Equity

During the current year, Young and Zinc maintained average capital balances in their partnership of $160,000 and $100,000, respectively. The partners receive 10% interest on average capital balances, and residual profit or loss is divided equally. Partnership profit before interest was $4,000. By what amount should Zinc's capital account change for the year? A $ 1,000 decrease. B $ 2,000 increase. C $11,000 decrease. D $12,000 increase.

A $ 1,000 decrease. Young received $16,000 ($160,000 × 10%) and Zinc received $10,000 ($100,000 × 10%) for the interest on average capital balances. This makes the residual loss $22,000 ($4,000 - $16,000 - $10,000). As the residual loss is evenly divided between the two partners, Zinc gets $11,000 of loss. Zinc's interest allowance less Zinc's portion of the residual loss is the change in Zinc's capital balance. $10,000 - $11,000 = $1,000 decrease.

On April 1 of the current year, Hyde Corp., a newly formed company, had the following stock issued and outstanding: Common stock, no par, $1 stated value, 20,000 shares originally issued for $30 per share. Preferred stock, $10 par value, 6,000 shares originally issued for $50 per share. Hyde's April 1 statement of stockholders' equity should report # Common stock Preferred stock Additional paid-in capital A $ 20,000 $ 60,000 $820,000 B $ 20,000 $300,000 $580,000 C $600,000 $300,000 $0 D $600,000 $ 60,000 $240,000

A $ 20,000 $ 60,000 $820,000 APIC = $580,000 + $240,000 = $820,000. If Hyde has only one APIC account, the issuance of the common and preferred stock would be recorded as follows. Common Stock (20,000 × $1) 20,000 Additional Paid-In Capital (to balance) 580,000 Preferred Stock (6,000 × $10) 60,000 Additional Paid-In Capital (to balance) 240,000

Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a 30% stock dividend. The market value was $50 per share, the par value was $10, and the average issue price was $30 per share. By what amount will Universe decrease stockholders' equity for the dividend? A $0 B $1,500,000 C $4,500,000 D $7,500,000

A $0 Stock dividends operate to transfer a part of the retained earnings to contributed capital (capitalization of retained earnings). In recording the stock dividend, a charge is made to retained earnings (thereby making a portion of retained earnings no longer available for distribution) and credits are made to paid-in capital accounts

Zinc Co.'s adjusted trial balance at December 31 includes the following account balances: Common stock, $3 par $600,000 Additional paid-in capital 800,000 Treasury stock, at cost 50,000 Net unrealized loss on available-for-sale marketable debt securities 20,000 Retained earnings: Appropriated for uninsured earthquake losses 150,000 Retained earnings: Unappropriated 200,000 What amount should Zinc report as total stockholders' equity in its December 31 balance sheet? A $1,680,000 B $1,720,000 C $1,780,000 D $1,820,000

A $1,680,000 Common stock, $3 par $600,000 Additional paid-in capital 800,000 Total paid-in capital $1,400,000 Retained earnings, appropriated 150,000 Retained earnings, unappropriated 200,000 Total retained earnings 350,000 Less: Treasury stock, at cost (50,000) Less: Net unrealized loss on AFS debt securities (20,000) Total stockholders' equity $1,680,000

East Co. issued 1,000 shares of its $5 par common stock to Howe as compensation for 1,000 hours of legal services performed. Howe usually bills $160 per hour for legal services. On the date of issuance, the stock was trading on a public exchange at $140 per share. By what amount should the additional paid-in capital account increase as a result of this transaction? A $135,000 B $140,000 C $155,000 D $160,000

A $135,000 Thus, the increase in Additional Paid-in Capital as a result of the transaction is the excess of the fair value over the par value of the common stock multiplied by the number of common shares issued [i.e., $140 - $5 = $135 × 1,000 = $135,000].

The following condensed balance sheet is presented for the partnership of Smith and Jones, who share profits and losses in the ratio of 60:40, respectively: Other assets $450,000 Smith, loan 20,000 $470,000 Accounts payable $120,000 Smith, capital 195,000 Jones, capital 155,000 $470,000 The partners have decided to liquidate the partnership. If the other assets are sold for $385,000, what amount of the available cash should be distributed to Smith? A $136,000 B $156,000 C $159,000 D $195,000

A $136,000 450,000-385,000=65,000 65,000*60%=39,000 195,000-39,000-20,000(loan)=136,000 470-450 = 20 Smith's capital balance of $195,000 is reduced by his $20,000 loan from the partnership ($195,000 - $20,000). The cash available to be distributed to each partner is determined after the loss on the sale of other assets is figured and the payment of liabilities. $175,000 - $39,000 = $136,000.

On May 1, Cobb and Mott formed a partnership and agreed to share profits and losses in the ratio of 3:7, respectively. Cobb contributed a parcel of land that cost him $10,000. Mott contributed $40,000 cash. The land was sold for $18,000 on that same date, immediately after formation of the partnership. What amount should be recorded in Cobb's capital account on formation of the partnership? A $18,000 B $17,400 C $15,000 D $10,000

A $18,000 Using historical costs for assets such as inventory, land, or equipment would be inequitable to any partner investing appreciated property. Therefore, the contribution of noncash assets to a partnership should be recorded based on fair values. The land was sold on the same date for $18,000 so that would be used for its fair value amount.

On May 18 of the current year, Sol Corp.'s board of directors declared a 10% stock dividend. The market price of Sol's 3,000 outstanding shares of $2 par value common stock was $9 per share on that date. The stock dividend was distributed on July 21, of this year, when the stock's market price was $10 per share. What amount should Sol credit to additional paid-in capital for this stock dividend? A $2,100 B $2,400 C $2,700 D $3,000

A $2,100 Retained earnings [(3,000 × 10%) × $9 FMV] 2,700 Common stock dividend distributable [(3,000 × 10%) × $2 PV] 600 Additional paid-in capital (to balance) 2,100 To record the declaration of the 10% stock dividend. The declaration of a'small' stock dividend (i.e., less than 20-25% of the number of common shares outstanding) should be recorded by capitalizing a portion of retained earnings equal to the fair value of the shares to be issued.

During the previous year, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110 per share. One share of preferred stock can be converted into three shares of Brad's $25 par common stock at the option of the preferred shareholder. On December 31 of the current year, when the market value of the common stock was $40 per share, all of the preferred stock was converted. What amount should Brad credit to Common Stock and to Additional Paid-in Capital--Common Stock as a result of the conversion? # Common stock Additional paid-in capital A $375,000 $175,000 B $375,000 $225,000 C $500,000 $ 50,000 D $600,000 $0

A $375,000 $175,000 Common Stock should be credited for $375,000 [i.e., (5,000 × 3) × $25], the par value of the common shares issued to effect the conversion. Additional Paid-in Capital--Common Stock should be credited for $175,000, the excess of the carrying amount of the preferred stock converted over the par value of common shares issued to effect the conversion [i.e., (5,000 x $110) - $375,000].

