ch15 test bank stockhoider equity

CHAPTER 15
STOCKHOLDERS’ EQUITY
TRUE-FALSE—Conceptua
T 1.

A corporation is incorporated in only one state regardless of the number of states in which
it operates.

F 2.

The preemptive right allows stockholders the right to vote for directors of the company.

T 3.

Common stock is the residual corporate interest that bears the ultimate risks of loss.

F 4.

arned capital consists of additional paid!in capital and retained earnings.

T ".

True no!par stock should be car ried in the acco unts at issue price w ithout any ad ditional
paid!in capital reported.

F #.

Companies allocate the proceeds received from a lum p!sum sale of securities based on
the securities$ par values.

T %.

Companies should record stock issued for services or non cash property at either the fair
value of the stock issued or the fair value of the consideration received& whichever is more
clearly determinable.

F '.

Treasury stock is a company$s own stock that has been reac(uired and retired.

F ).

The cost method records all transactions in treasury shares at their cost and repo rts the
treasury stock as a deduction from capital stock only.

T 1*.

+hen a corporation sells tre asury stock below its cost & it usually debits the difference
between cost and selling price to ,aid!in Capital from Treasury -tock.

F 11.

,articipating preferred stock re(uires that if a company fails to pay a dividend in any year&
it must make it up in a later year before paying any common dividends.

T 12.

Callable preferred stock permits the corpo ration at its option to redeem the outs tanding
preferred shares at specified future dates and at stipulated prices.

T 13.

The laws of some states re(uire that corporations restrict their legal capital from
distribution to stockholders.

F 14.

The -C makes it mand atory for comp anies to disc lose their dividend policy in their
annual report.

F 1".

All dividends& ecept for li(uidating dividends& reduce the total stoc kholders$ e(uity of a
corporation.

T 1#.

/ividends payable in assets of the corporation other than cash are called property
dividends or dividends in kind.


Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

15 - /

T 1%.

+hen a stock dividend is less tha n 2*!2" per cent of the comm on stock outstanding& a
company is re(uired to transfer the fair value of the stock issued from retained earnings.

F 1'.

-tock splits and large sto ck dividends have the same ef fect on a company$s retained
earnings and total stockholders$ e(uity.
F 1). The rate of retur n on commo n stock e(uity is compu ted by div iding net inco me by the
average common stockholders$ e(uity.
T 2*.

The payout ratio is determined by dividing cash div idends paid to comm on stockholders
by net income available to common stockholders.

T%ue-Fa!e An!,e%!—Conceptua
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.ULTIPLE CHOICE—Conceptua
21.

The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.

-

22.

The pre!emptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon li(uidation.

b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. eclude preferred stockholders from voting rights.

23.

The pre!emptive right enables a stockholder to
a. receive the same amou nt of dividends on a percentage basis as the preferred
stockholders.
b. receive cash dividends before other classes of stock without the pre!emptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. none of these answers are correct.

24.

ormally& stock issued by a corporation has certain rights and privileges that
can be restricted only by special contracts at the time the shares are issued. n the
absence of restrictive provisions& each share carries all of the following rights ecept
a. to share proportionately in profits and losses.
b. to share proportionately in corporate assets upon li(uidation.
c. to share proportionately in any new issue of stocks or bonds by the corporation.
d. to share proportionately in management of the corporation.


-tockholders$ (uity

15 - 0

2". Common stockholders of a busin ess enterprise are said to be the re sidual owners. The
term residual owner means that shareholders

a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise
ownership.
d. can negotiate individual contracts on behalf of the enterprise.

2#.

Total stockholders e(uity represents
a. a claim to specific assets contributed by the owners.
b. the maimum amount that can be borrowed by a company.
c. a claim against a portion of the total assets of a company.
d. only the amount of earnings that have been retained in the business.

2%.

A primary source of stockholders e(uity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation

and

contributions by stockholders.

2'.

-tockholders e(uity is gener ally classified into two ma5or categories
a. contributed capital and appropriated capital.

b. appropriated capital and ret ained earnings.
c. retained earnings and unap propriated capital.
d. earned capital and contributed capital.

2).

The accounting problem in a lump sum issuance is the allocation of proceeds between the
classes of securities. An acceptable method of allocation is
a. the pro forma method.
b. the proportional method.
c. the incremental method.
d. either the proportional method or the incremental method.

3*.

+hen a corporation issues its capital stock in payment for services& the least appropriate
basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.

31.

/irect costs incurred to sell stock such as underwriting costs should be accounted for as
1. a reduction of additional paid!in capital.
2. an epense of the period in which the stock is issued.
3. an intangible asset.
a.
b.

c.
d.

1
2
3
1 or 3


15 - 

s

Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

32.

A 6secret reserve6 will be created if
a. inade(uate depreciation is charg ed to inc ome.
b. a capital ependiture is charged to epense.
c. liabilities are understated.
d. stockholders e(uity is overstated.

33.

+hen a corporation sells stock to investors& the transaction will increase
Contributed Capital arned Capital
A.
7es
o

8.
7es
7es
C.
o
7es
/.

-

o

o

34.

+hen common stock is sold by a corporation a 5ournal entry is prepared which
includes a debit to cash and a credit to the common stock account. f the debit to cash is
greater than the credit to the common stock account then it can be assumed that
a. the common stock is worth more than its current market value.
b. a gain on the sale of stock is a part of the transaction.
c. the common stock was sold at a discount
d. the stated value of the common stock is less than the per share price investors
were willing to pay.

3".

The general rule to be applied when stock is issued for services or property
other than cash is that the property or services be recorded at
a. the fair market value of the stock issued.

a. the fair market value of the noncash consideration received.
c. either the fair market value of the stock issued or the fair market value of the
noncash consideration received& whichever is more clearly determinable.
d. a value that clearly reflects the intentions of the parties entering into the
transaction and provides a relevant basis for recording.

