Chapter 18

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Paid-in capital must consist solely of amounts invested by shareholders. T/F

FALSE

What was the average price of the additional treasury shares purchased by Levi during 2013? A. $11 per share. B. $12 per share. C. $12.50 per share. D. None of the above is correct.

A. $11 per share. [Cost of additional shares = 72 million - 50 million = 22 million Avg Price Paid = Cost/ Number of additional treasury shares = 22 mill/2 mill shares = $11 per share]

18.24) On January 1, 2013, the board of directors of Goby Inc. declared a $540,000 dividend. The following data is from the balance sheet of Goby on that date: Common stock = 500k Paid-in capital excess of par = 300k Retained earnings = 400k Paid-in capital from sale of treasury stock = 50k How much is the liquidating dividend? A. $140,000. B. $240,000. C. $290,000. D. None of the above is correct.

A. $140,000. [Total dividend = 540k Retained earnings = 400k Liquidating dividends (540-400) = 140k]

18.10) The shareholders' equity of Green Corporation includes $200,000 of $1 par common stock and $400,000 par value of 6% cumulative preferred stock. The board of directors of Green declared cash dividends of $50,000 in 2013 after paying $20,000 cash dividends in each of 2012 and 2011. What is the amount of dividends common shareholders will receive in 2013? A. $18,000. B. $26,000. C. $28,000. D. $32,000.

A. $18,000. [Green's common shareholders will receive dividends of $18,000 as a result of the 2013 distribution. 2011: Preferred = $20k(a) Common = 0 2012: Preferred = $20k(b) Common = 0 2013: Preferred = $32k(c) Common = 18k(remainder) (a)$24,000 current preference (6% x $400,000), thus $4,000 dividends in arrears. (b) $24,000 current preference (6% x $400,000), thus another $4,000 dividends in arrears. (c) $8,000 dividends in arrears plus the $24,000 current preference.]

18.7) Black Enterprises reported the following ($ in 000s) as of December 31, 2013. All accounts have normal balances. Deficit = 3,000 Common stock = 2,000 Paid-in capital treasury stock = 1,000 Treasury stock at cost = 400 Paid-in capital excess of par = 30,000 During 2014 ($ in 000s), net income was $9,000; 25% of the treasury stock was resold for $450; cash dividends declared were $600; cash dividends paid were $500 What ($ in 000s) was shareholders' equity as of December 31, 2013? A. $29,600. B. $35,600. C. $30,400. D. $28,600.

A. $29,600. [Common stock = 2,000 Paid-in capital excess of par = 30,000 Paid-in capital treasury stock = 1,000 Retained earnings = (3,000) Treasury stock = (400) Total shareholder's equity = 29,600]

18.3) The changes in account balances for Allen Inc. for 2013 are as follows: Assets = $225k Dr Common stock = $125 Cr Liabilities = $ 80k Cr Paid-in cap-excess of par = $15k Cr Assuming the only changes in retained earnings in 2013 were for net income and a $25,000 dividend, what was net income for 2013? A. $30,000. B. $20,000. C. $15,000. D. $5,000.

A. $30,000. [Debits: Assets = 225k dr Dividends = 25k dr Total = 250k dr Credits: Common stock = $125k cr Liabilities = $ 80k cr Paid-in cap-excess of par = $15k cr *Net income (250-125-80-15) = 30k cr* Total = 250k cr]

18.15) Montgomery & Co., a well-established law firm, provided 500 hours of its time to Fink Corporation in exchange for 1,000 shares of Fink's $5 par common stock. Montgomery's usual billing rate is $700 per hour, and Fink's stock has a book value of $250 per share. By what amount will Fink's paid-in capital—excess of par increase for this transaction? A. $345,000. B. $295,000. C. $350,000. D. $300,000.

A. $345,000. [Debit: Legal expense (500 x $700) = 350k Credit: Common stock (1k x $5) = (5k) Paid-in capital - excess of par = (345k)]

Treasury shares are most often reported as: A. A reduction of total shareholders' equity. B. A reduction of total paid-in capital. C. A reduction to retained earnings. D. An expense on the income statement.

A. A reduction of total shareholders' equity.

Which of the terms or phrases listed below is more associated with financial statements prepared in accordance with U.S. GAAP than with International Financial Reporting Standards? A. Accumulated other comprehensive income. B. Investment revaluation reserve. C. Share premium. D. Preference shares.

