Financial Accounting: Chapter 11: Stockholders' Equity: Paid-in Capital: Review Questions

How many votes per share of stock does a stockholder ordinarily have? -1 -10 -1,000 -100

1

A company has stockholders' equity of $400,000 and $450,000 at the beginning and end of the current year, respectively. The company's net income for the year was $51,000. What was the return on equity for the year? -12% -11.33% -12.75%

12% (Reason: Average stockholders' equity = ($400,000 + $450,000)/2 = $425,000. Return on assets = $51,000/$425,000 = 12%.)

A company has net income of $180,000, assets at the beginning of the year of $800,000, and assets at the end of the year of $1 million. The company's return on assets for the year is -18%. -20%. -22.5%.

20%. (Reason: Average assets = ($800,000 + $1,000,000)/2 = $900,000. Return on assets = $180,000/$900,000 = 20%).

A company has outstanding preferred stock with a 5% dividend rate. The interest rate on debt when the preferred stock was issued was 3%. Today, the interest rate is 7%. What impact would you expect this to have on the market value of the preferred stock? -A decrease in the market value of the preferred stock. -An increase in the market value of the preferred stock. -An unpredictable impact, with the market value going either up or down based on other factors.

A decrease in the market value of the preferred stock.

A company purchased 500 shares of its own stock for $60, then subsequently sold half of those shares for $75 and the other half for $85. The total additional paid-in capital that will result from these transactions is _________________

$10,000 (500 x $60= $30,000, 500/2= 250, 250 x $75= $18,750, $250 x $85= $21,250, $21,720 +$18,750= $40,000, $40,000-$30,000= $10,000).

A company has 10,000 shares of $100 par value, 5% preferred stock, 100,000 shares of $10 par value common stock, additional paid-in capital on common stock of $200,000, and retained earnings of $300,000. The preferred stock is cumulative and there is 1 prior year's dividends in arrears. What is the amount of the book value (per share) of the common stock? -$100 -$105 -$115 -$14.50 -$125

$14.50 (Reason: Total stockholders' equity = preferred stock (10,000 × $100) + common stock (100,000 × $10) + additional paid-in capital ($200,000) + retained earnings ($300,000) = $2,500,000. Preferred stock deduction = par value ($1,000,000) + dividends in arrears ($1,000,000 × 5% = $50,000) = $1,050,000. Book value of common stock = ($2,500,000 - $1,050,000)/100,000 shares = $14.50).

A company has 10,000 outstanding shares of $10 par value common stock and 5,000 outstanding shares of $50 par value, 6% preferred stock. How much is the total dividend that must be paid on preferred stock before any dividend can be paid on common stock? -$15,000 -$30,000 -$45,000

$15,000 (Reason: ($50 × 0.06) × 5,000 = $15,000)

A company sold 3,000 shares of $120 par value stock at $125. The additional paid-in capital from this transaction is _______________

$15,000. (3,000 x $125= $375,000, while 3,000 x $120= $360,000, $375,000=$360,000= $15,000).

A company has 10,000 shares of 5% cumulative preferred stock outstanding that has a $100 par value. Dividends are in arrears for 2 prior years. Preferred stockholders must receive a total of ____________________.

$150,000

A company has 10,000 shares of $100 par value, 5% preferred stock outstanding and 100,000 shares of $10 par value common stock outstanding. What is the total dividend that must be paid for common stock to receive $1 per share? -$550,000 -$150,000 -$100,000 -$50,000

$150,000 (Reason: (($100 × 0.05) × 10,000) + (100,000 × $1) = $150,000)

A company has the following stock outstanding: 100,000 shares of $10 par value common stock and 10,000 shares of $50 par value, 6% cumulative preferred stock, 1 year's dividends in arrears. How much must the total dividend declared by the board of directors be to both the preferred and common stock for common stock to receive $1 per share? -$100,000 -$160,000 -$30,000 -$130,000

$160,000 (Reason: ($50 × 0.06 × 10,000 × 2) + (100,000 × $1) = $160,000)

A company's book value per share is $12. It has 10,000 shares of $10 par value common stock outstanding and no additional paid-in capital. The company's retained earnings are _____________________

$20,000 (10,000 x $10= $100,000, while 10,000 x $12= $120,000, $120,000=$100,000= $12,000).

