shares Outstanding)
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
FACC.PONO.13.11-04 – LO: 11-04
KEYWORDS:
Bloom’s: Analyzing
51. Winslow Corporation reported the following in the stockholders’ equity section of its balance sheet at December 31,
2016:
Common stock, $1 stated value
$10,000
Additional paid-in capital—common
40,000
Retained earnings
25,000
Total contributed capital and retained earnings
$75,000
Less: Treasury stock (at cost $20 per share)
(2,000)
Total stockholders’ equity
$73,000
How many shares of stock are issued?
a.
9,000
b.
10,000
c.
10,100
d.
Not enough information to determine.
ANSWER:
b
RATIONALE:
$10,000 (Common Stock Value) / $1 (Stated Value per Share) = 10,000 Shares
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
FACC.PONO.13.11-04 – LO: 11-04
KEYWORDS:
Bloom’s: Analyzing
52. Zelienople Co. reported the following information at December 31, 2016:
Preferred stock, $10 par, 5,000 shares authorized, cumulative
$ 50,000
Common stock, $1 par, 500,000 shares authorized
200,000
Additional paid-in capital—Common
25,000
Retained earnings
75,000
Total contributed capital and retained earnings
$350,000
Less: Treasury stock (400 shares at cost)
5,000
Total stockholders’ equity
$345,000
The number of shares of common stock issued is
a.
5,000.
b.
200,000.
c.
500,000.
d.
550,000.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-02 – LO: 11-02
KEYWORDS:
Bloom’s: Analyzing
53. The Retained Earnings account balance for a large corporation is $10,000,000. This amount represents
a.
earnings that have not been distributed to shareholders.
b.
cash in the bank.
c.
the amount of cash available for dividends.
d.
revenues for all past years of operations.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-02 – LO: 11-02
KEYWORDS:
Bloom’s: Applying
54. With regard to preferred stock,
a.
its issuance provides no flexibility to the issuing company because its terms always require mandatory
dividend payments.
b.
no dividends are expected by the stockholders.
c.
its stockholders may have the right to participate, along with common stockholders, if an extra dividend is
declared.
d.
there is a legal requirement for a corporation to declare a dividend on preferred stock.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-02 – LO: 11-02
KEYWORDS:
Bloom’s: Understanding
55. Stockholders prefer to invest in preferred stock because
a.
preferred stock confers preferred voting rights.
b.
preferred stock can always be converted to common stock if they desire.
c.
the dividends are generally increased each year.
d.
the dividends are paid on preferred stock before they are paid on common stock.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-02 – LO: 11-02
KEYWORDS:
Bloom’s: Understanding
56. On January 1, 2016, Bogart Acres Company issued 10,000 shares of 10%, $20 par value cumulative preferred stock.
In 2016 and 2017, no dividends were declared on preferred stock. In 2018, Bogart had a profitable year and decided to
pay dividends to stockholders of both preferred and common stock. If it has $200,000 available for dividends in 2018,
how much could it pay to the common stockholders?
a.
$140,000
b.
$160,000
c.
$180,000
d.
$200,000
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-02 – LO: 11-02
KEYWORDS:
Bloom’s: Analyzing
57. The Stockholders’ Equity section of the balance sheet of Sea Turtle Company reveals the following information:
Common stock, $3 par value
$150,000
Additional paid-in capital—common
850,000
There have been two issues of stock since the corporation began business. The average issue price per share of stock was
a.
$3.00.
b.
$17.00.
c.
$20.00.
d.
Not enough information to determine.
ANSWER:
RATIONALE:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
Anole Company
Anole Company was incorporated as a new business on January 1, 2016. The company is authorized to issue 20,000
shares of $5 par value common stock and 10,000 shares of 6%, $10 par value, cumulative, participating preferred stock.
On January 1, 2016, the company issued 8,000 shares of common stock for $15 per share and 2,000 shares of preferred
stock for $30 per share. Net income for the year ended December 31, 2016, was $375,000.
58. Refer to the information about Anole Company.
The amount of Anole’s total contributed capital at December 31, 2016, is
a.
$60,000.
b.
$120,000.
c.
$180,000.
d.
$555,000.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
FACC.PONO.13.11-02 – LO: 11-02
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
59. Refer to the information about Anole Company.
The number of Anole’s unissued shares of common stock at December 31, 2016, is
a.
6,000.
b.
8,000.
c.
10,000.
d.
12,000.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
KEYWORDS:
Bloom’s: Analyzing
60. Refer to the information about Anole Company.
Anole’s total stockholders’ equity reported on the balance sheet at December 31, 2016, is
a.
$60,000.
b.
$120,000.
c.
$180,000.
d.
$555,000.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-01 – LO: 11-01
FACC.PONO.13.11-02 – LO: 11-02
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
61. Valor Company issued 5,000 shares of $1 par common stock for $30 per share, providing the company with $150,000
in cash. What effect, in addition to the increase in cash, does this transaction have on the accounting equation for Valor?
a.
Common Stock increases $150,000.
b.
Common Stock increases $5,000; Additional Paid-in Capital—Common increases $145,000.
c.
Common Stock increases $5,000; Retained Earnings increases $145,000.
d.
Common Stock increases $5,000; Gain on Sale of Common Stock increases $145,000.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
62. Perry Corporation issues 20,000 shares of $0.50 par common stock for $6 per share; the Additional Paid-in Capital—
Common account will increase by
a.
$110,000
b.
$10,000
c.
$120,000.
d.
$130,000.