On January 2 of the current year, Smith purchased the net assets of Jones' Cleaning, a sole proprietorship, for $350,000, and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy's cash-basis financial statements for the year ended December 31, Spiffy reported revenues in excess of expenses of $60,000. Smith's drawings during the year were $20,000. In Spiffy's financial statements, what amount should be reported as Capital--Smith? A $390,000 B $400,000 C $410,000 D $415,000

A $390,000 Capital--Smith, 1/2 (i.e., cost of net assets contributed by owner at 1/2) $ 350,000 Add: Income of sole proprietorship 60,000 Less: Smith's drawings (20,000) Capital--Smith, 12/31 $ 390,000

When preparing a draft of its year-end balance sheet, Mont, Inc., reported net assets totaling $875,000. Included in the asset section of the balance sheet were the following: Treasury stock of Mont, Inc., at cost, which approximates market value on December 31 $24,000 Idle machinery 11,200 Cash surrender value of life insurance on corporate executives 13,700 Allowance for decline in market value of available-for-sale debt investments 8,400 At what amount should Mont's net assets be reported in the December 31 year-end balance sheet? A $851,000 B $850,100 C $842,600 D $834,500

A $851,000 Net assets, before adjustments $875,000 Less cost of treasury stock (24,000) Net assets, 12/31 $851,000

Jones Co. had 50,000 shares of $5 par value common stock outstanding at January 1. On August 1, Jones declared a 5% stock dividend followed by a two-forone stock split on September 1. What amount should Jones report as common shares outstanding at December 31? A 105,000 B 100,000 C 52,500 D 50,000

A 105,000 Jones should report 105,000 shares outstanding (50,000 shares x 1.05 x 2)

Rudd Corp. had 700,000 shares of common stock authorized and 300,000 shares outstanding at December 31 of the previous year. The following events occurred during the current year: January 31 Declared 10% stock dividend June 30 Purchased 100,000 shares August 1 Reissued 50,000 shares November 30 Declared 2-for-1 stock split At December 31 of the current year, how many shares of common stock did Rudd have outstanding? A 560,000 B 600,000 C 630,000 D 660,000

A 560,000 Common shares outstanding, 12/31, previous year 300,000 10% stock dividend, 1/31 (300,000 × 10%) 30,000 Treasury shares purchased, 6/30 (100,000) Treasury shares reissued, 8/1 50,000 2-for-1 stock split, 11/30 (300,000 + 30,000 - 100,000 + 50,000) 280,000 * 2 = 560,000 Common shares outstanding, 12/31, current year 560,000

An accumulated balance of other comprehensive income (OCI) is a component of which of the following? A Corporation's equity B Partnership's equity C Sole proprietorship's equity D All of the above

A Corporation's equity A corporation's equity consists of three main components: contributed capital, which includes capital stock and additional paid-in capital; retained earnings; and the accumulated balance of OCI.

When property other than cash is invested in a partnership, at what amount should the noncash property be credited to the contributing partner's capital account? A Fair value at the date of contribution. B Contributing partner's original cost. C Assessed valuation for property tax purposes. D Contributing partner's tax basis.

A Fair value at the date of contribution. All identifiable assets (e.g., cash, inventory, land, patents, etc.) contributed to a partnership are recorded by the partnership at their fair values at the date of contribution.

If the agreement specifies how profits are to be shared, but is silent as to losses, how should losses be shared? A In the same manner as profits B According to the ratio of partners' capital balances as of a particular date C According to the partners' salaries or bonuses D Equally, or in a specified ratio

A In the same manner as profits If the agreement specifies how profits are to be shared, but is silent as to losses, losses are to be shared in the same manner as profits. Conversely, if the agreement specifies the sharing of losses, but is silent as to profits, profits are shared in the same manner as losses.

The per-share amount must be reported on the face of a public company's income statement for which of the following items? A Income from continuing operations. B Preferred stock dividend. C U.S. Treasury Stock. D Compensation effect of fair value on stock options.

A Income from continuing operations. The earnings per share must be reported on the face of a public company's income statement for the following items: Income from continuing operations. Income from discontinued operations. Net income.

On November 2 of year 2, Finsbury, Inc. issued warrants to its stockholders giving them the right to purchase additional $20 par value common shares at a price of $30. The stockholders exercised all warrants on March 1 of year 3. The shares had market prices of $33, $35, and $40 on November 2, year 2, December 31, year 2, and March 1, year 3, respectively. What were the effects of the warrants on Finsbury's additional paid-in capital and net income? # Additional paid-in capital Net income A Increased in year 3 No effect B Increased in year 2 No effect C Increased in year 3 Decreased in years 2 and 3 D Increased in year 2 Decreased in years 2 and 3

A Increased in year 3 No effect Stock rights have no impact on net income. No entry is required when stock rights are issued to existing stockholders (other than a memorandum entry). Therefore, APIC was not affected when the stock rights were issued. Stock issued upon the exercise of stock rights is recorded the same as any other issuance; therefore, when the stock rights were exercised APIC increased by the excess of the $30 exercise price over the $20 par value of the common stock.

On January 15 of the current year, Rico Co. declared its annual cash dividend on common stock for the year ended January 31. The dividend was paid on February 9 to stockholders of record as of January 28 of this year. On what date should Rico decrease retained earnings by the amount of the dividend? A January 15 B January 31 C January 28 D February 9

A January 15 The date of declaration date is the date on which dividends are declared by the board of directors. Declared cash dividends are a liability. The journal entry required at the date of declaration includes a debit (decrease) to Retained Earnings .

Aldrich Co. distributes cash dividends to its shareholders during the current year. The dividends are declared on March 9 and are payable to shareholders as of the date of record, which is April 15. The dividends are actually paid on May 19. At which of the following dates would the dividends become a liability to Aldrich? A March 9 B April 15 C May 19 D December 31

A March 9 The date of declaration, March 9, is the date on which dividends are formally declared by the board of directors and the declared dividends become a liability. On that date Aldrich would debit Retained Earnings and credit Dividends Payable. The date of record, April 15, is the date used to establish those stockholders who will receive the declared dividends.

Aldrich Co. distributes cash dividends to its shareholders during the current year. The dividends are declared on March 9 and are payable to shareholders as of the date of record, which is April 15. The dividends are actually paid on May 19. At which of the following dates would the dividends become a liability to Aldrich? A March 9. B April 15. C May 19. D December 31.

A March 9. Dividends become a liability at the date of declaration. On this date, the board of directors commit to the dividend. On March 9, the liability will be recorded. Retained earnings XXX Dividends payable XXX

Capital stock is best described as which of the following? A The par or stated value of the stock purchased by owners B Paid-in capital in excess of par or stated value C Retained earnings D The stock always used to build infrastructure

A The par or stated value of the stock purchased by owners Capital stock is the par or stated value of the stock purchased by owners.

Each of the following transactions will cause a decrease in stockholders' equity, except A The sale of treasury stock at less than cost B The declaration of a cash dividend C A loss on the sale of a discontinued segment D A loss from a foreign currency translation adjustment

A The sale of treasury stock at less than cost Each of the following transactions will cause a decrease in stockholders' equity: The declaration of a cash dividend. Dividends will reduce retained earnings in equity. A loss on the sale of a discontinued segment. A loss from a foreign currency translation adjustment.

Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The par value of the stock is $1 per share. During January of the current year, Porter bought back 500 shares at $6 per share, which were reported by Porter as treasury stock. The treasury stock shares were reissued later in the current year at $10 per share. Porter used the cost method to account for its equity transactions. What amount should Porter report as paid-in capital related to its treasury stock transactions on its balance sheet for the current year? A $ 1,500 B $ 2,000 C $ 4,500 D $20,000

B $ 2,000 Porter reissued the 500 shares of treasury stock at a price ($10 per share) in excess of the acquisition cost ($6 per share). The excess ($10 - $6 = $4 per share × 500 shares = $2,000) is credited to the PIC account related to treasury stock on Porter's balance sheet for the current year.

On December 30 of the current year, Hale Corp. paid $400,000 cash and issued 80,000 shares of its $1 par value common stock to its unsecured creditors on a pro rata basis pursuant to a reorganization plan under Chapter 11 of the bankruptcy statutes. Hale owed these unsecured creditors a total of $1,200,000. Hale's common stock was trading at $1.25 per share on December 30. As a result of this transaction, Hale's total stockholder's equity had a net increase of A $1,200,000 B $ 800,000 C $ 100,000 D $ 80,000

B $ 800,000 Alternatively, this question can be solved using the accounting equation. Since assets decreased by $400,000, and liabilities decreased by $1,200,000, Hale's stockholders' equity must have increased by $800,000.