-

-

3#.

n 9anuary 2*14& 0inley Corporation& a newly formed company& issued 1*&*** shares of
its :1* par common stock for :1" per share. ;n 9uly 1& 2*14& 0inley Corporation
reac(uired 1&*** shares of its outstanding stock for :12 per share. The ac(uisition of
these treasury shares
a. decreased total stockholders e(uity.
b. increased total stockholders e(uity.
c. did not change total stockholders e(uity.
d. decreased the number of issued shares.

,

3%.

Treasury shares are shares
a. held as an investment by the treasurer of the corporation.
b. held as an investment of the corporation.
c. issued and outstanding.
d. issued but not outstanding.

3'.

+hen treasury stock is purchased for more than the par value of the stock and the cost
method is used to account for treasury stock& what account<s= should be debited>
a. Treasury stock for the par value and paid!in capital in ecess of par for the ecess of
the purchase price over the par value.
b. ,aid!in capital in ecess of par for the purchase price.


-tockholders$ (uity

3).

4*.

15 - 5

c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained earnings for the ecess of the purchase
price over the par value.
?@ains6 on sales of treasury stock a. paid!in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.
,orter Corp. pur chased its ow n par value stock on 9anuary 1& 2*14 for :2 *&*** and
debited the treasury stock account for the purchase price. The stock was subse(uently
sold for :12&***. The :'&*** difference between the cost and sales price should be
recorded as a deduction from

a. additional paid!in capital to the etent that previous net 6gains6 from sales of the same
class of stock are included therein otherwise& from retained earnings.
b. additional paid!in capital without regard as to whether or not there have been previous
net 6gains6 from sales of the same class of stock included therein.
c. retained earnings.
d. net income.

41.

Bow should a 6gain6 from the sale of treasury stock be reflected when using the cost
method of recording treasury stock transactions>
a. As ordinary earnings shown on the income statement.
b. As paid!in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an etraordinary item shown on the income statement.

42.

+hich of the following best describes a possible result of treasury stock transactions by a
corporation>
a. ay increase but not decrease retained earnings.
b. ay increase net income if the cost method is used.
c. ay decrease but not increase retained earnings.
d. ay decrease but not increase net income.

43.

+hich of the following features of preferred stock makes it more like a debt than an e(uity
instrument>
a. ,articipating

b. Doting
c. Eedeemable
d. oncumulative

44.

The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to the par value of the preferred stock.
b. re(uires that di vidends not paid in any yea r must be made up in a later ye ar before
dividends are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is e(ual to the par
value of common stock at which time it can be converted into common stock.
d. enables a preferred stockholder to accumulate dividends until they e(ual the par value
of the stock and receive the stock in place of the cash dividends.


15 - 2
,

4".

-

4#.

Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

According to the 0A-8& redeemable preferred stock should be
a. included with common stock.
b. included as a liability.

c. ecluded from the stockholders$ e(uity heading.
d. included as a contra item in stockholders e(uity.
Cumulative preferred div idends in arre ars should be shown in a corporations balance
sheet as
a. an increase in current liabilities.
b. an increase in stockholders e(uity.
c. a footnote.
d. an increase in current liabilities for the current portion and long!term liabilities for the
long!term portion.

4%.

At the date of the financial statements& common sto ck shares issued woul d eceed
common stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.

4'.

An entry is not made on the
a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.

4).

Cash dividends are paid on the basis of the number of shares

a. authoriFed.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.

"*.

+hich of the following statements about property dividends is not true>
a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carry ing value value= of the nonmonetary assets transferred.
d. All of these statements are true.

"1.

Bouser Corporation owns 4&***&*** shares of stock in 8aha Corporation. ;n /ecember
31& 2*14& Bouser distributed these shares of stock as a dividend to its stockholders. This
is an eample of a
a. property dividend.
b. stock dividend.
c. li(uidating dividend.
d. cash dividend.

"2.

A dividend which is a return to stockholders of a portion of their original investments is a
a. li(uidating dividend.
b. property dividend.
c. liability dividend.

d. participating dividend.


-tockholders$ (uity

15 - 3

"3.

A mining company declared a li(uidating dividend. The 5ournal entry to record the
declaration must include a debit to
a. Eetained a rnings.
b. a paid!in capital account.
c. Accumulated /epletion.
d. Accumulated /epreciation.

"4.

f management wishes to 6capitaliFe6 part of the earnings& it may issue a
a. cash dividend.
b. stock dividend.
c. property dividend.
d. li(uidating dividend.

"".

+hich dividends do not reduce stockholders e(uity>
a. Cash dividends
b. -tock dividends
c. ,roperty dividends

d. Gi(uidating dividends

"#.

The declaration and issuance of a stock dividend larger than 2"H of the shares previously
outstanding
a. increases common stock outstanding and increases total stockholders e(uity.
b. decreases retained earnings but does not change total stockholders e(uity.
c. may increase or decre ase paid!in capital in eces s of par but doe s not chang e total
stockholders e(uity.
d. increases retained earnings and increases total stockholders e(uity.

"%.

Iuirk Corporation issued a 1**H stock dividend of its co mmon stock which had a par
value of :1* before and after the dividend. At what amount should retained earnings be
capitaliFed for the additional shares issued>
a. There should be no capitaliFation of retained earnings.
b. ,ar value
c. 0air value on the declaration date
d. 0air value on the payment date

"'.

The issuer of a "H comm on stock dividend to common stockholders should transfer from
retained earnings to paid!in capital an amount e(ual to the
a. fair value of the shares issued.
b. book value of the shares issued.
c. minimum legal re(uirements.
d. par or stated value of the shares issued.

").

At the date of declaration of a small common stock dividend& the entry should not include
a. a credit to Common -tock.
b. a credit to ,aid!in Capital in cess of ,ar.
c. a debit to Eetained arnings.
d. All of these are acceptable.


15 - 4

Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

#*.

The balance in Common -tock /ividend /istributable should be reported as aa. deduction from common stock issued.
b. addition to capital stock.
c. current liability.
d. contra current asset.

#1.

A feature common to both stock splits and stock dividends is
a. a transfer to earned capital of a corp oration.
b. that there is no effect on total stockholders e(uity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.

#2.