A. Accumulated other comprehensive income.

Heidi Aurora Imports applies International Financial Reporting Standards. The company issued shares of the company's Class B stock. Heidi Aurora Imports should report the stock in the company's statement of financial position: A. Among liabilities if the shares are mandatorily redeemable or redeemable at the option of the shareholder. B. As equity unless the shares are mandatorily redeemable. C. As equity unless the shares are redeemable at the option of the issuer. D. Among liabilities unless the shares are mandatorily redeemable.

A. Among liabilities if the shares are mandatorily redeemable or redeemable at the option of the shareholder.

The corporate charter sometimes is known as (a): A. Articles of incorporation. B. Statement of organization. C. By-laws. D. Registration statement.

A. Articles of incorporation.

Under IFRS, components of other comprehensive income: A. Can be reported as part of a single statement of comprehensive income. B. Are not permitted to be reported. C. Must be reported in a separate statement of comprehensive income. D. Can be reported as part of a statement of shareholders' equity.

A. Can be reported as part of a single statement of comprehensive income.

75. When dividends are declared in one fiscal year and paid in the next fiscal year, the liability for the dividend should be recorded as of the: A. Date the dividend is declared. B. Last day of the fiscal year. C. Date of record. D. Date of payment.

A. Date the dividend is declared.

18.12) Rick Co. had 30 million shares of $1 par common stock outstanding at January 1, 2013. In October 2013, Rick Co.'s Board of Directors declared and distributed a 1% common stock dividend when the market value of its common stock was $60 per share. In recording this transaction, Rick would: A. Debit retained earnings for $18 million. B. Credit paid-in capital—excess of par for $18 million. C. Credit common stock for $18 million. D. None of the above is correct.

A. Debit retained earnings for $18 million. [Shares to be distributed = .01 x 30 million = 300,000 shares Retained earnings: Market value of shares = 300,000 x $60 = $18 million]

18.19) On October 1, 2013, Chief Corporation declared and issued a 10% stock dividend. Before this date, Chief had 80,000 shares of $5 par common stock outstanding. The market value of Chief Corporation on the date of declaration was $10 per share. As a result of this dividend, Chief's retained earnings will: A. Decrease by $80,000. B. Not change. C. Decrease by $40,000. D. Increase by $80,000.

A. Decrease by $80,000. [Debit: Retained earnings (8k shares x $10/share) = 80k Credit: Common stock (8k shares x $5/share) = (40k) Paid-in capital excess of par = (40k)]

The 12/31/2013 balance sheet of Despot Inc. included the following: Common stock (25 mill shares @ $20 par) = $500 million Paid-in capital excess of par = 3 billion Retained earnings = 980 million In February 2013, Despot declared cash dividends of $12 million to be paid in April of that year. What effect did the April transaction have on Despot's accounts? A. Decreased assets and liabilities. B. Decreased assets and shareholders' equity. C. Increased liabilities and decreased shareholders' equity. D. None of the above is correct.

A. Decreased assets and liabilities.

Retained earnings represent: A. Earned capital. B. Cash. C. Assets. D. Net assets.

A. Earned capital.

When a company issues a stock dividend, which of the following would be affected? A. Earnings per share. B. Total assets. C. Total liabilities. D. Total shareholders' equity.

A. Earnings per share. [When a company issues a stock dividend, earnings per share decreases as the number of shares outstanding increases. There is no effect on total assets, total liabilities, or total shareholders' equity.]

The declaration and issuance of a stock dividend on shares of common stock: A. Has no effect on assets, liabilities, or total shareholders' equity. B. Decreases total shareholders' equity and increases common stock. C. Decreases assets and decreases total shareholders' equity. D. Does not change retained earnings or paid-in capital.

A. Has no effect on assets, liabilities, or total shareholders' equity.

18.9) The 12/31/2013 balance sheet of Despot Inc. included the following: Common stock (25 mill shares @ $20 par) = $500 million Paid-in capital excess of par = 3 billion Retained earnings = 980 million Despot declared a property dividend to give marketable securities to its common stockholders. The securities had cost Despot $7 million and currently have a fair value of $16 million. Which of the following would be included in recording the property dividend declaration? A. Increase in a liability for $16 million. B. Decrease in retained earnings for $7 million. C. Decrease in marketable securities by $16 million. D. All of the above are correct.

A. Increase in a liability for $16 million.

The preemptive right refers to the shareholder's right to: A. Maintain a proportional ownership interest in the corporation. B. Vote for members of the board of directors. C. Receive a share of dividends. D. Share in profits proportionally with all other stockholders.