The following changes in Vel Corp.'s account balances occurred during the current year: Increase Assets $89,000 Liabilities 27,000 Capital stock 60,000 Additional paid-in capital 6,000 Except for a $13,000 dividend payment and the year's earnings, there were no changes in retained earnings for the year. What was Vel's net income for the year? A $ 4,000 B $ 9,000 C $13,000 D $17,000

B $ 9,000 During the year, stockholders' equity increased by $62,000 (i.e., $89,000 - $27,000). Since paid-in capital increased by $66,000 (i.e., $60,000 + $6,000), retained earnings must have decreased by $4,000 (i.e., $66,000 - $62,000). Since the only charge to retained earnings was for a $13,000 dividend payment, net income for the year must have been $9,000.

Long Co. had 100,000 shares of common stock issued and outstanding at January 1 of the current. During the year, Long took the following actions: March 15 -- Declared a 2-for-1 stock split, when the fair value of the stock was $80 per share. December 15 -- Declared a $.50 per share cash dividend. In Long's statement of stockholders' equity for the current year, what amount should Long report as dividends? A $ 50,000 B $100,000 C $850,000 D $950,000

B $100,000 Common shares outstanding, 1/1 100,000 Adjustment for 2-for-1 stock split, 3/15 × 2 = Common shares outstanding, declaration date 200,000 Times: Cash dividend per common share × $0.50 = Cash dividends declared during year $100,000

On January 2 of the current year, Lake Mining Co.'s board of directors declared a cash dividend of $400,000 to stockholders of record on January 18 and payable on February 10 of the current year. The dividend is permissible under law in Lake's state of incorporation. Selected data from Lake's previous year December 31 balance sheet are as follows: Accumulated depletion $100,000 Capital stock 500,000 Additional paid-in capital 150,000 Retained earnings 300,000 The $400,000 dividend includes a liquidating dividend of A $0. B $100,000. C $150,000. D $300,000.

B $100,000. Any dividend that does not come out of retained earnings is a reduction of corporate paid-in capital and, to that extent, is a liquidating dividend. Dividend $400,000 Retained earnings (300,000) Liquidating dividend $100,000

Park Corp.'s stockholders' equity accounts at December 31 of the previous year were as follows: Common stock, $20 par $8,000,000 Additional paid-in capital $2,550,000 Retained earnings $1,275,000 All shares of common stock outstanding at December 31 of the previous year were issued originally for $26 a share. On January 4 of the current year, Park reacquired 20,000 shares of its common stock at $24 a share and retired them. Immediately after the shares were retired, the balance in additional paid-in capital would be A $2,430,000 B $2,470,000 C $2,510,000 D $2,590,000

B $2,470,000 Immediately after the shares were retired, the APIC balance would be $2,470,000 ($2,550,000 - $120,000 + $40,000). Common Stock (20,000 × $20 PV) 400,000 APIC - CS [20,000 × ($26- $20 PV)] 120,000 Cash (20,000 × $24) 480,000 APIC - Retirement of CS (to balance) 40,000

On June 30 of the current year the condensed balance sheet for the partnership of Eddy, Fox, and Grimm, together with their respective profit and loss sharing percentages, was as follows: Assets, net of liabilities $320,000 Eddy, capital (50%) 160,000 Fox, capital (30%) 96,000 Grimm, capital (20%) 64,000 Total Equity $320,000 Hamm is admitted as a new partner with a 25% interest in the capital of the new partnership for a cash payment of $140,000. Total goodwill implicit in the transaction is to be recorded. Immediately after the admission of Hamm, Eddy's capital account balance should be A $280,000 B $210,000 C $160,000 D $140,000

B $210,000 The goodwill method looks upon this transaction as an indication that the partnership possesses an actual value of $560,000 ($140,000/25%) after Hamm's admission. Since, even with Hamm's investment, the partnership is reporting only $460,000 ($320,000 + $140,000) in net assets, a valuation adjustment of $100,000 is required. This adjustment is recorded as goodwill and is allocated to the original partners—Eddy, Fox, and Grimm—by their respective profit and loss sharing percentages. Immediately after admission of Hamm, Eddy's capital account balance is $210,000 ($160,000 + $50,000). Goodwill 100,000 Eddy, Capital ($100,000 x 50%) 50,000 Fox, Capital ($100,000 x 30%) 30,000 Grimm, Capital ($100,000 x 20%) 20,000

Plack Co. purchased 10,000 shares (2% ownership) of Ty Corp. on February 14 of the current year. Plack received a stock dividend of 2,000 shares on April 30 when the market value per share was $35. Ty paid a cash dividend of $2 per share on December 15. In its current year income statement, what amount should Plack report as dividend income? A $20,000 B $24,000 C $90,000 D $94,000

B $24,000 A stock dividend is not income under the cost or equity methods of accounting for equity investments, but it does impact the number of shares owned at the dividend declaration date. (10,000 + 2,000) × $2 = $24,000.

Jensen performed legal services to assist Balm Co. in accomplishing its initial organization. Jensen accepted 1,000 shares of $5 par common stock in Balm as payment for his services. The Balm shares were not yet publicly traded, but they had a book value of $4 per share. Jensen provided 48 hours of service, which is normally billed at $125 per hour. By what amount should the common stock account increase? A $1,000 B $4,000 C $5,000 D $6,000

B $4,000 If fair values are not determinable, then appraised values or values set by the board of directors may be used. The fair value of the stock is not determinable because it is not yet traded publicly. The fair value of the services is $6,000 (48 hours × $125 per hour). The common stock account would increase by the 1,000 shares × $5 par value = $5,000. The remaining $1,000 would be an increase to the additional paid-in capital account.

Red and White formed a partnership in the previous year. The partnership agreement provides for annual salary allowances of $55,000 for Red and $45,000 for White. The partners share profits equally and losses in a 60/40 ratio. The partnership had earnings of $80,000 for the current year before any allowance to partners. What amount of these earnings should be credited to each partner's capital account? # Red White A $40,000 $40,000 B $43,000 $37,000 C $44,000 $36,000 D $45,000 $35,000

B $43,000 $37,000 Therefore, the profit or loss allocated to each partner should be calculated after deducting the salary allowances due to each partner. $20,000 × 60% = $12,000 Partnership Profit / Red / White Partnership profit prior to salary allowances $80,000 Deduct salary allowances (100,000) $55,000 $45,000 Residual partnership loss $(20,000) 60% of loss allocated to Red $55,000 (12,000) = $43,000 40% of loss allocated to White $45,000 (8,000) = 37,000 Credit to each partner's capital account $43,000 $37,000

The following stock dividends were declared and distributed by Sol Corp.: Percentage of common shares outstanding at declaration date Fair value Par value 10 $15,000 $10,000 28 40,000 30,800 What aggregate amounts should be debited to retained earnings for these stock dividends? A $40,800 B $45,800 C $50,000 D $55,000

B $45,800 On the other hand, the issuance of a "large" stock dividend (i.e., more than 20 to 25% of the number of shares outstanding) should be recorded by capitalizing a portion of retained earnings equal to the par value of the shares issued. Thus, Retained Earnings should be debited for (1) the fair value of the 10% stock dividend ($15,000) and (2) the par value of the 28% stock dividend ($30,800), for a total of $45,800.