+hat effect does the issuance of a 2!for!1 stock split have on each of the following>
a.
b.
c.
d.

,ar Dalue per -hare
oeffect
ncrease
/ecrease
/ecrease

Eetained arnings
oeffect
oeffect
oeffect
/ecrease

#3.

+hich one of the following disclosures should be made in the e(uity sec tion of the
balance sheet& rather than in the notes to the financial statements>
a. /ividend preferences
b. Gi(uidation preferences
c. Call prices
d. Conversion or eercise prices

#4.

The rate of return on common stock e(uity is calculated by dividing
a. net income less preferred dividends by average common stockholders$ e(uity.
b. net income by average common stockholders$ e(uity.
c. net income less preferred dividends by ending common stockholders$ e(uity.
d. net income by ending common stockholders$ e(uity.

#".

The payout ratio can be calculated by dividing
a. dividends per share by earnings per share.
b. cash dividends by net income less preferred dividends.
c. cash dividends by market price per share.
d. dividends per share by earnings per share and dividing cash dividends by net income
less preferred dividends.

##.

7ounger Company has outstanding both common stock and nonparticipating& non!
cumulative preferred stock. The li(uidation value of the preferred is e(ual to its par value.
The book value per share of the common stock is unaffected by
a. the declaration of a stock dividend on preferred payable in prefe rred stock when the
market price of the preferred is e(ual to its par value.
b. the declaration of a stock dividend on common stock payable in common stock when
the market price of the common is e(ual to its par value.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2!for!1 split of the common stock.


-tockholders$ (uity

,

#%.

J#'.

15 - 

Assume common stock is the on ly class of stock outstanding in the anley Corporation.
Total stockholders e(uity divided by the number of common stock shares outstanding is
called
a. book value per share.
b. par value per share.
c. stated value per share.
d. fair value per share.
/ividends are not paid on
a. noncumulative preferred stock.
b. nonparticipating preferred stock.
c. treasury common stock.
d. /ividends are paid on all of these.

J#).

oncumulative preferred dividends in ar rears
a. are not paid or disclosed.
b. must be paid before any other cash dividends can be distributed.
c. are disclosed as a liability until paid.
d. are paid to preferred stockholders if sufficient funds remain after payment of the
current preferred dividend.

J%*.

Bow should cumulative preferred dividends in arrears be shown in a corporations
statement of financial position>
a. ote disclosure
b. ncrease in stockholders e(uity
c. ncrease in current liabilities
d. ncrease in current liabilities for the amount epected to be declared within the year or
operating cycle& and increase in long!term liabilities for the balance

.ut(pe C+o(ce An!,e%!—Conceptua
Ite&

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44.

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15 - 16 Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

.ULTIPLE CHOICE—Co&putat(ona
Kse the following information for (uestions %1 and %2.
,resented below is information related to Bale Corporation
Common-tock&:1par
,aid!in Capital in cess of ,arLCommon -tock
,referred'1M2H-tock&:"*par
,aid!in Capital in cess of ,arL,referred -tock
Eetained
arnings
TreasuryCommon-tock
:4&"**&***
""*&***
2&***&***
4**&***
1&"**&***
1"*&***

%1.

The total stockholders e(uity of Bale Corporation is
a. :'&'**&***.
b. :'&)"*&***.
c. :%&3**&***.

d. :%&4"*&***.

%2.

The total paid!in capital a. :4&"**&***.
b. :"&*"*&***.
c. :"&4"*&***.
d. :4&)**&***.

%3.

anning Company issued 1*&*** shares of its :" par value common stock having a fair
value of :2" per share and 1"&*** shares of its :1" par value preferred stock having a fair
value of :2* per share for a lump sum of :"3*&***. Bow much of the proceeds would be
allocated to the common stock>
a.
b.
c.
d.

:2"*&***
:24*&)*)
:2')&*)1
:2'1&"#3

%4.

orton Company iss ues 4&*** shares of its :" par val ue com mon stock having a fair
value of :2" per share and #&*** shares of its :1" par value preferred stock having a fair

value of :2* per share for a lump sum of :21*&***. +hat amount of the proceeds should
be allocated to the preferred stock>
a. :1%1&'1'
b. :131&2"*
c. :114&"4"
d. :)"&4"4

%".

8erry Corporation has "*&* ** shares of :1* par comm on stock authoriFed. The following
transactions took place during 2*14& the first year of the corporation$s eistence
-old 1*&*** shares of common stock for :13."* per share.
shares
common
echange
for a patent
valued at :1"*&***.
At thessued
end of1*&***
the 8erry$s
firstofyear&
total stock
paid!inincapital
amounted
to
a. :#*&***.
b. :13"&***.
c. :1"*&***.
d. :2'"&***.

-tockholders$ (uity

15 - 11

%#.

@lavine Company issues #&*** shares of its :" par value common stock having a fair
value of :2" per share and )&*** shares of its :1" par value preferred stock having a fair
value of :2* per share for a lump sum of :2)%&***. The proceeds allocated to the
common stock is
a. :11'&'**
b. :13"&***
c. :1"*&***
d. :1#2&***

%%.

+heeler Company issued "&*** shares of its :" par val ue common stock having a fair
value of :2" per share and %&"** shares of its :1" par value preferred stock having a fair
value of :2* per share for a lump sum of :2#4&***. The proceeds allocated to the
preferred stock is
a. :1"'&4**
b. :1"*&***
c. :144&***
d. :12*&***

%'.

,ember Cor poration started bus iness in 2**) by iss uing 2**& *** shares of :2* par

common stock for :3# each. n 2*14& 2"&*** of these shares were purchased for :"2 per
share by ,ember Corporation and held as treasury stock. ;n 9une 1"& 2*1"& these 2"&***
shares were echanged for a piece of property that had an assessed value of :1&*1*&***.
,ember$s stock is actively traded and had a market price of :#* on 9une 1"& 2*1". The
cost method is used to account for treasury stock. The amount of paid!in capital from
treasury stock transactions resulting from the above events would be
a. :1&***&***.
b. : #**&***.
c. : 1)*&***.
d. : 2**&***.

