Financial Accounting Chapter 8

Curtain Co. paid dividends of $14,000; $21,000; and $22,000 during Year 1, Year 2, and Year 3, respectively. The company had 2,500 shares of 7.5%, $100 par value preferred stock outstanding that paid a cumulative dividend. The amount of dividends received by the common shareholders during Year 3 would be:

$750. Explanation: The annual preferred dividends each year = $100 x 2,500 shares x 7.5% = $18,750. In Year 1, there were $4,750 of dividends in arrears ($18,750 preferred dividends - $14,000 paid). In Year 2, there were $2,500 in arrears ($4,750 beginning + $18,750 preferred dividends - $21,000 paid). In Year 3, the preferred dividends was $18,750 + $2,500 in arrears = $21,250. The remaining $750 was paid to common shareholders.

Montana Company was authorized to issue 155,000 shares of common stock. The company had issued 72,000 shares of stock when it purchased 11,500 shares of treasury stock. The number of outstanding shares of common stock was:

60,500. Explanation: 72,000 shares issued - 11,500 shares of treasury stock = 60,500 shares outstanding

Flagler Corporation shows a total of $660,000 in its common stock account and $1,600,000 in its paid-in capital in excess of par value - common stock account. The par value of Flagler's common stock is $8. How many shares of Flagler stock have been issued?

82,500. Explanation: $660,000 total par value / $8 par value per share = 82,500 shares issued.

Which of the following is not considered an advantage of the corporate form of business organization?

Lack of government regulation. Explanation: The large amount of government regulation is a disadvantage of the corporate form of business.

On January 2, Year 1, Torres Corporation issued 20,000 shares of $10 par-value common stock for $11 per share. Which of the following statements is true?

The paid-in capital in excess of par value account will increase by $20,000. Explanation: The cash account will increase by $220,000 (20,000 x $11), the common stock account will increase by $200,000 (20,000 x $10 par value), and the paid-in capital in excess of par value account will increase by $20,000 (20,000 x $1).

On January 2, Year 1, Torres Corporation issued 22,000 shares of $15 par-value common stock for $25 per share. Which of the following statements is true?

The paid-in capital in excess of par value account will increase by $220,000. Explanation: The cash account will increase by $550,000 (22,000 x $25), the common stock account will increase by $330,000 (22,000 x $15 par value), and the paid-in capital in excess of par value account will increase by $220,000 (22,000 x $10).

Ix Company issued 36,000 shares of $10 par value common stock at a market price of $31. As a result of this accounting event, the amount of stockholders' equity would:

increase by $1,116,000. Explanation: Common stock will increase by $360,000, the par value, and paid-in capital in excess of par value will increase by $756,000, for a total increase in stockholders' equity of $1,116,000.

Flagler Corporation shows a total of $650,000 in its common stock account and $1,120,000 in its paid-in capital in excess of par value - common stock account. The par value of Flagler's common stock is $5. How many shares of Flagler stock have been issued?

130,000. Explanation: $650,000 total par value / $5 par value per share = 130,000 shares issued.

On January 12, Year 1, Gilliam Corporation issued 550 shares of $12 par-value common stock for $15 per share. The number of shares authorized is 5,000, and the number of shares outstanding prior to this transaction is 1,200. Which of the following answers describes the effect of the January 12, Year 1 transaction?

Assets = 8,250 Liab. = NA Com. Stk. = 6,600 Pd-in Excess = 1,650 Rev. = NA Exp. = NA Net Inc. = NA Cash Flow = 8,250 FA Explanation: Assets (cash) increase by $8,250 (550 x $15), common stock increases by $6,600 (= 550 shares x $12 par value), and paid-in excess of par value - common increases by $1,650 (= $8,250 - $6,600). The cash inflow is a financing activity.

Which form of business organization is established as a legal entity separate from its owners?

Corporation. Explanation: Corporations are owned by shareholders. Corporations file and pay income taxes on their own.

Which of the following statements about types of business entities is true?

One advantage of a corporation is ability to raise capital. Explanation: Corporations are more able to raise capital because they can issue common stock to a large number of potential investors.