Blau and Rubi are partners who share profits and losses in the ratio of 6:4, respectively. On May 1 of the current year their respective capital accounts were as follows: Blau $60,000 Rubi $50,000 On that date, Lind was admitted as a partner with a one-third interest in capital and profits for an investment of $40,000. The new partnership began with total capital of $150,000. Immediately after Lind's admission, Blau's capital should be A $50,000 B $54,000 C $56,667 D $60,000

B $54,000 Because the total capital of the partners following the admission of Lind will be equal to the sum of the original partner's capital balances plus the cash contributed by Lind (i.e., $60,000 + $50,000 + $40,000 = $150,000), no goodwill is recognized. Blau's capital balance, pre-admission $60,000 Credit to Lind for 1/3 of new partnership capital ($150,000 × 1/3) $50,000 Less: Cash contributed by Lind 40,000 Bonus to Lind from Blau and Rubi $10,000 Times Blau's share of bonus × 60% = Decrease in Blau's capital account (6,000) Blau's capital balance, post admission $54,000

A company had 400,000 shares of common stock issued and outstanding on January 1, year 1, and had the following equity transactions for year 1: Transactions Date Issued 200,000 new shares for cash April 1 Issued new shares as a result of a 2-for-1 stock split July 1 Purchased 300,000 shares treasury stock for cash October 1 What should the company use as the denominator for the calculation of basic earnings per share for the year ended December 31, year 1? A 1,650,000 B 1,025,000 C 1,325,000 D 1,075,000

B 1,025,000 1-Jan Outstanding 400,000 shares 12 months 400,000 x 12 /12 400,000 1-Apr Issued 200,000 new shares for cash 9 months 200,000 x 9 /12 150,000 1-Jul Issued new shares as a result of a 2 for 1 stock split (retroactively adjusted from the time of issue) Retroactively (400,000 x 2) + (150,000 x 2) 1,100,000 1-Oct Purchased as treasury stock 300,000 3 months 300,000 x 3 /12 -75,000

If 500 shares of $10 par value common stock are sold for $40 per share, the entry would be debit cash $20,000 and credit which of the following accounts for how much? A Common Stock $20,000 B Common Stock $5,000; Additional Paid-in Capital—Common $15,000 C Common Stock $15,000; Retain Earnings $5,000 D Retained Earnings $5,000; Common Stock $15,000

B Common Stock $5,000; Additional Paid-in Capital—Common $15,000 Common Stock is credited $5,000 (500 shares × $10 per share), with the remaining $15,000 credited to Additional Paid-in Capital.

Preferred stock with a _______________ feature allows preferred shareholders to exchange shares, at their option, for common stock. A Redeemable B Convertible C Callable D None of the above

B Convertible A redeemable feature means that preferred shareholders may redeem shares, at their option, at a specified price per share. A convertible feature means that preferred shareholders may exchange shares, at their option, for common stock.

A corporation declared a dividend, a portion of which was liquidating. How would this declaration affect each of the following: # Additional paid-in capital Retained earnings A Decrease No effect B Decrease Decrease C No effect Decrease D No effect No effect

B Decrease Decrease Any dividend not based on earnings must be a reduction of additional paid-in capital and, to that extent, is a liquidating dividend. Retained earnings XX Additional paid-in capital XX Cash dividends payable XX

A company declared a cash dividend on its common stock on December 15 of the previous year, payable on January 12 of the current year. How would this dividend affect stockholders' equity on the following dates? # December 15, previous year December 31, previous year January 12, current year A Decrease No effect Decrease B Decrease No effect No effect C No effect Decrease No effect D No effect No effect Decrease

B Decrease No effect No effect A cash dividend reduces retained earnings (and, therefore, net stockholders' equity) on the date of declaration. A cash dividend will have no effect on net stockholders' equity at the date of distribution.

The Flat and Iron partnership agreement provides for Flat to receive a 20% bonus on profits before the bonus. Remaining profits and losses are divided between Flat and Iron in the ratio of 2 to 3, respectively. Which partner has a greater advantage when the partnership has a profit or when it has a loss? # Profit Loss A Flat Iron B Flat Flat C Iron Flat D Iron Iron

B Flat Flat When there is a profit, Flat receives 20% of the profits before the bonus and 40% of the remaining 80% (i.e., 32%), for a total of 52% of the profits. In loss situations, Flat receives only 40% of the loss. Thus Flat has a greater advantage whether the partnership has a profit or loss.

Under the goodwill method, when a new partner's asset contribution is _________ than the ownership interest s/he is to receive, the excess assets are accounted for as goodwill attributable to the _________. A Greater; new partner B Greater; old partners C Less; old partners D Less; new and old partners equally

B Greater; old partners When a new partner's asset contribution is greater than the ownership interest s/he is to receive, the excess assets are accounted for as goodwill attributable to the old partners.

Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year. Murphy reacquired 30,000 of those shares at a cost of $15 per share, and recorded the transaction using the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share, and recognized a $50,000 gain on its income statement on May 20. Which of the following statements is correct? A Murphy's comprehensive income for the current year is correctly stated. B Murphy's net income for the current year is overstated. C Murphy's net income for the current year is understated. D Murphy should have recognized a $50,000 loss on its income statement for the current year.

B Murphy's net income for the current year is overstated. The net income for the current year is overstated, because no gains or losses are recognized on treasury stock transactions.

How would a stock split affect each of the following? # Assets Total stockholders' equity Additional paid-in capital A Increase Increase No effect B No effect No effect No effect C No effect No effect Increase D Decrease Decrease Decrease

B No effect No effect No effect A stock split consists of a reduction in the par value per share, together with a proportional increase in the number of shares outstanding. For instance, in a 2-for-1 split, the par value per share is halved, while the number of shares outstanding is doubled. Total par value, additional paid-in capital, stockholders' equity, and total assets remain unchanged.

Regarding stock rights, which of the following situations requires a journal entry instead of just a memorandum entry? A Stock rights are issued to existing stockholders. B Stock rights are exercised. C Stock rights are expired. D All of the above

B Stock rights are exercised. An entry is required only when stock rights are exercised. Cash is debited for the number of common shares acquired times the exercise price of the shares. Common stock is credited for the par or stated value of the shares issued. Additional paid-in capital is credited for the excess of the cash received over the par or stated value of the shares.

On June 27 of the current year, Brite Co. distributed to its common stockholders 100,000 outstanding common shares of its investment in Quik, Inc., an unrelated party. The carrying amount on Brite's books of Quik's $1 par common stock was $2 per share. Immediately after the distribution, the market price of Quik's stock was $2.50 per share. In its income statement for the year ended June 30 what amount should Brite report as gain before income taxes on disposal of the stock? A $250,000 B $200,000 C $ 50,000 D $0

C $ 50,000 Fair value of distributed shares (100,000 × $2.50) $ 250,000 Less: Distributed shares' carrying amount (100,000 × $2.00) (200,000) Pretax gain on distributed shares $ 50,000

A company issued rights to its existing shareholders to purchase for $15 per share, 5,000 unissued shares of common stock with a par value of $10 per share. Common stock will be credited at: A $15 per share when the rights are exercised B $15 per share when the rights are issued C $10 per share when the rights are exercised D $10 per share when the rights are issued

C $10 per share when the rights are exercised A stock right issue generally is recorded by memorandum entry only (but must be disclosed in the financial statement notes). When the rights are exercised, common stock is credited at its par value, regardless of the option price or the stock's FMV. The difference between the option price and the par value of the stock (i.e., $15 - $10 = $5) is credited to Additional Paid-In Capital when the stock is issued.

In September of year 2, West Corp. made a dividend distribution of one right for each of its 120,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West's $50 variable rate preferred stock at an exercise price of $80 per share. On March 20 of year 6, none of the rights had been exercised, and West redeemed them by paying each stockholder $0.10 per right. As a result of this redemption, West's stockholders' equity was reduced by A $ 120 B $ 2,400 C $12,000 D $36,000

C $12,000 No entry (other than a memorandum entry) is made when stock rights are issued to existing stockholders. However, the redemption of the rights resulted in an outflow of cash. As this did not increase a noncash asset or reduce liabilities, it must affect an equity account. Stockholders' equity was reduced by 120,000 shares × $0.10 per share = $12,000.