A. Maintain a proportional ownership interest in the corporation.

Share issue costs refer to the costs of obtaining the legal, promotional, and accounting services necessary to effect the sale of shares. The costs reduce the net cash proceeds from selling the shares and thus paid-in capital—excess of par, and are: A. Not recorded separately. B. Recorded as an asset. C. Recorded as a liability. D. Amortized over time.

A. Not recorded separately.

Issued stock refers to the number of shares: A. Outstanding plus treasury shares. B. Shares issued for cash. C. In the hands of shareholders. D. That may be issued under state law.

A. Outstanding plus treasury shares.

When treasury shares are resold at a price below cost: A. Paid-in capital and/or retained earnings is reduced. B. Paid-in capital and/or retained earnings is increased. C. Retained earnings is always reduced. D. A loss is taken on the income statement.

A. Paid-in capital and/or retained earnings is reduced.

18.28) R Co. has outstanding 100 million shares, $1 par common stock, selling for $8 per share. After a 1 for 4 reverse stock split: A. R would have 25 million shares, $4 par per share. B. The market price per share would be about $2. C. Fractional shares would be issued. D. Retained earnings would be reduced.

A. R would have 25 million shares, $4 par per share.

18.26) The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. What is the entry for the dividend declaration? A. Retained earnings = 9k dr Dividends payable = 9k cr B. Retained earnings = 9k dr Cash = 9k cr C. Retained earnings = 9k dr Dividends payable = 9k cr B. Retained earnings = 10k dr Cash = 10k cr

A. Retained earnings = 9k dr Dividends payable = 9k cr [Retained earnings [(20k-5k) x 60] = 9k dr Dividends Payable = 9k cr]

The par value of common stock represents: A. The arbitrary dollar amount assigned to a share of stock. B. The liquidation value of a share. C. The book value of a share of stock. D. The amount received when the stock was issued.

A. The arbitrary dollar amount assigned to a share of stock.

Retained earnings represent a company's: A. Undistributed net income. B. Undistributed net assets. C. Extra paid-in capital. D. Undistributed cash.

A. Undistributed net income.

18.21) At the beginning of 2011, Emily Corporation issued 10,000 shares of $100 par, 5%, cumulative, preferred stock for $110 per share. No dividends have been paid to preferred or common shareholders. What amount of dividends will a preferred shareholder owning 100 shares receive in 2013 if Emily pays $1,000,000 in dividends? A. $500. B. $1,500. C. $1,650. D. $10,000.

B. $1,500. [$100 x 5% x 100 shares x 3 years.]

18.20) On June 1, 2013, Blue Co. distributed to its common stockholders 200,000 outstanding common shares of its investment in Red, Inc., an unrelated party. The carrying amount on Blue's books of Red's $1 par common stock was $2 per share. Immediately after the declaration, the market price of Red's stock was $2.50 per share. In its income statement for the year ended June 30, 2013, what amount should Blue report as gain before income taxes on disposal of the stock? A. $0. B. $100,000. C. $400,000. D. $500,000.

B. $100,000. [Property dividends are recorded at the fair value of the property distributed, with any gain or loss being recognized in the current period. $2.50 - 2.00 = $.50 x 200,000 = $100,000.]

18.18) Boxer Company owned 20,000 shares of King Company that were purchased in 2011 for $500,000. On May 1, 2013, Boxer declared a property dividend of 1 share of King for every 10 shares of Boxer stock. On that date, there were 50,000 shares of Boxer stock outstanding. The market value of the King stock was $30 per share on the date of declaration and $32 per share on the date of distribution. By how much is retained earnings reduced by the property dividend? A. $0. B. $150,000. C. $160,000. D. $300,000.

B. $150,000. [(500,000/10) x $30 = $150,000]

18.23) Beagle Corporation has 20,000 shares of $10 par common stock outstanding and 10,000 shares of $100 par, 6% cumulative, nonparticipating preferred stock outstanding. Dividends have not been paid for the past two years. This year, a $300,000 dividend will be paid. What are the dividends per share payable to preferred and common, respectively? A. $6; $12. B. $18; $6. C. $6; $6. D. None of the above is correct.

B. $18; $6. [Preferred: $6 x 3 x 10,000 = $180,000 Common: ($300,000 - $180,000)/20,000 = $6]

18.27) Lucid Company declared a property dividend of 20,000 shares of $1 par Polk Company common stock. The Polk stock was purchased for $5 per share. Market value was $10 per share on the declaration date and $11 per share on the distribution date. What is the amount of the dividend? A. $100,000. B. $200,000. C. $220,000. D. $300,000.