ANSWER:
a
RATIONALE:
20,000 shares × ($6.00 – $0.50 (par value)) = $110,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
63. Abilene Western Shop began business on January 1, 2016. The corporate charter authorized issuance of 10,000 shares
of $2 par value common stock and 4,000 shares of $8 par value, 6% cumulative preferred stock. Abilene issued 2,400
shares of common stock for cash at $20 per share on January 2, 2016. What effect does the entry to record the issuance of
stock have on total stockholders’ equity?
a.
Increase of $4,800
b.
Decrease of $4,800
c.
Increase of $48,000
d.
Decrease of $48,000
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
64. Poole Company began business on January 1, 2016. The corporate charter authorized issuance of 5,000 shares of $1
par value common stock, and 4,000 shares of $8 par value, 6% cumulative preferred stock. None of the preferred shares
were issued. On July 1, Poole issued 1,000 shares of common stock in exchange for two years rent on a retail location.
The cash rental price is $2,400 per month and the rental period begins on July 1. The correct entry to record the July 1
transaction will
a.
Increase Cash, $57,600; Decrease Prepaid Rent, $57,600
b.
Increase Prepaid Rent, $57,600; Increase Common Stock, $57,600
c.
Increase Prepaid Rent, $57,600; Increase Common Stock, $1,000; Increase Additional Paid-in Capital—
Common, $56,600
d.
Increase Prepaid Rent, $57,600; Increase Common Stock, $5,000; Increase Additional Paid-in Capital—
Common, $52,600
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
65. Vegas Finance Company reported the following:
Common stock, $10 par, 100,000 shares authorized, 80,000 shares issued and outstanding
What is the effect of issuing 1,000 shares of common stock at $15 per share?
a.
Cash increases $10,000.
b.
Common Stock increases $15,000.
c.
Additional Paid-in Capital increases $5,000.
d.
Retained Earnings increases $5,000.
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
66. A new company issues 2,000 shares of $5 par common stock in exchange for the services of a lawyer during its first
month of business. The lawyer’s normal fee is $15,000 for similar work. Which of the following would be recorded if the
stock is not currently trading?
a.
A debit to Common Stock for $10,000
b.
A credit to Common Stock for $15,000
c.
A debit to Additional Paid-In Capital—Common Stock of $5,000
d.
A credit to Additional Paid-In Capital—Common Stock of $5,000
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
67. Vegan Company reported the following:
Common stock, $5 par, 200,000 shares authorized, 50,000 shares issued and outstanding
What is the effect of issuing 2,000 shares of common stock in exchange for land with valued by a realtor at $36,000 if the
common stock sells for $12 per share and is regularly traded?
a.
The Land account increases by $24,000.
b.
Retained Earnings decreases by $10,000.
c.
Common Stock increases by $36,000.
d.
Additional Paid-in Capital – Common increases by $24,000.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
68. Fairchild Company acquired a building valued at $210,000 for property tax purposes in exchange for 6,000 shares of
its $10 par common stock. The stock is widely traded and selling for $31 per share. At what amount should the building
be recorded by Fairchild Company?
a.
$210,000
b.
$60,000
c.
$186,000
d.
$150,000
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
69. Montana City Company began business on January 1, 2016. The corporate charter authorized issuance of 500 shares
of $1 par value common stock and 400 shares of $4 par value, 3% cumulative preferred stock. What is the maximum
amount that can be reported on the balance sheet for Common Stock and Preferred Stock, respectively, if all of the stock
is issued?
Common Stock Preferred Stock
a.
$500
$1,600
b.
$5,000
$120
c.
$500
$120
d.
Not enough information provided.
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
70. Portland Sound Cafe began business on January 1, 2016. The corporate charter authorized issuance of 1,000 shares of
no-par value common stock, of which 200 shares were issued, and 4,000 shares of $8 par value, 6% cumulative preferred
stock, of which none were issued. Portland Sound sold 400 shares of common stock at $8 per share on May 1. The entry
to record the issuance of the shares on May 1 will:
a.
Increase Cash, $1,000; Increase Additional Paid-in Capital—Common, $320; Increase Common Stock, $680
b.
Increase Cash, $3,200; Increase Additional Paid-in Capital—Common, $2,800; Increase Common Stock, $400
c.
Increase Cash, $4,800; Increase Common Stock, $4,800
d.
Increase Cash, $3,200; Increase Common Stock, $3,200
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
71. Ari’s Cafe began operations on March 1, 2016. The corporate charter authorized the issuance of 3,000 shares of $2 par
value common stock and 1,000 shares of $3 par value, 8% cumulative preferred stock. The company’s fiscal year ends on
February 28. Ari’s sold 500 shares of common stock at $6 per share on April 1. What impact does the entry to record the
April 1 transaction have on total stockholders’ equity?
a.
No effect
b.
Increase by $1,000
c.
Increase by $3,000
d.
Increase by $6,000
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
72. If a company issues $5 par value common stock,
a.
$5 per share is presented in the common stock account on the balance sheet.
b.
the minimum selling price is $5.
c.
the shareholders will receive $5 in dividends.
d.
liabilities are increased as a result of the transaction.
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing
73. A company purchased machinery by issuing 2,000 shares of $3 par value common stock. Since the company is new,
there is no established market price for its stock. How would the company record the transaction?
a.
In terms of the par value of the stock issued.
b.
At the fair market value of the machine.
c.
At the cost recorded by the previous owner of the machine.
d.
Recording the transaction would be postponed until a market price for the stock could be determined.
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-03 – LO: 11-03
KEYWORDS:
Bloom’s: Analyzing