Test Bank Financial Accounting 6E by Libby Chapter 11

Chapter 011: Reporting and Interpreting Interpreting Owner's Equity

True / False Questions

1. Outstanding shares of stock are those shares which a corporation has the ability to issue as documented in its charter in the state where incorporated. FALSE

AACSB Tag: Relative Thinking Difficulty: Medium L.O.: 1

2. A major advantage a corporation has over a proprietorship or partnership is that it allows individuals to participate in ownership by purchasing small amounts of stock. TRUE

AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 1

3. The shares issued can be less than those outstanding when the corporation has repurchased some of their shares which are called treasury shares. FALSE


4. Kansas City Company has 2,000,000 shares issued and 100,000 treasury shares. They report net income of $5,200,000 in 2009. Earnings per share equals $2.60. FALSE

AACSB Tag: Analytic Difficulty: Medium L.O.: 2

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5. Treasury stock is a corporation's own stock that was sold, issued, repurchased, and is still held by the corporation. TRUE


6. When a company compan y repurchases some of its shares of stock (treasury stock), the number of shares issued is reduced. FALSE


7. To pay a cash dividend, a corporation needs adequate cash, authorization from the board of directors, and adequate retained earnings. TRUE


8. A company has 5,000,000 shares issued and 400,000 held in the treasury. If the board of directors declares a $16 million cash dividend, then the dividends per share would be $3.20. FALSE


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5. Treasury stock is a corporation's own stock that was sold, issued, repurchased, and is still held by the corporation. TRUE


6. When a company compan y repurchases some of its shares of stock (treasury stock), the number of shares issued is reduced. FALSE


7. To pay a cash dividend, a corporation needs adequate cash, authorization from the board of directors, and adequate retained earnings. TRUE


8. A company has 5,000,000 shares issued and 400,000 held in the treasury. If the board of directors declares a $16 million cash dividend, then the dividends per share would be $3.20. FALSE


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9. On the date of payment of a cash dividend, the company would debit retained earnings and credit cash. FALSE


10. The dividend yield ratio is a measure of the immediate return investors are receiving from dividends stated as a percentage of market price. TRUE


11. A company reported earnings per share of $3.50 and dividends per share of $1.00 when the market price of the stock was $80.00. The dividend yield is 20%. FALSE


12. A stock split results in the reduction of the par or stated value per share and a proportionate increase in the number of shares outstanding. TRUE


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13. The most common reason a company would declare a stock split is to reduce the market price of its stock to increase the trading activity. TRUE


14. Preferred stock often has a preference in the distribution of assets over common stock in the event of dissolution of the corporation. TRUE


15. When preferred stock is cumulative and the board of directors passes on a dividend, the arrearage must be shown as a liability on the balance sheet and a reduction from retained earnings on the statement of stockholders' equity and the balance sheet. FALSE


16. Restrictions on retained earnings usually occur when a company borrows money and the creditor wants to restrict the amount of dividends that can be distributed. TRUE


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17. When a company compan y reissues treasury stock, it creates cash inflow from an investing activity because treasury stock is an investment asset on the balance sheet. FALSE


18. Payment of a cash dividend creates a cash outflow from an operating activity. FALSE


19. Partnerships, sole proprietorships, and corporations are three basic forms of business organizations. TRUE

AACSB Tag: Relative Thinking Difficulty: Easy L.O.: Sup A

20. All businesses pay income taxes. FALSE

AACSB Tag: Relative Thinking Difficulty: Medium L.O.: Sup A

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Chapter 011: Reporting and Interpreting Owner's Equity

Multiple Choice Questions

21. Advantages of a corporation include all of the following except A. ease of participating in ownership B. stockholders are not liable for a corporation's debts. C. the ownership rights of corporations are easily transferred. D. stockholders have a mutual agency relationship.


22. From an investor's viewpoint, in today's litigious environment, what would be considered the most advantageous characteristic of the corporate form of organization? A. Taxation. B. Ease of capital assembly. C. Continuity of life for the corporation. D. Limited liability for stockholders.