The condensed balance sheet of Adams & Gray, a partnership, at December 31, year 1, follows: Current assets $250,000 Equipment (net) 30,000 Total assets $280,000 Liabilities 20,000 Adams, capital 160,000 Gray, capital 100,000 Total liabilities and capital $280,000 On December 31, year 1, the fair values of the assets and liabilities were appraised at $240,000 and $20,000, respectively, by an independent appraiser. On January 2, year 2, the partnership was incorporated and 1,000 shares of $5 par value common stock were issued. Immediately after the incorporation, what amount should the new corporation report as additional paid-in capital? A $275,000 B $260,000 C $215,000 D 0

C $215,000 Assets (at fair value) 240,000 Liabilities (at fair value) 20,000 Common stock (1,000 × $5) 5,000 Additional paid-in capital (to balance) 215,000

Avers and Smith formed a partnership. Avers contributed cash of $50,000. Smith contributed property with a $36,000 carrying amount, a $40,000 original cost, and a fair value of $80,000. The partnership assumed the $35,000 mortgage attached to the property. What should Smith's capital account be on the partnership formation date? A $36,000 B $40,000 C $45,000 D $80,000

C $45,000 The contributing partner's capital account is credited for the fair value of the property less the assumed mortgage. Smith's capital account would be the fair value of the property of $80,000 less the mortgage assumed by the partnership of $35,000, for a balance of $45,000.

On March 1 of the current year, Rya Corp. issued 1,000 shares of its $20 par value common stock and 2,000 shares of its $20 par value convertible preferred stock for a total of $80,000. At this date, Rya's common stock was selling for $36 per share, and the convertible preferred stock was selling for $27 per share. What amount of the proceeds should be allocated to Rya's convertible preferred stock? A $60,000 B $54,000 C $48,000 D $44,000

C $48,000 The amount of the proceeds received that should be allocated to the preferred stock is $48,000 [i.e., ($54,000 / $90,000) × $80,000]. Since the fair value is available for each class of security, the lump sum received should be allocated to the two classes of securities by their relative fair value, as follows: Fair value of common stock (1,000 × $36) $36,000 Fair value of preferred stock (2,000 × $27) 54,000 $90,000

Jensen performed legal services to assist Balm Co. in accomplishing its initial organization. Jensen accepted 1,000 shares of $5 par common stock in Balm as payment for his services. The Balm shares were not yet publicly traded, but they had a book value of $4 per share. Jensen provided 48 hours of service, which is normally billed at $125 per hour. By what amount should the common stock account increase? A $1,000 B $4,000 C $5,000 D $6,000

C $5,000 The compensatory stock option expense is reported by the company based on the estimated FV of the options when granted. On the execution date, the fair value of the services is $6,000 ($125 x 48 hours). Since Jensen received 1,000 shares of $5 par value Common Stock, $5,000 will be recorded as an increase to common stock with the excess of $1 per share or $1,000 to additional paid-in capital.

On February 1, Tory began a service proprietorship with an initial cash investment of $2,000. The proprietorship provided $5,000 of services in February and received full payment in March. The proprietorship incurred expenses of $3,000 in February, which were paid in April. During March, Tory drew $1,000 against the capital account. In the proprietorship's financial statements for the two months ended March 31, prepared under the cash basis method of accounting, what amount should be reported as capital? A $1,000 B $3,000 C $6,000 D $7,000

C $6,000 The balance in the capital account at March 31, is the beginning balance plus the service revenues received less the owner's draw. The expenses incurred in February and paid in April are not included in the calculation, as Tory has a cash basis of accounting. $2,000 + $5,000 - $1,000 = $6,000.

In the current year, on December 1, Nilo Corp. declared a property dividend of marketable securities to be distributed on December 31 to stockholders of record on December 15. On December 1 the marketable securities had a carrying amount of $60,000 and a fair value of $78,000. What is the effect of this property dividend on Nilo's current year retained earnings, after all nominal accounts are closed? A $0 B $18,000 increase C $60,000 decrease D $78,000 decrease

C $60,000 decrease A transfer of a nonmonetary asset to a stockholder in a non-reciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset equal to the difference between the fair value and carrying amount of the asset. After all nominal accounts (e.g., Gain on Disposition of Investment) are closed, the effect of this property dividend is to decrease Retained Earnings by $60,000 (i.e., $78,000 - $18,000). Nilo records the following entries at the declaration date.

Rice Co. was incorporated on January 1 of the current year with $500,000 from the issuance of stock and borrowed funds of $75,000. During this first year of operations, net income was $25,000. On December 15, Rice paid a $2,000 cash dividend. No additional activities affected owners' equity in the year. At December 31, Rice's liabilities had increased to $94,000. In Rice's December 31 balance sheet, total assets should be reported at A $598,000 B $600,000 C $617,000 D $692,000

C $617,000 Total assets equal the sum of liabilities and stockholders' equity. Total liabilities, 12/31 (given) $ 94,000 Proceeds from issuance of stock $500,000 Net income for the year 25,000 Cash dividend declared (2,000) Total stockholders' equity, 12/31 523,000 Total liabilities and stockholders' equity (and thus total assets) at 12/31 $617,000

On April 1 of the current year, Fay Corporation established an employee stock ownership plan (ESOP). Selected transactions relating to the ESOP during the year were as follows: On April 1, Fay contributed $30,000 cash and 3,000 shares of its $10 par common stock to the ESOP. On this date, the market price of the stock was $18 a share. On October 1, the ESOP borrowed $100,000 from Union National Bank and acquired 5,000 shares of Fay's common stock in the open market at $17 a share. The note is for one year, bears interest at 10%, and is guaranteed by Fay. On December 15, the ESOP distributed 6,000 shares of Fay common stock to employees of Fay in accordance with the plan formula. In its year-end income statement, how much should Fay report as compensation expense relating to the ESOP? A $184,000 B $120,000 C $84,000 D $60,000

C $84,000 Cash contributed $30,000 Common stock contributed (3,000 shares × $18 fair value) 54,000 ESOP compensation expense $84,00

Which of the following statements regarding legal capital is false? A The portion of contributed capital required by statute to be retained in the business for the protection of creditors is called legal capital. B Legal capital may not be used as a basis for dividends. C Acquisition of treasury stock is limited to the amount of legal capital. D The amount of legal capital cannot be reduced arbitrarily by the corporation.

C Acquisition of treasury stock is limited to the amount of legal capital. Acquisition of treasury stock is limited to the amount of retained earnings, not legal capital.

Two years ago Fogg, Inc. issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31 of the current year when Fogg acquired some of the issued shares for $20 per share and retired them. Which of the following statements correctly states an effect of this acquisition and retirement? A Current year net income is decreased. B Current year net income is increased. C Additional paid-in capital is decreased. D Retained earnings is increased.

C Additional paid-in capital is decreased. The effect of the acquisition and retirement of each common share is to decrease APIC by $10 (i.e., $15 - $5). A corporation cannot record a gain or loss on the acquisition and retirement of its own common stock. Retained earnings can be decreased, but never increased, as a result of the acquisition and retirement of its own common stock.

Which of the following financial instruments issued by a public company should be reported on the issuer's books as a liability on the date of issuance? A Cumulative preferred stock. B Preferred stock that is convertible to common stock five years from the issue date. C Common stock that contains an unconditional redemption feature. D Common stock that is issued at a 5% discount as part of an employee share purchase plan.

C Common stock that contains an unconditional redemption feature. Financial instruments can be issued with an unconditional obligation on the part of the issuer to redeem the instruments by transferring assets to the purchaser at a specified date or upon an event that is certain to occur (e.g., the death or termination of the individual who holds it).

If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be A Reported as a gain in the income statement. B Treated as a reduction in the carrying amount of remaining treasury stock. C Credited to additional paid-in capital. D Credited to retained earnings

C Credited to additional paid-in capital. Under the cost method, if treasury stock is sold at a price that exceeds its cost, the excess should be credited to Additional Paid-in Capital . The excess is not reported as a gain in the income statement or as a credit to Retained Earnings under either the cost or par methods. Retained earnings may be decreased, but never increased, by treasury stock transactions.