%).

;n -eptember 1& 2*14& DaldeF Company reac(uired 2*&*** shares of its :1* par value
common stock for :1" per share. DaldeF uses the cost method to account for treasury
stock. The 5ournal entry to record the reac(uisition of the stock should debit
a. Treasury -tock for :2**&***.
b. Common -tock for :2**&***.
c. Common -tock for :2**&*** and ,aid!in Capital in cess of ,ar for :%"&***.
d. Treasury -tock for :3**&***.

'*.

@annon Company ac(uired 1*&*** shares of its own common stock at :2* per share on
0ebruary "& 2*14& and sold "&*** of these shares at :2% per share on August )& 2*1".
The fair value of @annons common stock was :24 per share at /ecember 31& 2*14& and
:2" per share at /ecember 31& 2*1". The cost method is used to record treasury stock
transactions. +hat accountshares>
a. Treasury -tock for :13"&***.

b. Treasury -tock for :1**&*** and ,aid!in Capital from Treasury -tock for :3"&***.
c. Treasury -tock for :1**&*** and Eetained arnings for :3"&***.
d. Treasury -tock for :12*&*** and Eetained arnings for :1"&***.


15 - 1/ Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

'1.

Gong Co. issued 1**&*** shares of :1* par co mmon stock for :1&2**&***. A year later
Gong ac(uired 12&*** shares of its own common stock at :1" per share. Three months
later Gong sold #&*** of these shares at :1) per share. f the cost method is used to
record treasury stock transactions& to record the sale of the #&*** treasury shares& Gong
should credit
a. Treasury -tock for :114&***.
b. Treasury -tock for :#*&*** and ,aid!in Capital from Treasury -tock for :"4&***.
c. Treasury -tock for :)*&*** and ,aid!in Capital from Treasury -tock for :24&***.
d. Treasury -tock for :)*&*** and ,aid!in Capital in cess of ,ar for :24&***.

'2.

An ana lysis of stockholders e(u ity of Bahn Cor poration as of 9anuary 1& 2*14& is as
follows
Common stock& par value :2* authoriFed 1**&*** shares
issuedandoutstanding)*&***shares
,aid!incapitalinecessofpar
Eetained
earnings
Total

:1&'**&***
'**&***
%#*&***
:3&3#*&***

Bahn uses the cost method of accounting for treasury stock and during 2*14 entered into
the following transactions
Ac(uired 2&"** shares of its stock for :%"&***.
-old 2&*** treasury shares at :3" per share.
-old the remaining treasury shares at :2* per share.
Assuming no other e(uity transactions occurred during 2*14& what should Bahn report at
/ecember 31& 2*14& as total additional paid!in capital>
a. :%)"&***
b. :'**&***
c. :'*"&***
d. :'1"&***
'3.

,ercy Corporation was organiFed on 9anua ry 1& 2*14& with an auth oriFation of 1& 2**&***
shares of common stock with a par value of :# per share. /uring 2*14& the corporation
had the following capital transactions
9anuary "
9uly 2'
/ecember 31

issued 4"*&*** shares N :1* per share
purchased #*&*** shares N :11 per share
sold the #*&*** shares held in treasury N :1' per share

,ercy used the cost method to record the purchase and reissuance of the treasury

shares. +hat is the total amount of additional paid!in capital as of /ecember 31& 2*14>
a. :!*!.
b. :1&3'*&***.
c. :1&'**&***.
d. :2&22*&***.


-tockholders$ (uity
'4.

15 - 10

-osa Co.s stockholders e(uity at 9anuary 1& 2*14 is as follows
Common stock& :1* par value authoriFed 3**&*** shares
;utstanding22"&***shares
,aid!incapitalinecessofpar
Eetained
earnings
Total

:2&2"*&***
#**&***
2&1)*&***
:"&*4*&***

/uring 2*14& -osa had the following stock transactions
Ac(uired #&*** shares of its stock for :2%*&***.
-old 3&#** treasury shares at :"* a share.
-old the remaining treasury shares at :41 per share.
o other stock transactions occurred during 2*14. Assuming -osa uses the cost method

to record treasury stock transactions& the total amount of all additional paid!in capital
accounts at /ecember 31& 2*14 is
a. :")1&#**.
b. :"%*&***.
c. :#*'&4**.
d. :#2%&#**.
'".

,resented below is the sto ckholders e(uity section of ;ak s Corporation at /ec ember 31&
2*14
Common stock& par value :2* authoriFed %"&*** shares
issuedandoutstanding4"&***shares
: )**&***
,aid!incapitalinecessofparvalue
3"*&***
Eetained
earnings
3**&***
:1&""*&***
/uring 2*1"& the following transactions occurred relating to stockholders e(uity
3&*** shares
shares were
were reac(uired
reac(uired at
at :3"
:2' per
per share.
share.
3&***
1&'** shares of treasury stock were sold at :3* per share.

0or the year ended /ecember 31& 2*1"& ;aks reported net income of :4"*&***.
Assuming ;aks accounts for treasury stock under the cost method& what should it report
as total stockholders e(uity on its /ecember 31& 2*1"& balance sheet>
a. :1&'#"&***.
b. :1&'#1&4**.
c. :1&'"%&'**.
d. :1&41"&***.

'#.

;n /ecember 1& 2*14& Abel Corporation echanged 4*&*** shares of its :1* par va lue
common stock held in treasury for a used machine. The treasury shares were ac(uired by
Abel at a cost of :4* per share& and are accounted for under the cost method. ;n the date
of the echange& the common stock had a fair value of :"" per share srcinally issued at :3* per share=. As a result of this echange& Abels total stockholders
e(uity will increase by
a. :1&#**&***.
: 4**&***.
b.
c. :2&2**&***.
d. :1&'**&***.


15 - 1 Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

'%.