B. $200,000. [20,000 x $10 = $200,000]

18.11) The shareholders' equity of Red Corporation includes $200,000 of $1 par common stock and $400,000 par value of 6% cumulative preferred stock. The board of directors of Red declared cash dividends of $50,000 in 2013 after paying $20,000 cash dividends in 2012 and $40,000 in 2011. What is the amount of dividends common shareholders will receive in 2013? A. $18,000. B. $22,000. C. $26,000. D. $28,000.

B. $22,000. [Red's common shareholders will receive dividends of $22,000 as a result of the 2013 distribution. 2011: Preferred = $24k(a) Common = 16k(remainder) 2012: Preferred = $20k(b) Common = 0 2013: Preferred = $28k(c) Common = 22k(remainder) (a)$24,000 current preference (6% x $400,000). (b)$24,000 current preference, thus $4,000 dividends in arrears. (c)$4,000 dividends in arrears plus the $24,000 current preference.]

What was the average price (rounded to the nearest dollar) of the additional shares issued by Levi in 2013? A. $5 per share. B. $26 per share. C. $39 per share. D. Cannot be determined from the given information.

B. $26 per share. [Proceeds = Increase in common stock + increase in additional paid-in capital. Proceeds = 30 mill + 128 Mill = 158 Mill Avg Issue Price = Proceeds/Number of shares issued Avg Issue Price = 158 mill/6 mill shares = 26.33/ share]

18.13) Poodle Corporation was organized on January 3, 2013. The firm was authorized to issue 100,000 shares of $5 par common stock. During 2013, Poodle had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is total paid-in capital at the end of 2013? A. $420,000. B. $370,000. C. $470,000. D. $320,000.

B. $370,000. [(30,000 x $7) + (20,000 x $8) = $370,000]

18.5) As of December 31, 2013, Warner Corporation reported the following: Dividends payable = 20k Treasury stock = 600k Paid-in capital share repurchase = 20k Other paid-in capital acct = 4 mill Retained Earnings = 3 mill During 2014, half of the treasury stock was resold for $240,000; net income was $600,000; cash dividends declared were $1,500,000; and stock dividends declared were $500,000. What would shareholders' equity be as of December 31, 2014? A. Amount is not shown. B. $5,760,000. C. $5,820,000. D. $6,760,000.

B. $5,760,000. [Shareholders Equity December 31, 2014 = Shareholders Equity December 31, 2013 + Resold 2014 Treasury Stock + 2014 Net Income - 2014 Cash Dividends; Shareholders Equity December 31, 2014 = 6.42 mill + 240k + 600k - 1.5 mill = 5,760,000]

18.22) Pug Corporation has 10,000 shares of $10 par common stock outstanding and 20,000 shares of $100 par, 6% noncumulative, nonparticipating preferred stock outstanding. Dividends have not been paid for the past two years. This year, a $150,000 dividend will be paid. What are the dividends per share for preferred and common, respectively? A. $7.50; $0. B. $6; $3. C. $6; $1.50. D. None of the above is correct.

B. $6; $3. [Preferred: $6 per share x 20,000 = $120,000; $120,000/20,000 shares = $6 per share Common: ($150,000 - $120,000)/10,000 = $3 per share]

Mandatorily redeemable preferred stock (preference shares) is reported as debt, with the dividends reported in the income statement as interest expense, using: A. U.S. GAAP. B. IFRS. C. Both U.S. GAAP and IFRS. D. Neither U.S. GAAP nor IFRS.

C. Both U.S. GAAP and IFRS.

118.16) In 2011, Winn, Inc., issued $1 par value common stock for $35 per share. No other common stock transactions occurred until July 31, 2013, when Winn acquired some of the issued shares for $30 per share and retired them. Which of the following statements correctly states an effect of this acquisition and retirement? A. 2013 net income is decreased. B. Additional paid-in capital is decreased. C. 2013 net income is increased. D. Retained earnings is increased.

B. Additional paid-in capital is decreased. [The entries to record the stock issuance and subsequent acquisition and retirement (per share) are as follows: Issuance: Cash = 35 dr Common stock = 1 cr Paid-in capital excess of par = 34 cr Retirement: Common stock = 1 dr Paid-in capital excess of par = 34 dr Paid-in capital share repurch = 5 cr Cash = 30 cr The net result is a decrease in additional paid-in capital of $29 per share retired.]

When stock traded on an active exchange is issued for a machine: A. No entry is recorded until restrictions are lifted. B. An asset is recorded for the fair value of the stock. C. An asset is recorded for the appraised value of the machine. D. Paid-in capital is increased by the appraised value of the machine.