Which of the following statements regarding dividends on preferred stock is false? A If all or part of the stated dividend on cumulative preferred stock is not paid in a given year, the unpaid portion accumulates. B No dividends can be paid on common stock until the accumulated dividends are paid on cumulative preferred stock. C Dividends in arrears should be reported as a liability. D If a dividend on noncumulative preferred stock is not paid in a given year, the dividend is lost forever.

C Dividends in arrears should be reported as a liability. Dividends in arrears are not a liability; however, they should be disclosed parenthetically or in the footnotes to the financial statements.

A company issued rights to its existing shareholders without consideration. The rights allowed the recipients to purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the following accounts will be increased? # Common stock Additional paid-in capital A Yes Yes B Yes No C No No D No Yes

C No No No entry (other than a memorandum entry) is made when stock rights are issued to existing stockholders without consideration.

Which of the following would be reported in the income statement of a proprietorship? # Proprietor's draw Depreciation A Yes Yes B Yes No C No Yes D No No

C No Yes A sole proprietorship's equity consists of a single proprietor's equity account, Owner's Equity or Net Worth. This is the sum of the beginning capital balance, plus additional investments during the period, plus net income (or minus net loss) minus withdrawals.

When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill's interest exceeded Mill's capital balance. Under the bonus method, the excess A Was recorded as goodwill. B Was recorded as an expense. C Reduced the capital balances of Yale and Lear. D Had no effect on the capital balances of Yale and Lear.

C Reduced the capital balances of Yale and Lear. The final settlement of Mill's interest exceeded his capital balance. The excess payment represents Mill's share of the unrecorded goodwill of the partnership. Under the bonus method, this excess payment would be recorded as a decrease in the remaining partners' capital accounts.

A company whose stock is trading at $10 per share has 1,000 shares of $1 par common stock outstanding when the board of directors declares a 30% common stock dividend. Which of the following adjustments should be made when recording the stock dividend? A Treasury stock is debited for $300. B Additional paid-in capital is credited for $2,700. C Retained earnings is debited for $300. D Common stock is debited for $3,000.

C Retained earnings is debited for $300. When the stock dividend is large (greater than 25% of the outstanding shares) only the par or stated value of the additional shares is capitalized. In this case, debit Retained Earnings for $300; credit Common Stock for $300.

Which of the following is (are) true regarding dividends? A At the date of declaration, property dividends are recorded at the fair value of assets given up, and any difference between fair value and carrying amount of the asset is recorded as a gain or loss as a component of other comprehensive income. B Liquidating dividends represent a share in the profits of the company. C The shareholder has no income as a result of a stock dividend. D All of the above

C The shareholder has no income as a result of a stock dividend. The shareholder has no income as a result of the stock dividend, because the stock dividend (or stock split) is not a distribution division or severance of the corporate assets.

At December 31 of year 1 and year 2, Carr Corp. had outstanding 4,000 shares of $100 par value 6% cumulative preferred stock and 20,000 shares of $10 par value common stock. At December 31, year 1, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in year 2 totaled $44,000. Of the $44,000, what amounts were payable on each class of stock? # Preferred Stock Common Stock A $44,000 $0 B $36,000 $ 8,000 C $32,000 $12,000 D $24,000 $20,000

Cash dividends declared in year 2 $44,000 Dividends in arrears at 12/31, year 1 $12,000 Dividends for year 2 (4,000 × $100 × 6%) 24,000 = Cash dividends payable to preferred stock: (36,000) 44,000 - 36,000 = 8,000 Cash dividends payable to common stock $ 8,000

Abel and Carr formed a partnership and agreed to divide initial capital equally, even though Abel contributed $100,000 and Carr contributed $84,000 in identifiable assets. Under the bonus approach to adjust the capital accounts, Carr's unidentifiable asset should be debited for A $46,000 B $16,000 C $ 8,000 D $0

D $0 Carr must have made an intangible contribution to the partnership because Abel and Carr have agreed to divide initial capital equally, even though Carr contributed less in identifiable assets ($84,000 < $100,000). Because the bonus method is used to record the formation of the partnership, and the bonus method assumes that an intangible contribution does not constitute a partnership asset with a measurable cost, no unidentifiable asset (i.e., goodwill) is recognized by the partnership

On December 1 of the current year, Line Corp. received a donation of 2,000 shares of its $5 par value common stock from a stockholder. On that date, the stock's market value was $35 per share. The stock was originally issued for $25 per share. By what amount would this donation cause total stockholders' equity to decrease? A $70,000 B $50,000 C $20,000 D $0

D $0 The question does not indicate whether the donated shares are accounted for as treasury stock under the cost or par value methods, or whether the donated shares were canceled and retired. Therefore, this question cannot be answered by constructing a journal entry to record the donation of the shares.

Frey Inc. was organized on January 2 of the current year with the following capital structure: 10% cumulative preferred stock, par value $100 and liquidation value $105; authorized, issued and outstanding 1,000 shares $100,000 Common stock, par value $25; authorized 100,000 shares; issues and outstanding 10,000 shares 250,000 Frey's net income for the year ended December 31 was $450,000, but no dividends were declared. How much was Frey's book value per preferred share at December 31? A $100 B $105 C $110 D $115

D $115 The book value per preferred share is the portion of stockholders' equity distributable to preferred stockholders in the event of liquidation (Liquidation value + Dividends in arrears), divided by the number of preferred shares outstanding. [($105 × 1,000 sh.) + (10% × $100,000)] / 1,000 shares = $115 share..

he following condensed balance sheet is presented for the partnership of Alfa and Beda, who share profits and losses in the ratio of 60:40, respectively: Cash $ 45,000 ------Accounts payable $120,000 Other assets 625,000 ----Alfa, capital 348,000 Beda, loan 30,000 -----Beda, capital 232,000 $700,000----- $700,000 The assets and liabilities are fairly valued on the balance sheet. Alfa and Beda decide to admit Capp as a new partner with a 20% interest. No goodwill or bonus is to be recorded. What amount should Capp contribute in cash or other assets? A $110,000 B $116,000 C $140,000 D $145,000

D $145,000 Total current capital ($348,000 + $232,000) $580,000 Divided by: Percentage current capital is of new total capital (100% - Capp @ 20%) / 80% = Total new capital, including Capp $725,000 Less: Alfa & Beda Capital (current capital) (580,000) = Capp's contribution for 20% interest $145,000

Kern and Pate are partners with capital balances of $60,000 and $20,000, respectively. Profits and losses are divided in the ratio of 60:40. Kern and Pate decided to form a new partnership with Grant, who invested land valued at $15,000 for a 20% capital interest in the new partnership. Grant's cost of the land was $12,000. The partnership elected to use the bonus method to record the admission of Grant into the partnership. Grant's capital account should be credited for A $12,000 B $15,000 C $16,000 D $19,000

D $19,000 Original partnership capital ($60,000 + $20,000) $80,000 Fair value of identifiable asset contributed by Grant 15,000 = Total recorded capital of new partnership 95,000 Grant's capital interest × 20% = Credit to Grant's capital account $19,000

Eagle and Falk are partners with capital balances of $45,000 and $25,000, respectively. They agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have a 25% interest in capital and profits, for an investment of $30,000. What amount should be recorded as goodwill to the original partners? A $0 B $ 5,000 C $ 7,500 D $20,000

D $20,000 In the goodwill method of recording the admission of a new partner, the assets are revalued at their fair values and any excess valuation implied in the purchase price is recorded as goodwill. Robb's 25% interest for an investment of $30,000 implies that total net assets are valued at $120,000 ($30,000/25%). Net assets $120,000 Less: Robb investment (30,000) Eagle capital (45,000) Falk capital (25,000) Goodwill $20,000