Guther nc .& has 4& *** shares of #H& :"* par val ue& cumulative preferred stock and
1**&*** shares of :1 par value common stock outstanding at /ecember 31& 2*1"& and
/ecember 31& 2*14. The board of directors declared and paid a :1*&*** dividend in 2*14.

n 2*1"& :4'&*** of dividends are declared and paid. +hat are the dividends received by
the preferred stockholders in 2*1">
a. :34&***
b. :24&***
c. :14&***
d. :12&***

''.

Anders& nc.& has 1"&*** shares of "H& :1** par value& cumulative preferred stock and
#*&*** shares of :1 par value common stock outstanding at /ecember 31& 2*1". There
were no dividends declared in 2*13. The board of directors declares and pays a :13"&***
dividend in 2*14 and in 2*1". +hat is the amount of dividends received by the common
stockholders in 2*1">
a. :4"&***
b. :%"&***
c. :13"&***
d. :*

').

Colson nc. declared a :32*&*** cash dividend. t currently has 12&*** shares of %H&
:1** par value cumulative preferred stock outstanding. t is one year in arrears on its
preferred stock. Bow much cash will Colson distribute to the common stockholders>
a. :1"2&***.
b. :1#'&***.
c. :23#&***.
d. one.

)*.

,ierson Corporation owned 1*&*** shares of Bunter Corporation. These shares were
purchased in 2*11 for :)*&***. ;n ovember 1"& 2*1"& ,ierson declared a property
dividend of one share of Bunter for every ten shares of ,ierson held by a stockholder. ;n
that date& when the market price of Bunter was :2' per share& there were )*&*** shares
of ,ierson outstanding. +hat gain and net reduction in retained earnings would result
from this property dividend>
@ain
et Eeduction in
Eetained arnings
a.
:*
:2"2&***
b.
:*
:
'1&***
c.
:1%1&***
: '1&***
d.
:1%1&***
: 3#&***


-tockholders$ (uity
)1.

-tinson Corporation owned 3*&*** shares of atile Corporation. These shares were
purchased in 2*11 for :2%*&***. ;n ovember 1"& 2*1"& -tinson declared a property

dividend of one share of atile for every ten shares of -tinson held by a stockholder. ;n
that date& when the market price of atile was :2' per share& there were 2%*&*** shares
of -tinson outstanding. +hat gain and net reduction in retained earnings would result from
this property dividend>
@ain
et Eeductionin
Eetained arnings
a.
:*
:243&***
b.
:*
:%"#&***
c.
d.

)2.

15 - 15

:"13&***
:"13&***

:1*'&***
:243&***

+inger Corporation owned #**&*** shares of 0egan Corporation stock. ;n /ecember 31&
2*14& when +ingers account ?(uity nvestments <0egan CorporationO= had a carrying
value of :" per share& +inger distrib uted these shares to its stockholders as a dividend.
+inger originally paid :' for each share. 0egan has 2&***& *** shares issue d and

outstanding& which are traded on a national stock echange. The (uoted market price for
a 0egan share was :% on the declaration date and :) on the distribution date.
+hat would be the reduction in +ingers stockholders e(uity as a result of the above
transactions>
a. :2&4**&***.
b. :3&***&***.
c. :4&'**&***.
d. :"&4**&***.

)3.

@ibbs Corporation
owned
shares
of ;liver
Corporation$s
:" par value
stock.
These shares
were 2*&***
purchased
in 2*11
for :1'*&***.
;n -eptember
1"&common
2*1"&
@ibbs declared a property dividend of one share of ;liver for every ten shares of @ibbs
held by a stockholder. ;n that date& when the market price of ;liver was :2' per share&
there were 1'*&*** shares of @ibbs outstanding. +hat T reduct ion in retained
earnings would result from this property dividend>

a. :342&***
b. :"*4&***
c. :1%1&***
d. :1#2&***

)4.

elvern$s Corporation has an inve stment in 1"& *** shares of +allace Company common
stock with a cost of :#"4&***. These shares are used in a property dividend to
stockholders of elvern$s. The property dividend is declared on ay 2" and scheduled to
be distributed on 9uly 31 to stockholders of record on 9une 1". The fair value per share of
+allace stock is :#3 on ay 2"& :## on 9une 1"& and :#' on 9uly 31. The net effect of
this property dividend on retained earnings is a reduction of
a. :1&*2*&***.
b. : ))*&***.
c. : )4"&***.
d. : #"4&***.


15 - 12 Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

)".

BernandeF Company has "#*&*** shares of :1* par value common stock outstanding.
/uring the year& BernandeF declared a 1*H stock dividend when the market price of the
stock was :3* per share. 0our months later BernandeF declared a :."* per share cash
dividend. As a result of the dividends declared during the year& retained earnings
decreased by
a. :1&)''&***.
b. : '4*&***.

c. : 3*'&***.
d. : 2'*&***.

)#.

;n 9une 3*& 2*1 4& when rm ler Co.s stock was selling at :#" per share& its ca pital
accounts were as follows
Capital stock ,remiumoncapitalstock
Eetainedearnings

:2&"**&***
#**&***
4&2**&***

f a 1**H stock dividend were declared and distributed& capital stock would be
a. :2&"**&***.
b. :3&1**&***.
c. :"&***&***.
d. :%&3**&***.
)%.

The stockholders e(uity section of @unk el Corporation as of /ec ember 31& 2*1 4& was as
follows
Common stock& par value :2 authoriFed 2*&*** shares
issuedandoutstanding1*&***shares
: 2 *&***
,aid!incapitalinecessofpar
3*&***
Eetained

earnings
)"&***
:14"&***
;n arch 1& 2*1"& the board of directors declared a 1"H stock dividend& and accordingly
1&"** additional shares were issued. ;n arch 1& 2*1"& the fair value of the stock was :#
per share. 0or the two months ended 0ebruary 2'& 2*1"& @unkel sustaine d a net loss of
:1"&***.
+hat amount should @unkel report as retained earnings as of arch 1& 2*1">
a. :%1&***.
b. :%%&***.
c. :'1&***.
d. :'%&***.


-tockholders$ (uity
)'.