B. An asset is recorded for the fair value of the stock.

Heidi Aurora Imports issued shares of the company's Class B stock. Heidi Aurora Imports should report the stock in the company's statement of financial position: A. Among liabilities if the shares are mandatorily redeemable or redeemable at the option of the shareholder. B. As equity unless the shares are mandatorily redeemable. C. As equity unless the shares are redeemable at the option of the issuer. D. Among liabilities unless the shares are mandatorily redeemable.

B. As equity unless the shares are mandatorily redeemable.

The par value of shares issued is normally recorded in the: A. Paid-in capital in excess of par account. B. Common stock account. C. Retained earnings account. D. Appropriated retained earnings account.

B. Common stock account.

In terms of business volume, the dominant form of business organization is the: A. Partnership. B. Corporation. C. Limited liability company. D. Proprietorship.

B. Corporation.

When treasury stock is purchased for an amount greater than its par value, what is the effect on total shareholders' equity? A. Increase. B. Decrease. C. No effect. D. Cannot tell from the given information.

B. Decrease.

A statement of comprehensive income does not include: A. Gains resulting from the return on assets exceeding expectations. B. Gains and losses on unsold held-to-maturity securities. C. Losses resulting from the return on pension assets falling short of expectations. D. Prior service cost.

B. Gains and losses on unsold held-to-maturity securities.

The 12/31/2013 balance sheet of Despot Inc. included the following: Common stock (25 mill shares @ $20 par) = $500 million Paid-in capital excess of par = 3 billion Retained earnings = 980 million In January 2013, Despot recorded a transaction with this journal entry: Debit: Cash = 150 million Credit: Common stock = 100 million Paid-in capital excess of par = 50 million The transaction was for the: A. Issue of 2 million shares of common stock at par value. B. Issue of common stock for $150 million in cash. C. Receipt of $20 per share for a new stock issue. D. All of the above are correct.

B. Issue of common stock for $150 million in cash.

A statement of comprehensive income does not include: A. Net income. B. Losses resulting from the return on pension assets exceeding expectations. C. Losses from changes in estimates regarding the PBO. D. Prior service cost.

B. Losses resulting from the return on pension assets exceeding expectations.

Characteristics of the corporate form that have led to the growth of this form of business ownership include all of the following except: A. Ease of raising capital. B. Low government regulation. C. Limited liability. D. Ease of ownership transfer.

B. Low government regulation.

Any dividend that is considered to be a liquidating dividend will: A. Reduce retained earnings. B. Reduce paid-in capital. C. Increase paid-in capital. D. Reduce the common stock account.

B. Reduce paid-in capital.

Accumulated other comprehensive income: A. is a liability. B. might include prior service cost from pension plan amendments. C. includes accumulated pension expense. D. is reported in the income statement.

B. might include prior service cost from pension plan amendments.

18.17) Coy, Inc., initially issued 200,000 shares of $1 par value stock for $1,000,000 in 2011. In 2012, the company repurchased 20,000 shares for $200,000. In 2013, 10,000 of the repurchased shares were resold for $160,000. In its balance sheet dated December 31, 2013, Coy, Inc.'s treasury stock account shows a balance of: A. $0. B. $40,000. C. $100,000. D. $200,000.

C. $100,000. [A treasury stock account is created when a company reacquires its own stock as treasury stock. The full purchase price (cost) is debited to Treasury Stock. When treasury stock is sold, the Treasury Stock account is credited for the cost per share, with an additional credit to Paid-in Capital, Treasury Stock (or Paid-in Capital—Repurchased Shares), if the sale price exceeds the reacquisition price. The 2012 repurchase is accounted for with a debit to Treasury Stock for $200,000. When half of the treasury stock is resold, $100,000 is credited to Treasury Stock and $60,000 is credited to Paid-In Capital, Treasury Stock. The balance in the Treasury Stock account is $200,000 - $100,000 = $100,000.]

Revenue and expense items and components of other comprehensive income can be reported in a single statement of comprehensive income using: A. U.S. GAAP. B. IFRS. C. Both U.S. GAAP and IFRS. D. Neither U.S. GAAP nor IFRS.

C. Both U.S. GAAP and IFRS.

18.1) Roberto Corporation was organized on January 1, 2013. The firm was authorized to issue 100,000 shares of $5 par common stock. During 2013, Roberto had the following transactions relating to shareholders' equity: Issued 10,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is total shareholders' equity at the end of 2013? A. $270,000. B. $300,000. C. $250,000. D. $200,000.