A company has 100,000 outstanding shares of $20 par value common stock that originally sold for $25 per share. It goes into the market and purchases 5,000 of those shares for $45. Assuming this is its first treasury stock purchase, what is the balance in the Treasury Stock account after this transaction? -$225,000 -$125,000 -$4.5 million -$2 million

$225,000 (Reason: 5,000 × $45 = $225,000)

A company had 10,000 outstanding shares of $10 par value stock that originally sold for $15 per share and have a current market price of $50 per share. The company declares and distributes a 2-for-1 stock split. What is the expected market price of the stock after the split? -$10 -$50 -$15 -$25

$25 (Reason: $50/2 = $25)

A company has stockholders' equity as follows: 1,000 outstanding shares of $10 par value common stock; $5,000 of additional paid-in capital; and $12,000 of retained earnings. What is the book value (per share) of the common stock? -$27 -$10 -$12 -$15

$27 (Reason: ((1,000 × $10) + $5,000 + $12,000)/1,000 = $27)

A company sold 7,000 shares of $100 par value stock at $150 per share. What is the amount of additional paid-in capital recognized in this transaction? -$350,000 -$1.05 million -$700,000

$350,000 (7,000 x $150= $1,050,000, while 7,000 x $100= $700,000, $1,050,000-$700,000= $350,000)

If a company purchased 10,000 shares of treasury stock for $50 and subsequently sold 3,000 of those shares for $56, what is the remaining treasury stock balance after these transactions? -$150,000 -$350,000 -$392,000 -$500,000

$350,000 (Reason: (10,000 - 3,000 shares) × $50 = $350,000)

A company sold 1,000 shares of $10 par value common stock at $12 and 1,000 shares of $25 par value preferred stock at $30. What is the total increase in the company's paid-in capital as a result of these transactions? -$12,000 -$42,000 -$40,000 -$30,000 -$7,000

$42,000 (Reason: (1,000 × $12) + (1,000 × $30) = $42,000)

A company sold 1,000 shares of treasury stock for $45 per share that it had purchased for $40 per share. The stock has a par value of $20 and originally sold for $32. The additional paid-in capital that results from the resale of the treasury stock is -$40,000. -$45,000. -$12,000. -$5,000.

$5,000. (Reason: 1,000 shares × ($45 - $40) = $5,000)

If a company had assets of $500,000 at the beginning of the year and $600,000 at the end of the year and a return on assets of 10%, what was its net income for the year? -$50,000 -$55,000 -$60,000

$55,000 (Reason: Average assets = ($500,000 + $600,000)/2 = $550,000. Net income = $550,000 × 10% = $55,000.)

A company has 100,000 shares of 5%, $100 par value noncumulative preferred stock outstanding and 100,000 shares of $10 par value common stock outstanding. No dividends have been paid for 3 prior years. What is the total dividend that must be paid for common stock to receive $1 per share? -$600,000 -$2.1 million -$1.5 million -$500,000

$600,000 (Reason: ($100 × 0.05 × 100,000) + ($100,000 × $1) = $600,000)

A company has 50,000 shares of 5%, $100 par value preferred stock outstanding, which is cumulative. It also has outstanding 100,000 shares of $10 par value common stock. Dividends have not been paid for the past 2 years. This year, the board of directors wants to pay common stock a $2 dividend per share. The total amount the board must declare in order to meet the board's dividend objective for common stock is ___________________.

$950,000

One advantage of the corporate form of organization is that corporations are subject to less regulation than other forms of business organization. -True -False

False

Which of the following is/are true about the market value of common stock? -Investor expectations are important in determining the market value of common stock. -Prevailing interest rates have no effect on the market value of common stock. -The profitability of the company is important in determining the market value of common stock. -The level of risk that the investor takes on is important in determining the market value of common stock.

Investor expectations are important in determining the market value of common stock. The profitability of the company is important in determining the market value of common stock. The level of risk that the investor takes on is important in determining the market value of common stock.

Regarding the corporate form of business organization, which of the following are correct statements? -It is responsible for its own debts. -It is responsible for its own taxes. -It may not enter into contracts. -It is recognized under law as a separate legal entity.

It is responsible for its own debts. It is responsible for its own taxes. It is recognized under law as a separate legal entity.

Which of the following is NOT a right of stockholders of a corporation? -Voting for directors and certain other key issues. -Participating in dividends declared by the board of directors. -Managing the company on a day-to-day basis. -Sharing in the distribution of assets should the company be liquidated.

Managing the company on a day-to-day basis.

Which of the following is NOT a characteristic of preferred stock that distinguishes it from common stock? -Preference over common stock in the event the company is liquidated. -Preference over common stock to receive dividends. -Right to receive annual dividends without action by the board of directors.

Right to receive annual dividends without action by the board of directors.

The officer whose daily responsibilities relate most directly to the accounting -function of business operations is the -vice president, sales. -chief financial officer. -vice president, human resources. -chief executive officer or president.

chief financial officer.

Corporations whose shares are not traded on an active securities exchange are described as -closely held. -always small in size (e.g., net income below $100,000). -unprofitable. -obsolete.

closely held.