15 - 13

The stockholders e(uity of Bowell Company at 9uly 31& 2*14 is presented below
Common stock& par value :2*& authoriFed 4**&*** shares
issued and outstanding 1#*&*** shares
:3&2**&***
,aid!incapitalinecessofpar
1#*&***
Eetained
earnings
#"*&***
:4&*1*&***
;n August 1& 2*14& the board of directors of Bowell declared a 1*H stock dividend on

common stock& to be distributed on -eptember 1"th. The marke t price of Bowells
common stock was :%* on August 1& 2*14& and :%# on -eptember 1"& 2*14. +hat is the
amount of the debit to retained earnings as a result of the declaration and distribution of
this stock dividend>
a. : #4*&***.
b. :1&12*&***.
c. :1&21#&***.
d. : '**&***.

)).

;n 9anuary 1& 2*1 4& /odd& nc.& declared a 1"H stock dividend on its co mmon stock
when the fair value of the common stock was :3* per share. -tockholders e(uity before
the stock dividend was declared consisted of
Common stock& :1* par value& authoriFed 2**&*** shares
issued and outstanding 12*&*** shares
:1&2**&***
Additional paid!in capital on common stock
1"*&***
Eetained
earnings
%**&***
Totalstockholderse(uity
:2&*"*&***
+hat was the effect on /odd$s retained earnings as a result of the above transaction>
a. :2%*&*** decrease
b. :"4*&*** decrease
c. :)**&*** decrease
d. :4"*&*** decrease

1**.

;n 9anuary 1& 2*14& Culver Corporation had 11*&*** shares of its :" pa r value common
stock outstanding. ;n 9une 1& the corporation ac(uired 1*&*** shares of stock to be held
in the treasury. ;n /ecember 1& when the mark et price of the stoc k was :1*& the
corporation declared a 1"H stock dividend to be issued to stockholders of record on
/ecember 1#& 2*14. +hat was the impact of the 1"H stock dividend on the balance of the
retained earnings account>
a. :)3%&"** decrease
b. :1"*&*** decrease
c. :1#"&*** decrease
d. o effect


15 - 14 Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

1*1.

At the beginning of 2*1"& 0laherty Company had retained earnings of :3"*&***. /uring
the year 0laherty reported net income of :1**&***& sold treasury stock at a ?gainO of
:3#&***& declared a cash dividend of :#*&***& and declared and issued a small stock
dividend of 3&*** shares <:1* par value= when the fair value of the stock was :2* per
share. The amount of retained earnings available for dividends at the end of 2*1" was
a. :33*&***.
b. :3#*&***.
c. :3##&***.
d. :3)#&***.

1*2.

asterson Company has 42*&*** shares of :1* par value common stock outstanding.
/uring the year asterson declared a 1"H stock dividend when the market price of the
stock was :3# per share. Three months later asterson declared a :.#* per share cash
dividend. As a result of the dividends declared during the year& retained earnings
decreased by
a. :2&#'3&'**
b. :2&2#'&***
c. : 41"&'**
d. : 3)#&***

1*3.

Gayne Corporation had the following information in its financial statements for the years
ended 2*14 and 2*1"
Cash dividends for the year 2*1"
et income for the year ended 2*1"
arketpriceofstock&12M31M14
arketpriceofstock&12M31M1"
Common stockholders$ e(uity& 12M31M14

:

Common
stockholders$
e(uity& 12M31M1"
;utstanding
shares&12M31M1"
,referred dividends for the year ended 2*1"

1*&***

'3&***
1*
12
1&#**&***
1&)'*&***
1'*&***
1"&***

+hat is the payout ratio for Gayne Corporation for the year ended 2*1">
a. 3*.1H
b. 1'.1H
c. 14.%H
d. 12.*H
1*4.

Gayne Corporation had the following information in its financial statements for the years
ended 2*14 and 2*1"
Cash dividends for the year 2*1"
et income for the year ended 2*1"
arketpriceofstock&12M31M14
arketpriceofstock&12M31M1"
Common stockholders$ e(uity& 12M31M14
Common stockholders$
e(uity& 12M31M1"
;utstanding
shares&12M31M1"
,referred dividends for the year ended 2*1"

:

1*&***
'3&***
1*
12
1&#**&***
1&)'*&***
1'*&***
1"&***


-tockholders$ (uity

15 - 1

+hat is the book value per share for Gayne Corporation for the year ended 2*1">
a. :11.**
b. :).)2
c. :).)4
d. :'.')
1*".

At the beginning of 2*1"& Bamilton Company had retained earnings of :2"*&***. /uring
the year Bamilton reported net income of :%"&***& sold treasury stock at a ?gainO of
:2%&***& declared a cash dividend of :4"&***& and declared and issued a small stock
dividend of 1&"** shares <:1* par value= when the fair value of the stock was :3* per
share. The amount of retained earnings available for dividends at the end of 2*1" was
a.
b.
c.
d.

:2'4&"**.
:2#2&***.
:2"%&"**.
:23"&***.

1*#.

ingenback Company has "#*&*** shares of :1* par value common stock outstanding.
/uring the year ingenback declared a 1"H stock dividend when the market price of the
stock was :4' per share. Two months later ingenback declared a :.#* per share cash
dividend. As a result of the dividends declared during the year& retained earnings
decreased by
a. : 3'#&4**.
b. : "2'&***.
c. :4&*32&***.
d. :4&41'&4**.

1*%.

-ealy Corporation had the following information in its financial statements for the years
ended 2*14 and 2*1"
Cash
dividends
foryear
the year
2*1"
et income
for the
ended

2*1"
arketpriceofstock&12M31M14
arketpriceofstock&12M31M1"
Common stockholders$ e(uity& 12M31M14
Common stockholders$ e(uity& 12M31M1"
;utstandingshares&12M31M1"
,referred dividends for the year ended 2*1"

:

"&***
'%&***
1*
12
1&***&***
1&2**&***
1**&***
1*&***

+hat is the rate of return on common stock e(uity for -ealy Corporation for the year
ended 2*1">
a. %.)H
b. #.4H
c. %.*H
d. #."H


15 - /6 Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

1*'.