C. $250,000. [Issue of stock ( 10k x $7) = $70k Issue of stock (20k x $8) = $160k Net income = $100k Dividends = ($50k) Treasury stock (3k x $10) = ($30k) Total = $250k]

18.8) Black Enterprises reported the following ($ in 000s) as of December 31, 2013. All accounts have normal balances. Deficit = 3,000 Common stock = 2,000 Paid-in capital treasury stock = 1,000 Treasury stock at cost = 400 Paid-in capital excess of par = 30,000 During 2014 ($ in 000s), net income was $9,000; 25% of the treasury stock was resold for $450; cash dividends declared were $600; cash dividends paid were $500. What ($ in 000s) was shareholders' equity as of December 31, 2014? A. $38,100. B. $37,450. C. $38,450. D. $38,350.

C. $38,450. [Shr Hldr Eq 2013 = 29,600 Net income = 9,000 Sale of treasury stock = 450 Dividends declared = (600) Shareholders equity 12/31/14 = 38,450]

18.4) As of December 31, 2013, Warner Corporation reported the following: Dividends payable = 20k Treasury stock = 600k Paid-in capital share repurchase = 20k Other paid-in capital acct = 4 mill Retained Earnings = 3 mill During 2014, half of the treasury stock was resold for $240,000; net income was $600,000; cash dividends declared were $1,500,000; and stock dividends declared were $500,000. What was shareholders' equity as of December 31, 2013? A. $7,020,000. B. $6,440,000. C. $6,420,000. D. $6,400,000.

C. $6,420,000. [Paid-in capital share repurchase = 20k Other paid-in capital acct = 4 mill Retained Earnings = 3 mill Treasury stock = (600k) Total shareholders equity = 6,420,000]

How many of Levi's common shares were outstanding on 12/31/2012? A. 14 million. B. 9 million. C. 5 million. D. None of the above is correct.

C. 5 million. [5 million shares were outstanding at this date (9 million were issued, and 4 million shares were in the treasury).]

When a property dividend is declared, the property to be distributed should be revalued to fair value as of the: A. Record date. B. Date of distribution. C. Date of declaration. D. Announcement date.

C. Date of declaration.

18.29) F Co. declares a 5% stock dividend. If the market price at declaration is $12 per share, a shareholder with 110 shares likely would receive: A. Five additional shares. B. Fractional share rights for 5½ shares. C. Five additional shares and $6 in cash. D. Five additional shares and a fractional share right for 2½ shares.

C. Five additional shares and $6 in cash. [110 shares x 5% = 5.5 shares; one-half share x $12 = $6.]

Accumulated other comprehensive income is reported: A. In the balance sheet as an asset. B. In the balance sheet as a liability. C. In the balance sheet as a component of shareholders' equity. D. In the statement of comprehensive income.

C. In the balance sheet as a component of shareholders' equity.

Details of each class of stock must be reported: A. On the face of the balance sheet only. B. In disclosure notes only. C. On the face of the balance sheet or in disclosure notes. D. On the face of the balance sheet and in disclosure notes.

C. On the face of the balance sheet or in disclosure notes.

Two of the three primary account classifications within shareholders' equity are: A. Preferred stock and retained earnings. B. The par value of common stock and retained earnings. C. Paid-in capital and retained earnings. D. Preferred and common stock.

C. Paid-in capital and retained earnings.

When more than one security is sold for a single price and the total selling price is not equal to the sum of the market prices, the cash received is allocated between the securities based on: A. Relative book values. B. Par values. C. Relative market values. D. The earnings per share.

C. Relative market values.

The net assets of a corporation are equal to: A. Contributed capital. B. Retained earnings. C. Shareholders' equity. D. None of the above.

C. Shareholders' equity.

When preferred stock carries a redemption privilege, the shareholders may: A. Purchase new shares as they become available. B. Exchange their preferred shares for common shares. C. Surrender the preferred shares for a specified amount of cash. D. Purchase treasury shares ahead of common shareholders.

C. Surrender the preferred shares for a specified amount of cash.

Corporations are formed in accordance with: A. The Model Business Corporation Act. B. Federal statutes. C. The laws of individual states. D. Federal trade commission regulations.

C. The laws of individual states.

The common stock account in a company's balance sheet is measured as: A. The number of common shares outstanding multiplied by the stock's par value per share. B. The number of common shares outstanding multiplied by the stock's current market value per share. C. The number of common shares issued multiplied by the stock's par value per share. D. None of the above is correct.