23. Which of the following statements about a corporation is false? A. Corporations are the dominant form of business organization in terms of volume of operations. B. Their owners have limited liability. C. Corporations allow even small investors to participate in ownership. D. Corporations are separate legal entities from their owners.


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24. Which of the following is true about the corporate form of business but is not true for a proprietorship or partnership? A. It is a separate economic entity from its owners. B. Investment in a corporation's stock is less risky than investing in bonds. C. It is easier for individuals to become owners in a corporation by buying small amounts of stock than it is to own a proprietorship or partnership share. D. A corporation is easier to form than a partnership.


25. Which of the following statements is false? A. Most small shareholders do not attend the corporation's annual meeting so they cast their vote by proxy card. B. Corporations are created by application to a specific state not the federal government. C. Most large corporations are chartered out of Delaware since it has very favorable laws of incorporation. D. Corporations have a limited life.


26. Which of the following represents the maximum shares of stock issuable to the public? A. Authorized shares B. Issued shares C. Outstanding shares D. Unissued shares


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27. Which of the following represents the shares currently in the hands of investors? A. Authorized shares B. Issued shares C. Outstanding shares D. Unissued shares


28. Which of the following represents the shares sold in either an initial public offering or subsequent seasoned new issuances? A. Authorized shares B. Issued shares C. Outstanding shares D. Unissued shares


29. Which of the following about earnings per share is true? A. It indicates the portion of earnings distributed to the owners as an immediate return on their investment. B. Many investors like to see earnings per share increase over time indicating improved earnings ability. C. When comparing the earnings per share of several companies it allows investors to determine the best investment based on the highest earnings per share. D. If earnings per share equals $5.00, then the maximum dividend payment would be $5.00.


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30. Which of the following statements about earnings per share is true? A. Increased net income would cause earnings per share to decrease. B. Issuance of more common shares would cause earnings per share to increase. C. Repurchase of treasury shares would cause earnings per share to decrease. D. None of the other answers is true.

AACSB Tag: Relative Thinking Difficulty: Hard L.O.: 2

31. The par value of common stock is the A. average market price of the stock during the period in which it is sold. B. ceiling (maximum) amount above which the stock may not be sold initially. C. nominal value per share established in the corporate charter. D. selling price of the stock at the date it was issued by the corporation.


32. Depot Company has one class of capital stock issued. It is A. common stock. B. preferred stock, voting. C. preferred stock, noncumulative. D. common stock, nonvoting.


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33. If Hayes Corporation sells and issues 100 shares of its $1 par value common stock at $15 per share, the entry to record the sale will not include a A. Debit to cash of $1,500. B. Credit to capital in excess of par of $1,400. C. Credit to common stock of $100. D. Credit to retained earnings of $1,500.


34. Choose the correct definition for par value from the following: A. The amount that a corporation must pay when it exercises its right to convert shares of stock. B. The equity of one share of outstanding stock in the issuing corporation's net assets as recorded in the corporation's accounts. C. An arbitrary value placed on a share of stock at the time the stock is authorized in the corporate charter. D. The costs of bringing a corporation into existence, such as legal fees, promoter's fees, and amounts paid to the state to secure a charter.


35. Irish Corporation issued (sold) 10,000 shares of its no par common stock for $70 per share. The bylaws established a stated value of $10 per share. The transaction would increase common stock by A. zero B. $600,000 C. $100,000 D. $700,000


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36. Which of the following statements about stock option plans is true? A. Offering stock options to a company's managers reduces the likelihood they will not always act in the best interest of the investors. B. Stock option plans are often a major part of an executive's compensation plan. C. Stock options usually have a grant price equal to the market price of the stock when the options are first offered to the executives. D. All of these are true.