-ealy Corporation had the following information in its financial statements for the years
ended 2*14 and 2*1"
Cash dividends for the year 2*1"
et income for the year ended 2*1"
arketpriceofstock&12M31M14
arketpriceofstock&12M31M1"
Common stockholders$ e(uity& 12M31M14
Common stockholders$ e(uity& 12M31M1"
;utstandingshares&12M31M1"
,referred dividends for the year ended 2*1"

:

"&***
'%&***
1*
12
1&***&***
1&2**&***
1**&***
1*&***

+hat is the payout ratio for -ealy Corporation for the year ended 2*1">
a. 13.*H
b. ".%H
c. #."H
d. 1%.2H
1*).

ays& nc. had net i ncome for 2*14 of : 1&*#*&*** and earnings per share on common
stock of :". ncluded in the net income was :1"*&*** of bond interest epense related to
its long!term debt. The income ta rate for 2*14 was 3*H. /ividend s on preferred stock
were :2**&***. The payout ratio on common stock was 2"H. +hat were the dividends on
common stock in 2*14>
a. :21"&***.
b. :2#"&***.
c. :241&2"*.
d. :322&"**.

11*.

,resented below is information related to ;render& nc.
Common
stock
4H,referredstock
Eetained earnings et
income
for
year

/ecember 31&2*14
2*1"
:%"&***
:#*&***
3"*&***
3"*&***
)*&***
%"&***

3"&***
32&***

+hat is ;render$s rate of return on common stock e(uity for 2*1">
a. 23.3H
b. 14.*H
c. 31.1H
d. 21.2H
111.

The following data are provided
"H Cumulative preferred stock& :"* par
Commonstock&:1*par
Additional
paid!in capital
Eetained earnings
et
income

/ecember 31&
2*1"
2*14
:1**&***
:1**&***
14*&***
)*&***
'*&***
24*&***
#*&***

%*&***
21"&***


-tockholders$ (uity

15 - /1

Additional information
;n ay 1& 2*1"& "&*** shares of common stock were issued. The preferred dividends were
declared during 2*1". The market price of the common stock was :"* at /ecember 31& 2*1".

not

The rate of return on common stock e(uity for 2*1" is calculated as
a. #* P 41".
b. #* P 4#*.
c. "" P 41".
d. "" P 4#*.
112.

The following data are provided
"H Cumulative preferred stock& :"* par
Commonstock&:1*par
Additional paid!in capital
Eetained earnings et
income

/ecember 31&
2*1"
2*14
:1**&***
:1**&***
14*&***
)*&***
'*&***
%*&***
24*&***
21"&***
#*&***

Additional information
;n ay 1& 2*1"& "&*** shares of common stock were issued. The preferred dividends were
declared during 2*1". The market price of the common stock was :"* at /ecember 31& 2*1".
The book value per share of common stock at 12M31M1" is calculated as
a. 4"" P 14.
b. 3'* P 14.
c. 22* P 14.
d. 4#* P 14.
113.

Turner Corporation had the following information in its financial statements for the year
ended 2*14 and 2*1"
Cashdividendsfortheyear2*1"
etincomefortheyearended2*1"
arketpriceofstock&12M31M1"
Common stockholders$ e(uity& 12M31M14
Common stockholders$ e(uity& 12M31M1"

;utstandingshares&12M31M1"
,referred dividends for the year ended 2*1"

: 1"&***
13*&***
24
2&2**&***
2&4**&***
1"*&***
3*&***

+hat is the payout ratio for Turner Corporation for the year ended 2*1">
a. 11."H
b. 1".*H
c. 23.1H
d. 34.#H

not


15 - // Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

114.

Turner Corporation had the following information in its financial statements for the year
ended 2*14 and 2*1"
Cashdividendsfortheyear2*1"
etincomefortheyearended2*1"
arketpriceofstock&12M31M1"
Common stockholders$ e(uity& 12M31M14

Common stockholders$ e(uity& 12M31M1"
;utstandingshares&12M31M1"
,referred dividends for the year ended 2*1"

: 1"&***
13*&***
24
2&2**&***
2&4**&***
1"*&***
3*&***

+hat is the book value per share for Turner Corporation for the year ended 2*1">
a. :1".'*
b. :1#.**
c. :14.#%
d. :1".%*
J11". +ritten& nc. has outstanding #**&*** shares of :2 par common stock and 12*&*** shares
of no!par 'H preferred stock with a stated value of :". The preferred stock is cumulative
and nonparticipating. /ividends have been paid in every year ecept the past two years
and the current year.
Assuming that :3**&*** will be distributed as a dividend in the current year& how much
will the common stockholders receive>
a. Qero.
b. :1"#&***.
c. :2*4&***.
d. :2"2&***.
J11#. +ritten& nc. has outstanding #**&*** shares of :2 par common stock and 12*&*** shares
of no!par 'H preferred stock with a stated value of :". The preferred stock is cumulative
and nonparticipating. /ividends have been paid in every year ecept the past two years

and the current year.
Assuming that :12#&*** will be distributed as a dividend in the current year& how much
will the preferred stockholders receive>
a. :42&***.
b. :4'&***.
c. :)#&***.
d. :12#&***.
J11%. +ritten& nc. has outstanding #**&*** shares of :2 par common stock and 12*&*** shares
of no!par 'H preferred stock with a stated value of :". The preferred stock is cumulative
and participating. /ividends have been paid in every year ecept the past two years and
the current year.
Assuming that :3##&*** will be distributed& and the preferred stock is
how much will the common stockholders receive>
a. :222&***.
b. :1'*&***.
c. :1'#&***.
d. : )#&***.

also

participating&


-tockholders$ (uity

15 - /0

J11'. 7oder& nc. has 1"*&*** shares of :1* par value common stock and %"&*** shares of :1*
par value& #H& cumulative& participating preferred stock outstanding. /ividends on the
preferred stock are one year in arrears. Assuming that 7oder wishes to distribute

:4*"&*** as dividends& the common stockholders will receive
a. : )*&***.
b. :1#"&***.
c. :24*&***.
d. :31"&***.
J11). ann Co. has outstanding '*&*** shares of 'H preferred stock with a :1* par value and
1"*&*** shares of :3 par value common stock. /ividends have been paid every year
ecept last year and the current year. f the preferred stock is cumulative and
nonparticipating and :4**&*** is distributed& the common stockholders will receive
a. :*.
b. :2%2&***.
c. :33#&***.
d. :4**&***.