C. The number of common shares issued multiplied by the stock's par value per share.

The owners of a corporation are its shareholders. If a corporation has only one class of shares, they typically are labeled common shares. Each of the following are ownership rights held by common shareholders, unless specifically withheld by agreement, except: A. The right to vote on policy issues. B. The right to share in profits when dividends are declared (in proportion to the percentage of shares owned by the shareholder). C. The right to dividends equal to a stated rate time par value (if dividends are paid). D. The right to share in the distribution of any assets remaining at liquidation after other claims are satisfied.

C. The right to dividends equal to a stated rate time par value (if dividends are paid).

The Model Business Corporation Act: A. Uses the words "common" and "preferred" in describing distinguishing characteristics of stock. B. Defines legal capital as the amount of net assets not available for distribution to shareholders. C. Provides guidance for choosing an appropriate par value for new issues of stock. D. Has affected the laws of most states.

D. Has affected the laws of most states.

Which of the following statements is true when dividends are not declared or paid on cumulative preferred stock? A. The shareholders must be allowed to convert their shares to common stock. B. The unpaid dividends are accrued as a liability. C. The unpaid dividends are reported in a note to the financial statements. D. The unpaid dividends accrue interest until paid.

C. The unpaid dividends are reported in a note to the financial statements.

18.2) The changes in account balances for Elder Company for 2013 are as follows: Assets = $480k Dr Common stock = $250 Cr Liabilities = $ 160k Cr Paid-in cap-excess of par = $30k Cr Assuming the only changes in retained earnings in 2013 were for net income and a $50,000 dividend, what was net income for 2013? A. $40,000. B. $60,000. C. $70,000. D. $90,000.

D. $90,000. [Debits: Assets = 480k dr Dividends = 50k dr Total = 530k dr Credits: Common stock = $250 cr Liabilities = $ 160k cr Paid-in cap-excess of par = $30k cr *Net income (530-250-160-30) = 90k cr* Total = 530k cr]

Which of the following transactions decreases retained earnings? A. A property dividend. B. A stock dividend. C. A cash dividend. D. All of the above are correct.

D. All of the above are correct.

Paid-in capital in excess of par is reported: A. As a reduction of shareholders' equity. B. As a noncurrent asset. C. As a noncurrent liability. D. As an increase in shareholders' equity.

D. As an increase in shareholders' equity.

Preferred stock is called preferred because it usually has two preferences. These preferences relate to: A. Dividends and voting rights. B. Par value and dividends. C. The preemptive right and voting rights. D. Assets at liquidation and dividends.

D. Assets at liquidation and dividends.

What was the amount of net income earned by Levi during 2013? A. $0. B. $40 million. C. $62 million. D. Cannot be determined from the given information.

D. Cannot be determined from the given information. [The increase in retained earnings is a composite of net income and changes due to dividends. You cannot determine the portion due to net income unless you have information about the dividends]

18.14) Olsson Corporation received a check from its underwriters for $72 million. This was for the issue of one million of its $5 par stock that the underwriters expect to sell for $72 per share. Which is the correct entry to record the issue of the stock? A. Cash = 72 mill Stock issue expense = (20 mill) Stock contract receivable = (52 mill) B. Cash = 72 mill Deffrd stock issue revenue = (20 mill) Common stock = (5 mill) Paid-in capital excess of par = (47 mill) C. Cash = 72 mill Common stock (72 mill) D. Cash = 72 mill Common stock = (5 mill) Paid-in capital excess of par = (67 mill)

D. Cash = 72 mill Common stock = (5 mill) Paid-in capital excess of par = (67 mill) [common stock (1 mill x $5 par) = 5 mill]

18.6) As of December 31, 2013, Warner Corporation reported the following: Dividends payable = 20k Treasury stock = 600k Paid-in capital share repurchase = 20k Other paid-in capital acct = 4 mill Retained Earnings = 3 mill During 2014, half of the treasury stock was resold for $240,000; net income was $600,000; cash dividends declared were $1,500,000; and stock dividends declared were $500,000. The 2014 sale of half of the treasury stock would: A. Reduce income before tax by $60,000. B. Reduce retained earnings by $60,000. C. Increase total shareholders' equity by $300,000. D. Decrease retained earnings by $40,000.

D. Decrease retained earnings by $40,000. [Debit: Cash = 240k Paid-in capital share repurchase = 20k *Retained earnings (300-20-240) = 40k* Total debits = 300k Credits: Treasury stock (600k/2) = 300k]

When preferred stock is purchased by the issuing corporation at a price below the original issue price and the stock is retired, the transaction: A. Increases net income for the year. B. Increases retained earnings. C. Increases revenue for the year. D. Increases paid-in capital share repurchase.