37. Which of the following statements about treasury stock transactions is true? A. The total number of shares issued increases when treasury stock is purchased. B. The total number of shares authorized changes when treasury stock is purchased. C. Gains and losses on treasury stock transactions are reported on the income statement. D. A stockholders' equity account is debited when treasury stock is purchased.


38. The balance sheet of Werther Company showed the following data about its common stock, par $1: authorized shares, 10,000,000; outstanding shares, 4,300,000; and issued shares 4,700,000. Therefore, the number of treasury stock shares was A. 0. B. 4,700,000. C. 4,300,000. D. 400,000.


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39. Which of the following is a "contra" stockholders' equity account? A. Retained earnings. B. Preferred Stock. C. Treasury stock. D. Capital in excess of par value.


40. During 2008, Thomas Corporation repurchased some shares of its own common stock. It records treasury stock at cost. What effect did this transaction have on 2008 stockholders' equity and earnings per share, respectively?

A. B. C. D.


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41. McGuire Company had the following stockholders' equity section:

At what amount per share was the treasury stock purchased? A. $17.00. B. $10.00. C. $12.75. D. $15.00.


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42. Which of the following entries would be recorded when a company reissues 1,000 shares of treasury stock for $50 per share when they were repurchased at a cost of $47 per share and have a $1 par value?

A.

B.

C.

D.


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43. Which of the following entries would be recorded when a company reissues 1,000 shares of treasury stock for $40 per share when they were repurchased at a cost of $44 per share and have a $1 par value?

A.

B.

C.

D.


44. In the case of a cash dividend, a dividend liability comes into existence on the A. date of declaration. B. date of record. C. date of dividend payment. D. last day of the month in which the dividend is declared.


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45. Shares of stock eligible for dividends are A. the number of shares of authorized. B. the number of shares issued. C. the number of shares outstanding. D. the number of treasury shares.


46. Mosiman reported the following asset and liability balances at the end of 2009 and 2010

During 2010, cash dividends of $50,000 were declared and paid. Additional capital stock was issued for $100,000. Therefore, the net income (or net loss) for 2010 was A. $400,000 B. $480,000 C. $350,000 D. $300,000


47. Accounting entries associated with a cash dividend usually are made on the A. record date and payment date. B. payment date only. C. declaration date and record date. D. declaration date and payment date.


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48. On December 15, 2009, the board of directors of Cross Corporation declared a cash dividend, payable on January 8, 2010 of $.80 per share on the 2,000,000 common shares outstanding. The accounting period ends December 31. Because of this action, on December 15, 2009, Cross Corporation should A. make no journal entry because the event had no effect on the corporation's financial position until 2010. B. decrease retained earnings $1.6 million and increase contributed capital $1.6 million. C. decrease retained earnings $1.6 million and increase liabilities by $1.6 million. D. decrease cash $1.6 million and decrease retained earnings $1.6 million.


49. The declaration and payment of a cash dividend A. reduces retained earnings and increases liabilities by the amount of the dividend. B. reduces retained earnings and increases contributed capital by the same amount. C. reduces assets and increases liabilities each by the amount of the dividend. D. reduces assets and retained earnings each by the amount of the dividend.


50. In 2008, Fast Franks had a dividend yield of .1% and Blazing Burgers was .2%. Which of the following is false? A. Dividend yield will usually drop when the market price per share drops. B. They pay very little in dividends because they reinvest their earnings in expansion of operations. C. They provide very little immediate return to their investors. D. Dividend yield will usually drop when the market price per share rises.


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51. When a stock dividend (on par value stock) is declared and issued A. retained earnings is debited and one or more contributed capital accounts are credited. B. capital in excess of par value is debited and retained earnings is credited. C. the number of shares outstanding increases while the par value of each share decreases. D. .the number of shares outstanding decreases while the par value of each share increases.


52. A stock dividend A. results in a transfer of retained earnings to contributed capital. B. increases the number of shares outstanding and involves a pro rata reduction in the par value per share. C. is accounted for in exactly the same manner as a stock split. D. results in a transfer of retained earnings to contributed capital an d also increases the number of shares outstanding and involves a pro rata reduction in the par value per share.