.ut(pe C+o(ce An!,e%!—Co&putat(ona
Ite&

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%2.
%3.
%4.
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a
b
b
c
d

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'2.

An!

d
d
b
c
c

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c
c
a
a

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)#.

b
d
d
a
c

)).

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1*1.
1*2.
1*3.

b
b
a
a
c

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1*#.
1*%.
1*'.
1*).
11*.

d
c
c
a
b

113.
114.
J11"
J11#
J11%

b
b
b
d
b

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%%.

b
c

'3.
'4.

d
c

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d

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b

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1*".

a
d

111.
112.

c
a

J11'
J11)

c
b

.ULTIPLE CHOICE—CPA A'apte'
12*.

A corporation was orga niFed in 9anu ary 2*14 wit h authoriFed capi tal of :1* par value
common stock. ;n 0ebruary 1& 2*14& shares were issued at par for cash. ;n arch 1&
2*14& the corporations attorney accepted %&*** shares of common stock in settlement for
legal services with a fair value of :)*&***. Additional paid!in capital would increase on
0ebruary 1& 2*14 arch 1& 2*14
a.
7es
o

b.
7es
7es
c.
o
o
d.
o
7es


15 - / Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on

121.

;n 9uly 1& 2*14& all Co . issued 2&"** shares of its :1* par co mmon stock and "&***
shares of its :1* par convertible preferred stock for a lump sum of :13*&***. At this date
alls common stock was selling for :24 per share and the convertible preferred stock for
:1' per share. The amount of the proceeds allocated to alls preferred stock should be
a. :#"&***.
b. :%'&***.
c. :)*&***.
d. :%1&"**.

122.

Borton Co. was organiFed on 9anuary 2& 2*14& with "**&*** authoriFed shares of :1* par
value common stock. /uring 2*14& Borton had the following capital transactions
9anuary "Lissued 3%"&*** shares at :14 per share.
9uly 2%Lpurchased 2"&*** shares at :11 per share.

ovember 2"Lsold 1'&*** shares of treasury stock at :13 per share.
Borton used the cost method to record the purchase of the treasury shares. +hat would
be the balance in the ,aid!in Capital from Treasury -tock account at /ecember 31& 2*14>
a. :*.
b. :1'&***.
c. :3#&***.
d. :"4&***.

123.

n 2*14& Bobbs Corp. ac(uired 12&*** shares of its own :1 par v alue common stock at
:1' per share. n 2*1"& Bobbs issued '&*** of these shares at :2" per share. Bobbs
uses the cost method to account for its treasury stock transactions. +hat accounts and
what amounts should Bobbs credit in 2*1" to record the issuance of the #&*** shares>
Treasury
Additional
-tock
,aid!in Capital
a.
b.
c.
d.

124.

:144&***
:144&***

:"#&***
:1)2&***

:13#&***

Eetained
arnings

Common
-tock

:14*&***
:"#&***

:'&***
:'&***

At its date of incorporation& -auder& nc. issued 1**&*** shares of its : 1* par common
stock at :11 per share. /uring the current year& -auder ac(uired 2*&*** shares of its
common stock at a price of :1# per share and accounted for them by the cost method.
-ubse(uently& these shares were reissued at a price of :12 per share. There have been
no other issuances or ac(uisitions of its own common stock. +hat effect does the
reissuance of the stock have on the following accounts>
a.
b.
c.
d.

Eetained arnings
/ecrease
oeffect
/ecrease
oeffect

Additional ,aid!in Capital
/ecrease
/ecrease
oeffect
oeffect


-tockholders$ (uity

15 - /5

12".

0armer Corp. owned 2*&*** shares of aton Corp. purchased in 2*11 for :4"*&***. ;n
/ecember 1"& 2*14& 0armer declared a property dividend of all of its aton Corp. shares
on the basis of one share of aton for every 1* shares of 0armer common stock held by
its stockholders. The property dividend was distributed on 9anuary 1"& 2*1". ;n the
declaration date& the aggregate market price of the aton shares held by 0armer was
:%"*&***. The entry to record the declaration of the dividend would include a debit to
Eetained arnings of
a. :*.
b. :3**&***.
c. :4"*&***.
d. :%"*&***.

12#.

A corporation decl ared a dividend& a portion of whi ch was li(u idating. Bow woul d this
distribution affect each of the following>

a.
b.
c.
d.
12%.

Additional
,aid!in Capital
/ecrease
/ecrease
oeffect
oeffect

Eetained arnings
oeffect
/ecrease
/ecrease
oeffect

;n ay 1& 2*14& Qiek Corp. declared and issued a 1*H com mon stock dividend. ,rior to
this dividend& Qiek had 2**&* ** shares of :1 par value commo n stock issued and
outstanding. The fair value of Qiek s common stock was :2* per share on ay 1& 2*14.
As a result of this stock dividend& Qieks total stockholders e(uity
a. increased by :4**&***.
b. decreased by :4**&***.
c. decreased by :2*&***.
d. did not change.

12'.

Bow would the declaration and subse(uent iss uance of a 1*H stock dividend by the
issuer affect each of the following when the fair value of the shares eceeds the par value
of the stock>
Additional
Common -tock
,aid!in Capital
a.
oeffect
oeffect
b.
oeffect
ncrease
c.
ncrease
oeffect
d.
ncrease
ncrease

12).

;n /ecember 31& 2*14& the stockholders e(uity section of Arndt& nc.& was as follows
Common stock& par value :1* authoriFed 3*&*** shares
issuedandoutstanding)&***shares
Additional paid!in capital
Eetained
earnings

:) *&***

11#&***
1'4&***

Totalstockholderse(uity

:3)*&***