On April 1, Ivy began operating a service proprietorship with an initial cash investment of $1,000. The proprietorship provided $3,200 of services in April and received full payment in May. The proprietorship incurred expenses of $1,500 in April which were paid in June. During May, Ivy drew $500 against her capital account. What was the proprietorship's income for the two months ended May 31, under the following methods of accounting? # Cash-basis Accrual-basis A $1,200 $1,200 B $1,700 $1,700 C $2,700 $1,200 D $3,200 $1,700

D $3,200 $1,700 The sole proprietor's drawing of $500 is recorded as a reduction of her capital account under both the cash-basis and accrual-basis methods of accounting. Cash Accrual Revenue for services provided in April, payment received May $3,200 - $3,200 April expenses, paid June -- (1,500) Proprietorship's income for two months ended May 31 $3,200 - $1,700

Bain Corp. owned 20,000 common shares of Tell Corp. purchased several years ago for $180,000. On December 15 of the previous year, Bain declared a property dividend of all of its Tell Corp. shares on the basis of one share of Tell for every 10 shares of Bain common stock held by its stockholders. The property dividend was distributed on January 15 of the current year. On the declaration date, the aggregate market price of the Tell shares held by Bain was $300,000. The entry to record the declaration of the dividend would include a debit to retained earnings (or property dividends declared) of A $0 B $120,000 C $180,000 D $300,000

D $300,000 A transfer of a nonmonetary asset to a stockholder in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset. Bain records the following entries at the declaration date. Retained Earnings 300,000 Property Dividend Payable 300,000

Cor-Eng Partnership was formed on January 2 of the current year. Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2 while Eng contributed $20,000 in cash. Eng's initial capital balance in Cor-Eng is A $20,000 B $25,000 C $40,000 D $60,000

D $60,000 Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Cor is given an initial capital balance of $60,000, equal to the fair value of the identifiable assets Cor contributed to the partnership. Eng is also given an initial capital balance of $60,000. Since Eng only contributed identifiable assets with a fair value of $20,000, Eng must have also contributed an unidentifiable asset (i.e., goodwill) with a fair value of $40,000.

Beck Corp. issued 200,000 shares of common stock when it began operations two years ago and issued an additional 100,000 shares in the past year. Beck also issued preferred stock convertible to 100,000 shares of common stock. In the current year Beck purchased 75,000 shares of its common stock and held it in Treasury. At December 31 of the current year, how many shares of Beck's common stock were outstanding? A 400,000 B 325,000 C 300,000 D 225,000

D 225,000 The 225,000 common shares outstanding are computed by subtracting the 75,000 Treasury shares from the 300,000 (i.e., 200,000 + 100,000) common shares issued.

In the Adel-Brick partnership, Adel and Brick had a capital ratio of 3:1 and a profit and loss ratio of 2:1, respectively. The bonus method was used to record Colter's admittance as a new partner. What ratio would be used to allocate, to Adel and Brick, the excess of Colter's contribution over the amount credited to Colter's capital account? A Adel and Brick's new relative capital ratio. B Adel and Brick's new relative profit and loss ratio. C Adel and Brick's old capital ratio. D Adel and Brick's old profit and loss ratio.

D Adel and Brick's old profit and loss ratio. Under the bonus method, the excess of the partner's contribution over the amount credited to the new partner's capital account is viewed as a bonus to the original partners. The bonus is allocated to the original partners based upon their old profit and loss ratio.

Knowing that a subscription is a contract to purchase one or more shares of stock in the future, and that a corporation does not issue shares until the full subscription price is paid, how may a corporation use the amounts already paid by a subscriber who defaults on the contract? A Return the amount in full to the defaulted subscriber B Retain the defaulted subscriber's funds and issue an equivalent number of shares C Retain the defaulted subscriber's funds to cover any losses on resale, and then return the balance, if any, to the defaulted subscriber D All of the above

D All of the above If a subscriber defaults on a subscription contract, amounts paid to the corporation may be: returned in full; retained by the corporation and an equivalent number of shares issued; or retained to cover any losses on resale, and the balance, if any, returned to the defaulted subscriber.

On December 1 of the current year, shares of authorized common stock were issued on a subscription basis at a price in excess of par value. A total of 20% of the subscription price of each share was collected as a down payment on December 1 with the remaining 80% of the subscription price of each share due in the next year. Collectibility was reasonably assured. At December 31 the stockholders' equity section of the balance sheet would report additional paid-in capital for the excess of the subscription price over the par value of the shares of common stock subscribed and A Common stock issued for 20% of the par value of the shares of common stock subscribed. B Common stock issued for the par value of the shares of common stock subscribed. C Common stock subscribed for 80% of the par value of the shares of common stock subscribed. D Common stock subscribed for the par value of the shares of common stock subscribed.

D Common stock subscribed for the par value of the shares of common stock subscribed. The common stock's par value is recorded as Common Stock Subscribed, and the excess of the subscription price over the common stock's par value is recorded as Additional Paid-In Capital. Cash (20% down payment) XX Subscriptions receivable (balance due) XX Common stock subscribed (shares × par value) XX Additional paid-in capital (to balance) XX

East Corp., a calendar-year company, had sufficient retained earnings in year 1 as a basis for dividends, but was temporarily short of cash. East declared a dividend of $100,000 on April 1, year 1, and issued promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1, year 1, had a maturity date of March 31, year 2, and a 10% interest rate. How should East account for the scrip dividend and related interest? A Debit retained earnings for $110,000 on April 1, year 1. B Debit retained earnings for $110,000 on March 31, year 2. C Debit retained earnings for $100,000 on April 1, year 1, and debit interest expense for $10,000 on March 31, year 2. D Debit retained earnings for $100,000 on April 1, year 1, and debit interest expense for $7,500 on December 31, year 1.

D Debit retained earnings for $100,000 on April 1, year 1, and debit interest expense for $7,500 on December 31, year 1. At the end of the year, interest is accrued. At the date of declaration, April 1, year 1, the journal entry is as follows. Retained Earnings 100,000 Notes Payable to Stockholders 100,000 And then on December 31, year 1 Interest Expense ($100,000 × 10% × 9/12) 7,500 Interest Payable 7,500

The Low and Rhu partnership agreement provides special compensation to Low for managing the business. Low receives a bonus of 15 percent of partnership net income before salary and bonus, and also receives a salary of $45,000. Any remaining profit or loss is to be allocated equally. During the current year, the partnership had net income of $50,000 before the bonus and salary allowance. As a result of these distributions, Rhu's equity in the partnership would A Increase. B Not change. C Decrease the same as Low's. D Decrease.

D Decrease. Low's bonus results in a residual loss for the partnership for the year. Low's equity would still increase due to the bonus Low received. Partnership profit prior to distributions $ 50,000 Less: Bonus to Low (15% × $50,000) (7,500) Salary to Low (45,000) Residual partnership loss $ (2,500) Times: Rhu's loss percentage × 50% Decrease in Rhu's equity in partnership $ (1,250)

In the current year, Bal Corp. declared a $25,000 cash dividend on May 8 to stockholders of record on May 23 payable on June 3. As a result of this cash dividend, working capital A Was not affected. B Decreased on June 3. C Decreased on May 23. D Decreased on May 8.

D Decreased on May 8. On the declaration date, May 8, the liability for dividends payable is recorded by a debit to Retained Earnings and a credit to Cash Dividends Payable . Since the declaration of the cash dividend increases current liabilities without affecting current assets, working capital is decreased on this date.

At December 31 of year 2 and year 3, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No dividends were in arrears as of December 31, year 1. Apex did not declare a dividend during year 2. During year 3, Apex paid a cash dividend of $10,000 on its preferred stock. Apex should report dividends in arrears in its year 3 financial statements as a (an) A Accrued liability of $15,000. B Disclosure of $15,000. C Accrued liability of $20,000. D Disclosure of $20,000.