The basic stock that all corporations issue is called -common stock. -preferred stock. -authorized stock.

common stock.

The number of shares a corporation is authorized to sell is legally established in the -company's articles of incorporation. -strategic plan of the company. -bylaws.

company's articles of incorporation.

Smith Company reacquires 50 share of its own $20 par stock for $30 per share. The related journal entry to record this transaction includes a: -debit to Treasury Stock for $500 -credit to Treasury Stock for $1,500 -debit to Treasury Stock for $1,000 -debit to Treasury Stock for $1,500

debit to Treasury Stock for $1,500

Smith Company reacquires 50 shares of its own $20 par stock for $30 per share. The related journal entry to record this transaction includes a: -debit to Treasury Stock for $1,500 -credit to Treasury Stock for $1,500 -debit to Treasury Stock for $500 -debit to Treasury Stock for $1,000

debit to Treasury Stock for $1,500

Johnson Company reacquires 1,000 shares of its own $10 par stock for $50 per share. The related journal entry to record this transaction includes a: -debit to Treasury Stock for $50,000 -debit to Treasury Stock for $10,000 -credit to Treasury Stock for $50,000 -credit to Treasury Stock for $40,000

debit to Treasury Stock for $50,000

Transactions between a corporation and its stockholders are classified in the statement of cash flows as __________________ activities.

financing

In a statement of cash flows, a corporation's transactions with its owners in which it purchases and sells its own stock are classified as -financing activities. -investing activities. -operating activities.

financing activities.

The fact that stockholders are not personally liable for the debts of the corporation is referred to as _________________ personal liability.

limited

The price at which shares of stock are sold from one investor to another represents the ________________ value of the shares.

market

Shares of stock that have been issued and are in the hands of stockholders are called _______________________ shares.

outstanding

Contributions by investors in exchange for capital stock, is also called -paid-in capital -retained earnings -contributed capital -corporate capital

paid-in capital contributed capital

A corporation whose stock is traded through organized securities exchanges is said to be _________________ owned.

publicly

The primary purpose of a stock split is to -reduce the market price of the company's common stock. -give each existing shareholder a smaller percentage of the company's outstanding stock. -give each existing stockholder a larger percentage of the company's outstanding stock. -increase the market price of the company's common stock.

reduce the market price of the company's common stock.

The retention of profits earned by the corporation is called -retained earnings -contributed capital -paid-in capital

retained earnings

Owners of a corporation are called ______. -sole proprietors -shareholders -stockholders

shareholders stockholders

As evidence of a stockholder's ownership, each stockholder receives from the corporation a(n) ____________________________ that indicates the number of shares he or she owns.

stock certificate

After a corporation sells shares of its stock to stockholders, those shares are owned by -the corporation. -the Securities and Exchange Commission. -the stockholder.

the stockholder.

The corporate officer identified who has custody of the company's funds and is generally responsible for planning and controlling the company's cash -position is the -chief executive officer or president. -vice president, production. -treasurer.

treasurer.

Which of the following is preferred for the assets and stockholders' equity numbers in calculating the return on assets and the return on stockholders' equity? -The average of the beginning and ending balances. -The balance at the end of the year. -The balance at the beginning of the year.

The average of the beginning and ending balances.

Which of the following is/are correct regarding the relationship between the book value and the market value of common stock? -They are different names for the same thing. -The book value may be useful in evaluating the reasonableness of the market value. -The book value is a historical amount based only on the amount stockholders invested in the company. -The relationship between the book value and the market value is one measure of investors' confidence in a company's management.

The book value may be useful in evaluating the reasonableness of the market value. The relationship between the book value and the market value is one measure of investors' confidence in a company's management.

What is the primary motivation for stockholders to purchase preferred stock? -To have a more secure dividend flow than is expected from common stock. -To control the corporation through voting. -To protect their investment from any possibility of a decline in market value.

To have a more secure dividend flow than is expected from common stock.

Common stockholders have which of the following rights? -To vote at stockholders' meetings. -To receive dividends annually regardless of the profitability of the company. -To participate in dividends when declared by the board of directors. -To residual claims on assets if the company is liquidated.

To vote at stockholders' meetings. To participate in dividends when declared by the board of directors. To residual claims on assets if the company is liquidated.

After a corporation sells its stock to stockholders, changes in the market price of those shares directly affect the financial position of the stockholder but not the financial position of the corporation. -True -False

True

Having available the needed number of shares of stock to satisfy employee stock option plans is a primary reason companies purchase treasury stock. -True -False

True

Some preferred stocks grant the holder the right to relinquish the stock in exchange for common stock of the same company. -True -False

True