53. Chicago Clock Corporation issued a 3-for-2 stock split (i.e., three new shares in exchange for each two old shares turned in) of its common stock which had a par value of $100 before the split. What dollar amount of retained earnings should be transferred to the common stock account? A. Par value of $100 per share. B. Market value per share on the issue date. C. Half of the previous total amount in the common stock account(s). D. None should be transferred.


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54. Which of the following statements is false? A. Stock splits shuffle amounts between retained earnings and contributed capital accounts. B. Both stock splits and stock dividends increase the common shares issued. C. Both stock splits and stock dividends increase the common shares outstanding. D. Both stock splits and stock dividends have the impact of reducing the market price of the stock.


55. A company has 4 million common shares authorized, 2.5 million shares issued and 100,000 treasury shares. Their par value is $1 per share and the market price is $30 when the company declares a 4/1 stock split. Which of the following is true? A. There will be a transfer of $2.4 million from retained earnings to contributed capital. B. Only the shares outstanding will quadruple to 4.8 million and the par value will be reduced to $.25 per share. C. The shares authorized, issued, outstanding, and held in treasury will all quadruple while the par value will be reduced to $.25 per share. D. The company will be unable to declare a 4/1 split because they do not have enough authorized shares to issue the needed 4.8 million shares.


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56. A company declares a 40% stock dividend when there are 4.0 million common shares outstanding with a $1 par value. Their current market price is $20 per share. Which of the following will be the effect of the stock dividend? A. Retained earnings will decrease by $1.6 million and contributed capital will increase by $1.6 million. B. Contributed capital will decrease by $1.6 million and retained earnings will increase by $1.6 million. C. Retained earnings will decrease by $32 million and contributed capital will increase by $32 million. D. Contributed capital will decrease by $32 million and retained earnings will increase by $32 million.


57. The following information is available for the Davidson Company. They have 10,000,000 common shares issued, 500,000 million shares held in treasury, par value of $2 per share, and current market price of $25 per share. They declare a 15% stock dividend. Which of the following is true? A. Retained earnings will decrease and common stock will increase by $3 million. B. Retained earnings will decrease and common stock will increase by $2.85 million. C. Retained earnings will decrease and common stock will increase by $35.625 million D. Retained earnings will decrease and common stock will increase by $36.0 million.


58. With respect to preferred stock, select the statement that is correct. A. It must have a par value. B. It cannot exist unless there also is common stock. C. It is never issued without voting privileges. D. It always provides for a fixed payment to be made to the stockholders even for years when no dividends have been declared.


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59. The conversion feature on convertible preferred stock enables the stockholder to convert it to A. convertible bonds. B. cash. C. common stock. D. products of the company.


60. What is the correct entry for the sale of 1,000 shares of $10 par preferred stock for $50,000? A.

B.

C.

D.


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61. Which is false about preferred stock? A. Preferred stock has a higher priority status relative to common stock. B. The same capital accounts are used to record the issuance of preferred stock and common stock. C. It usually does not carry voting rights. D. Preferred stockholders receive dividends in arrears only if the shares are cumulative.


62. Which of the following statements is true? A. Common stock has a dividend rate fixed by the stock contract. B. Preferred stock has a volatile market value; therefore, it is a more risky investment than common stock. C. As a company's profits and cash flow increases, the board of directors may choose to increase the dividends received by common stockholders. D. All other answers are false.


63. Assume the following shares outstanding: Preferred stock, 6%, $50 par value, cumulative, 1,000 shares with dividends in arrears 3 years, for 2006, 2007, and 2008. Common stock, $100 par value, 2,000 shares. Total dividends declared in 2009 were $50,000. The total amount of dividends to which common stockholders are entitled is A. $62,000. B. $50,000. C. $45,000. D. $38,000.