D Disclosure of $20,000. No entry (other than a memorandum entry) is made when stock rights are issued to existing stockholders without consideration.o dividend was declared in year 2, resulting in a dividend in arrears of $15,000 ($100 × 5% × 3,000 shares). Therefore, in its year 3 financial statements, Apex reports dividends in arrears of $20,000 ($15,000 from year 2 + $5,000 from year 3). Dividend amount ($100 × 5% × 3,000 shares) $ 15,000 Less: Dividend paid, year 3 (10,000) Dividend in arrears, year 3 $ 5,000

Stock dividends on common stock should be recorded at their fair market value by the investor when the related investment is accounted for under which of the following methods? # Cost Equity A Yes Yes B Yes No C No Yes D No No

D No No Stock dividends received on common stock may be recorded only by memorandum entry, regardless of whether the investment is accounted for by the cost or equity method. Under the cost method, the cost of the common stock investment would be divided by the number of common shares owned after the stock dividend to compute a new cost basis per share.

he following format was used by Gee, Inc. for its current year statement of owners' equity: Common stock, $1 par Additional/paid-in capital/Retained earnings Balance at 1/1 $90,000 $800,000 $175,000 Additions and deductions: 100% stock dividend 5% stock dividend _________ _________ _________ Balance at 12/31 _________ _________ _________ When both the 100% and the 5% stock dividends were declared, Gee's common stock was selling for more than its $1 par value. How would the 100% stock dividend affect the additional paid-in capital and retained earnings amounts reported in Gee's year-end statement of owners' equity? # Additional paid-in capital Retained earnings A Increase Increase B Increase Decrease C No change Increase D No change Decrease

D No change Decrease Since the 100% stock dividend exceeds 20 to 25% of the number of shares outstanding, it is considered to be a 'large' stock dividend. Thus, it should be recorded by capitalizing a portion of Retained Earnings equal to the par value of the shares issued

Retained Earnings include which of the following? A Dividends declared B Gains from treasury stock transactions C Both A and B D None of the above

D None of the above The Retained Earnings account is used to close out all profit and loss accounts. The balance represents the accumulated income of the corporation less dividends paid (not declared) and amounts transferred to paid-in capital accounts. Retained earnings should not include the following: Gains from treasury stock transactions Gifts of property Additions to owners' equity attributable to reappraisals of property Accumulated balance of other comprehensive income

Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise's carrying amount over its market value should be A Ignored B Reported as a separately disclosed reduction of retained earnings C Reported as discontinued operations loss, net of income taxes D Reported as a reduction in income from continuing operations

D Reported as a reduction in income from continuing operations Dividend paid in the form of property is recorded at Fair Market Value as on the declaration date and any difference between the fair value and book value is recognized as gain or loss as if the asset is sold at the fair value.

A retained earnings appropriation can be used to A Absorb a fire loss when a company is self-insured. B Provide for a contingent loss that is probable and reasonable. C Smooth periodic income. D Restrict earnings available for dividends.

D Restrict earnings available for dividends. The purpose of a retained earnings appropriation is to restrict a portion of retained earnings as to availability for dividends. A retained earnings appropriation is not used to absorb a fire loss when a company is self-insured, provide for a contingent loss that is probable and reasonably estimable, or to smooth periodic income.

Quoit, Inc. issued preferred stock with detachable common stock warrants. The issue price exceeded the sum of the warrants' fair value and the preferred stocks' par value. The preferred stocks' fair value was not determinable. What amount should be assigned to the warrants outstanding? A Total proceeds. B Excess of proceeds over the par value of the preferred stock. C The proportion of the proceeds that the warrants' fair value bears to the preferred stocks' par value. D The fair value of the warrants.

D The fair value of the warrants. The proceeds should be allocated between the preferred stock and the detachable stock purchase warrants based on their relative fair market values at date of issue. If the relative fair values are not known, then the fair value of either security is used.

Allen retired from the partnership of Allen, Beck, and Chale. Allen's cash settlement from the partnership was based on new goodwill determined at the date of retirement plus the carrying amount of the other net assets. As a consequence of the settlement, the capital accounts of Beck and Chale were decreased. In accounting for Allen's withdrawal, the partnership could have used the # Bonus method Goodwill method A No Yes B No No C Yes Yes D Yes No

D Yes No Allen, the withdrawing partner, is to receive cash or other assets equal to his current capital balance plus his share of unrecorded goodwill. If the bonus method were to be used to account for this transaction, the payment made to Allen for his share of the unrecorded goodwill would be recorded as a decrease in the remaining partners' capital accounts.

Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole's # Paid-in capital Retained earnings A No No B Yes Yes C No Yes D Yes No

D Yes No Any dividend not based on earnings must be a reduction of corporate paid-in capital and, to that extent, is a liquidating dividend. Since no portion of the dividend is based on accumulated past earnings, Paid-in Capital decreases by the full dividend amount, while Retained Earnings is unaffected. The following journal entry illustrates the effects of the declaration of a $100,000 liquidating cash dividend.

On July 1 of the current year, Cove Corp., a closely held corporation, issued 6% bonds with a maturity value of $60,000, together with 1,000 shares of its $5 par value common stock, for a combined cash amount of $110,000. The market value of Cover's stock cannot be ascertained. If the bonds were issued separately, they would have sold for $40,000 on an 8% yield to maturity basis. What amount should Cove report for additional paid-in capital on the issuance of the stock? A $75,000 B $65,000 C $55,000 D $45,000

Lump sum cash proceeds $110,000 Less: Market value of bonds (40,000) Cash proceeds allocated to common stock $ 70,000 Less: Par value of common stock (1,000 × $5) (5,000) Additional paid-in capital on issuance of common stock $ 65,000

_____________ stock avoids the contingent liability involved with the issuance of other types of stocks at a discounted price. A Par value B No-par value C No-par with stated value D None of the above

No-par value stock avoids the contingent liability involved with the issuance of par value stock at a price below par (discount).

The stockholders' equity section of Brown Co.'s December 31, year 1, balance sheet consisted of the following: Common stock, $30 par, 10,000 shares authorized and outstanding $ 300,000 Additional paid-in capital 150,000 Retained earnings (deficit) (210,000) On January 2, year 2, Brown put into effect a stockholder-approved quasi-reorganization by reducing the par value of the stock to $5 and eliminating the deficit against additional paid-in capital. Immediately after the quasi-reorganization, what amount should Brown report as additional paid-in capital? A $(60,000) B $150,000 C $190,000 D $400,000

The balance in the additional paid-in capital account after the quasi-reorganization is the beginning balance, plus the difference in the old and new par values times the number of issued shares [($30 - $5) × 10,000 = $250,000], less the retained earnings deficit. $150,000 + $250,000 - $210,000 = $190,000.

Asp Co. was organized on January 2 with 30,000 authorized shares of $10 par common stock. During the year, the corporation had the following capital transactions: January 5 Issued 20,000 shares at $15 per share July 14 Purchase 5,000 shares at $17 per share December 27 Reissued the 5,000 shares held in treasury at $20 per share Asp used the par value method to record the purchase and reissuance of the treasury shares. In its December 31 Balance sheet, what amount should Asp report as additional paid-in capital in excess of par? A $100,000 B $125,000 C $140,000 D $150,000

Under the par value method, the recording of the acquisition of treasury stock effectively removes the treasury stock from the accounts. The excess in acquisition price over the original issuance price ($17 - $15 = $2/share) is debited to Additional Paid-In-Capital From Treasury Stock , but only to the extent of any existing balance from prior treasury stock transactions. The difference, if any, is debited to Retained Earnings . 20,000 shares @ $5/share over par, 1/ 5 $100,000 5,000 shares @ $5/share Treasury Stock, 7/14 (25,000) 5,000 shares @ ($20 - $10 par) = $10/per share, 12/27 50,000 APIC balance 12/31 $125,000