D. Increases paid-in capital share repurchase.

Stock splits are issued primarily to: A. Increase the number of outstanding shares. B. Increase the number of authorized shares. C. Increase legal capital. D. Induce a decline in market value per share.

D. Induce a decline in market value per share.

18.25) ABC declared a property dividend. The dividend consisted of 10,000 common shares of its investment in XYZ Company. The shares had originally been purchased at $4 per share and had a $1 par value. The value of the shares on the declaration date is $7 per share. What is the first entry that should be recorded related to this dividend? A. Retained earnings = 70k dr Property dividends payable = 70k cr B. Retained earnings = 70k dr Property dividends payable = 40k cr Gain = 30k cr C. Investment in XYZ = 30k dr Retained earnings = 30k cr D. Investment in XYZ = 30k dr Gain on investment = 30k cr

D. Investment in XYZ = 30k dr Gain on investment = 30k cr [Investment in XYZ [10k x (7-4)] = 30k dr Gain on appreciation of investment = 30k cr]

A small stock dividend is defined as one that is: A. Less than or equal to 40%. B. Less than 40%. C. Less than or equal to 10%. D. Less than 25%.

D. Less than 25%.

When treasury shares are sold at a price above cost: A. A gain account is credited. B. A loss is reported. C. A revenue account is credited. D. Paid-in capital is increased.

D. Paid-in capital is increased.

Preferred shares that are participating may: A. Vote for the board of directors. B. Be exchanged for common stock. C. Receive extra cash during corporate liquidation. D. Receive additional dividends beyond the stated amount.

D. Receive additional dividends beyond the stated amount.

The retained earnings balance reported in the balance sheet typically is not affected by: A. Net income. B. A prior period adjustment. C. Dividends paid. D. Restrictions.

D. Restrictions.

Outstanding common stock is: A. Stock that is performing well on the New York Stock Exchange. B. Stock that has been authorized by the state for issue. C. Stock held in the corporate treasury. D. Stock in the hands of shareholders.

D. Stock in the hands of shareholders.

Authorized common stock refers to the total number of shares: A. Outstanding. B. Issued. C. Issued and outstanding. D. That can be issued.

D. That can be issued.

When stock is issued in exchange for property, the best evidence of fair value might be any of the following except: A. The appraised value of the property received. B. The selling price of the stock in a recent transaction. C. The price of the stock quoted on the stock exchange. D. The average book value of outstanding stock.

D. The average book value of outstanding stock.

When a property dividend is declared, the reduction in retained earnings is for: A. The book value of the property on the date of declaration. B. The book value of the property on the date of distribution. C. The fair value of the property on the date of distribution. D. The fair value of the property on the date of declaration.

D. The fair value of the property on the date of declaration.

Common shareholders usually have all of the following rights except: A. To share in the profits. B. To share in assets upon liquidation. C. To elect a board of directors. D. To participate in the day-to-day operations.

D. To participate in the day-to-day operations.

Which of the following statements is *true* with regard to preferred stock (preference shares)? A. Most preferred stock (preference shares) is reported under U.S. GAAP as debt. B. Most preferred stock (preference shares) is reported under IFRS as equity. C. Under U.S. GAAP, mandatorily redeemable preferred stock is reported as equity. D. Under IFRS, preferred stock dividends are reported in the income statement as interest expense.

D. Under IFRS, preferred stock dividends are reported in the income statement as interest expense.

Cash dividends become a binding liability as of the record date. T/F

FALSE

Dividends in arrears on cumulative preferred stock are liabilities to be paid at a later date. T/F

FALSE

Noncash assets received as consideration for the issue of stock are always valued based on the fair value of the stock. T/F

FALSE

Restrictions on retained earnings must be disclosed in the body of the balance sheet. T/F

FALSE

Investors should be wary of stock buybacks during down times because the resulting decrease in shares and increase in earnings per share can be used to mask a slowdown in earnings growth. T/F

TRUE

Mandatorily redeemable preferred stock is reported as a liability. T/F

TRUE

Stock designated as preferred usually has preferential rights over other classes of stock relative to dividends and liquidating distributions. T/F

TRUE

Stock dividends cause a reduction in retained earnings, but they never reduce total shareholders' equity. T/F

TRUE

Treasury stock transactions never increase retained earnings or net income. T/F

TRUE

Under GAAP, the declaration of a property dividend may require the recognition of a gain or loss if the fair value of the property is different from its carrying value on the declaration date. T/F

TRUE


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