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64. Slickers, Inc. had the following shares outstanding during 2008: Preferred stock, 7%, $50 par value, cumulative, 1,000 shares with dividends in arrears for 2006 and 2007. Common stock, $100 par value, 2,000 shares. The total dividends declared for the current year were $50,000. The total amount of dividends to which the preferred stockholders are entitled is A. $ 3,500. B. $ 7,000. C. $10,500. D. $12,000.


65. At January 1, 2009, Grabowski Corporation had outstanding capital stock as shown below. On December 31, 2009, it declared and paid cash dividends of $48,000 to the preferred stockholders. Common stock — 1,000,000 shares outstanding, $1 par value. Preferred stock — 2,000 shares outstanding, $75 par, 8%, cumulative. The stock was issued at a price of $15 per share. At December 31, 2009, how many years were the preferred dividends in arrears? A. One year. B. Two years. C. Three years. D. Four years.


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66. What is the difference between cumulative and noncumulative preferred stock? A. They both receive dividends in arrears. B. Cumulative stock's undeclared dividends accumulate each year until paid, while noncumulative stock's right to receive dividends is forfeited in an y year that dividends are not declared. C. Cumulative does not receive dividends but noncumulative does. D. Cumulative preferred stock's right to receive dividends is forfeited in any year that dividends are not declared. However, noncumulative stock's undeclared dividends accumulate each year until paid.


67. Cornhusker Corporation plans to raise $10 million cash on January 1, 2009, by issuing either bonds payable (8% interest rate) or cumulative preferred stock (8% dividend rate). The accounting period ends December 31. How would the annual interest amount or annual preferred dividend amount (if paid) affect the net income for the year ended December 31, 2009? A. Net income would be reduced by the annual interest and by the preferred stock dividends. B. Net income would be reduced by the interest but not by the preferred stock dividends. C. Net income would not be reduced by the annual interest nor by the preferred stock dividends. D. Net income would be reduced by the preferred dividends but not by the interest


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68. The Candle Barn has the following classes of stock: Preferred stock, 8%, $100 par, 100,000 shares issued and outstanding, cumulative. Common stock, par $5, 100,000 shares issued 50,000 shares outstanding. It paid no dividends in its first year of existence. In 2010, its second year of existence, the board of directors of The Candle Barn declared a total dividend of $1,800,000 that was paid to the holders of preferred and common stock. What was the amount of the dividend paid in 2010 on each share of preferred stock? A. $16.00 B. $ 8.00 C. $12.00 D. None of these is correct.


69. Retained earnings A. is an asset. B. has a debit balance for a successful corporation. C. represents the future dividend liability of the company. D. represents the income that has been earned by the company, less any dividends declared since the first day of operations.


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70. CBA Company reported total stockholders' equity of $85,000 on its balance sheet dated December 31, 2008. During the year ended December 31, 2009, it reported a net income of $10,000, declared and paid a cash dividend of $2,000, and issued additional capital stock of $20,000. Therefore, total stockholders' equity at December 31, 2010, was A. $117,000. B. $113,000. C. $109,000. D. $101,000.


71. Raceway Company reported the following balance sheet amounts at December 31, 2009

The total amount of retained earnings on December 31, 2009, was A. $50,000. B. $40,000. C. $30,000. D. $20,000.


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72. Before the journal entry to record income tax and before the closing entries were recorded at the end of the accounting period (December 31, 2009), the following data were taken from the accounts of BestDeals Corporation:

The total amount of stockholders' equity that should be reported on the balance sheet dated December 31, 2009, is A. $278,000. B. $398,000. C. $576,000. D. $614,000.


73. Which of the following statements is false? A. Issuance of stock creates cash inflow connected to financing activities. B. Payment of a cash dividend creates cash outflow connected to investing activities. C. Repurchase of the company's stock, called treasury stock, creates cash outflow connected to financing activities. D. All other answers are false.


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74. Which of the following is true? A. Cash dividends reduce cash from operating activities. B. Cash from financing activities will increase when treasury shares are reissued. C. Issuance of stock would reduce cash from financing activities. D. Repurchase of treasury shares would create a decrease in cash from investing activities.


75. Which of the following is false? A. Cash from financing activities increases when treasury shares are reissued. B. Cash dividends decrease cash from financing activities. C. Cash from investing activities decreases when we reacquire treasur y shares. D. Issuance of a seasoned new issuance of stock increases cash flow from financing activities.


76. The following information was available for General Tech in 2009. What was the net effect on cash flows connected to financing activities of the following amounts?

A. $768,280 increase. B. $768,280 decrease. C. $468,896 decrease. D. $617,224 decrease.


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77. Which of the following accounts would appear in the general ledger of a partnership? A. Retained earnings account. B. Dividends paid account. C. Common stock accounts. D. Drawings accounts.


78. A primary advantage of a general partnership, compared with a corporation, does not include A. ease of formation. B. limited liability for the owners. C. no income tax on the business itself. D. complete control by the partners.


79. Which of the following is true about a proprietorship? A. The capital account is used to record only the investments of the owner. B. The drawing account records distribution of assets to the proprietor. C. A proprietorship is a separate legal entity from the owner. D. A proprietorship is subject to income tax.


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80. Which of the following is true about a partnership? A. One capital and drawing account is used for each partnership. B. The capital account is used to record each partner's investment and their designated share of the earnings. C. Partnerships are subject to income taxes. D. The drawings account is closed to retained earnings at the end of the period.


Essay Questions

81. Constance Corporation reported a $750,000 balance in its par value common stock account at the end of 2009. The company held 50,000 shares of its own stock and had 700,000 shares outstanding. Calculate the par value per share of the company's stock. $750,000/ (50,000 + 700,000) = $1.00 per share


82. The charter of Delta Corporation specified a maximum of 25,000 shares of common stock. At the current date, 5,000 shares remain unissued, and 2,000 of the issued shares have been repurchased and are still held by Delta. Calculate the number of shares:


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83. DRP, Inc., sold and issued 50,000 shares of its own preferred stock (par $50) at $110, and 200,000 shares of its own common stock (no par) at $40. Cash was collected in full and all of the stock was issued. Give the required journal entry.


84. The balance sheet at December 31, 2009, showed the following data for ASC Corporation:

Calculate the number of shares: A. Issued B. Unissued C. Treasury stock D. Authorized E. Outstanding

AACSB Tag: Analytic Difficulty: Easy L.O.: 3

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Chapter 011: Reporting and Interpreting Owner's Equity 85. Three dates are described below.


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86. At the end of 2008, Washington Corporation reported a $40,000 balance in its common stock account (par value $1 per share). The treasury stock account showed $720 (cost $6 per share). No dividends were paid during the first two years. During 2008 the company declared and paid a cash dividend at $1.50 per share. Calculate the total amount of the 2008 cash dividend. [($40,000/$1 per share)

($720/ $6)]

$1.50 = $59,820


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87. Survivor Company was formed on January 1, 2008 by selling and issuing 20,000 shares of common stock at $15 per share. On December 1, 2009, the company declared a cash dividend of $10,000 which will be paid in cash on January 15, 2010. The annual accounting period ends December 31. A. Give the journal entry to record the sale and issuance of the common stock on January 1, 2008, for each of the following independent assumptions: 1. The common stock has a par value of $10 per share. 2. The common stock was no par with a stated value of $5 per share. 3. The common stock was no par and no stated value. B. Give the journal entry to record the dividend declaration on December 1, 2009. C. Show the journal entry to record payment of the dividend on January 15, 2010.


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88. Contrast the economic effects of a cash dividend (declared and paid) with a stock dividend (declared and issued) on the distributing corporation by completing the following chart by placing "X" where appropriate.


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89. The following information is available for Bradford Bikes for the years 2009 and 2008:

A. Calculate the dividend yield ratio for both 2009 and 2008. B. Interpret the yield ratio in terms of whether it is high or low, whether it indicates a steady dividend policy, and whether Bradford Bikes appears to be growing or stagnant. A. Dividend yield in 2009 is 1.6% ($.85/$53.00) and 2008 is 1.5% ($.63/$41.50) B. The dividend yield paid as an immediate return to Bradford Bikes's stockholders is low in comparison to the market price investors are willing to pay for their shares of stock. However, they are paying out about 30% of their current earnings as dividend return to their investors. It appears Bradford Bikes increased their dividends to boost the market price of their stock.


90. The following information is available for Italiano Ices for the years 2009 and 2008:

A. Calculate the dividend yield for both 2009 and 2008. B. Does the dividend yield appear to be low, moderate or high and what caused the change in the yield from 2008 to 2009? A. In 2009, the dividend yield was 2.6% and in 2008, it was 2.0%. B. The yield appears to be on the low side, which means the company is reinvesting in growth of operations and earnings to improve the price performance. The ratio increased primarily because the market price of the stock dropped almost $5 per share in 2009 even though the dividends went up $.12 per share.


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Chapter 011: Reporting and Interpreting Owner's Equity 91. Tractor Corporation was just formed. The following accounts of Tractor Corporation, with code letters, are needed to record the transactions given below. You are to indicate the appropriate journal entry for each transaction by entering the code letters and the correct amounts. The transactions are independent unless otherwise stated.

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Chapter 011: Reporting and Interpreting Owner's Equity 92. HighRise Company reported the following amounts of contributed capital in the stockholders' equity accounts as of January 1, 2010:

Indicate the journal entry required to record each of the following transactions by entering the letter code corresponding to each account to be debited and credited and the amount of each debit and credit. The transactions are independent unless otherwise stated.

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Chapter 011: Reporting and Interpreting Owner's Equity 93. On January 1, 2008, the stockholders' equity section of Gibbons Corporation's balance sheet showed the following

During the year, 2008, the accounts showed the following summarized transactions (assume they occurred in the order given): (1) Issued a 10% stock dividend; 1,000 shares issued when the market price was $12. (2) Purchased treasury stock (200 shares at $11). (3) Declared and paid a cash dividend of $19,800. (4) Net income, $30,000. The stockholders' equity section of the balance sheet at December 31, 2008, should report the following:

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*$160,000

$19,800 – (1,000 shares

$12) + $30,000 = $158,200

AACSB Tag: Analytic Difficulty: Hard L.O.: 6

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94. On January 1, 2009, the accounts of Mac Corporation showed the following:

During 2009, the following transactions occurred affecting stockholders' equity (in t he order given): A. Issued a 100% stock dividend when the market price was at $5 per share. B. Purchased treasury stock, 1,000 shares at a total cost of $8,000. C. Declared and paid cash dividends, $15,000. D. Net income for 2009, $25,000. Required: The stockholders' equity section of the balance sheet for the company must be prepared for the December 31, 2009 balance sheet. It is given below with certain amounts missing. Supply the missing amounts by entering them in the blanks.

(1) ($60,000/$2) = 30,000 shares 100% stock dividends = 60,000 shares (2) 60,000 shares $1 = $60,000 (3) $60,000 (4) $60,000 + $60,000 = $120,000 (5) $140,000 (stock dividend, 30,000 shares $1) (cash dividend, $15,000) + net income, $25,000 = $120,000 (6) Treasury stock, shares, 1,000 (7) $8,000 (cost) (8) $120,000 + $120,000 $8,000 = $232,000


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95. In December 31, 2009, Brave Corporation reported the following on its balance sheet:

Fill in all the blanks for the stockholders' equity section of the balance sheet.


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96. Lopez Corporation reported the following in its December 31, 2009, balance sheet:

Fill in all the blanks for the stockholders' equity section of the balance sheet.


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97. During 2009, Sanders Corporation made the following journal entry to record the declaration and payment of a cash dividend:

The total par values of common and preferred stock outstanding were $70,000 and $40,000, respectively. No dividends were declared or paid during 2008. There are 1,000 shares of common treasury stock. A. If the preferred stock is noncumulative, calculate the current dividend rate on the preferred stock. B. If the preferred stock is cumulative, calculate the current dividend rate on the preferred stock. A. $40,000 Rate = $3,600; Rate = 9% B. 2 ($40,000 Rate) = $3,600 ($40,000 Rate) = $1,800 Rate = 4.5% or 9% [from part (A.]/2 = 4.5%


98. Wedge Corporation has the following capital stock outstanding: Common stock, par $1, 250,000 shares. 8% preferred stock, par $100, 5,000 shares, cumulative, with 2 years in arrears excluding the current year. Cash dividends of $150,000 were declared and paid near the end of the current year. A. Calculate total dividends received by the preferred stockholders. B. Calculate total dividends received by the common stockholders. A. Preferred: (5,000 shares $100 8%) 3 = $120,000 B. Common: $150,000 $120,000 = $30,000


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99. Marlin, Inc., declared a cash dividend of $40,000 in 2009 when the following stocks were outstanding:

No dividends were declared or paid during the prior year. Compute the amount of cash that would be paid to each stockholder group under each of the following separate cases.


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100. Identify the effects on cash flow from financing activities of the following activities as increasing (+), decreasing ( ) or having no effect on financing cash flows:

AACSB Tag: Analytic Difficulty: Hard L.O.: 8

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Matching Questions

101. Match the items with the definitions. 1. Stock that may, at the option of the holder, be turned in for another security 2. The difference between total shares issued and total shares authorized 3. The difference between the issue price and par value 4. Stock on which dividends in arrears must be paid prior to any current dividends 5. Stock that has specified rights over common stock 6. Stock that has been issued, repurchased, and is held by the corporation

Convertible stock 1 Treasury stock 6 Preferred stock 5 Capital in excess o par value 3 Unissued shares 2 Cumulative stock 4


102. Match the terms with the descriptions below. 1. That portion of corporate capital required b y statute to be retained in the business for protection of creditors 2. Represents the total interests of all parties in the properties of the business. It is the sum of the liabilities and stockholders' equity 3. The total equity at any given time of the legal owners of the enterprise 4. The investment made by the owners of the corporation AACSB Tag: Relative Thinking Difficulty: Easy L.O.: 2

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Total assets 2 Contributed capital 4 Stockholders' equity 3 Legal capital 1


103. Match the terms with the definitions below. 1. No par stock with an assigned "value" 2. Stock with specified differences from the basic stock 3. Stock that is limited to a specified dividend rate per year 4. Stock having no minimum amount that must be paid in at first sale and issuance 5. Authorized but unissued shares of stock 6. The basic issue of stock; the residual equity 7. Stock that has been issued, repurchased, and is held by the corporation 8. Stock on which dividends in arrears must be paid before current dividends can be paid

None of the answers 7 None of the answers 5 Preferred stock, noncumulative 3 No par stock Common stock Preferred stock, cumulative No par, stated value stock

4 6 8 1

Preferred stock 2


104. This question relates to stockholders' equity. For each item listed, indicate its best description. 1. Preferred stock 2. Retained earnings 3. No par stock 4. Contributed capital 5. Legal capital 6. Cumulative dividends not yet paid 7. Treasury stock 8. Common stock 9. Charter 10. By source

None of the answers Represents the residual equity and is voting stock. Specified by state law. The basic concept followed in accounting and reporting stockholders' equity. Distinguished by special equity provisions.

4

Does not create capital in excess of par value. The legal document authorizing a corporation. The corporation's own stock; issued, repurchased, and still held. Cumulative net income less cumulative dividends declared. Dividends in arrears.

3 9


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8 5 10 1

7 2 6

Test Bank Financial Accounting 6E by Libby Chapter 11

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