Chapter 11

Century Corporation issued 400,000 shares of $4 par value common stock at the time of its incorporation. The stock was issued for cash at a price of $16 per share. During the first year of operations, the company sustained a net loss of $100,000. The year-end balance sheet would show the balance of the Common Stock account to be: A) $1,600,000. B) $1,500,000. C) $6,300,000. D) $6,400,000.

A) $1,600,000. Issued x par value: 400,000 x $4 = 1,600,000

Which of the following individuals has the most power to influence corporate policy on a long-term basis? A) A shareholder owning 60% of the outstanding common stock. B) A shareholder owning 80% of the outstanding preferred stock. C) The treasurer of the corporation. D) The controller of the corporation.

A) A shareholder owning 60% of the outstanding common stock.

Which of the following does not appear in a corporate income statement? A) Gains and losses from treasury stock transactions. B) Income tax expense. C) The income or loss from a segment of the business that has been discontinued during the current year. D) Gains and losses not expected to recur in the foreseeable future.

A) Gains and losses from treasury stock transactions.

On January 1, Year 1, Juniper Corporation issued 60,000 shares of its total 200,000 authorized shares of $4 par value common stock for $8 per share. On December 31, Year 1, Juniper Corporation's common stock is trading at $12 per share. Assume Juniper Corporation decides to issue an additional 1,000 shares of its common stock on December 31, Year 1. How will the above increase in value affect Juniper? A) Juniper can issue the 1,000 shares at a higher price than the initial 60,000 shares. B) Juniper can sell the 1,000 shares for $12 each, as well as collect an additional $4 per share for each of the 60,000 shares sold initially. C) Juniper reports a gain of $4 per share on all stock sold during the year. D) Paid-in capital at the end of Year 1 will be $732,000 (i.e., 61,000 shares times $12 per share).

A) Juniper can issue the 1,000 shares at a higher price than the initial 60,000 shares.

Which of the following best describes the book value of a share of stock? A) Net assets divided by the number of shares outstanding. B) The amount at which the stock would sell on the market if sold by a willing and informed seller to a willing and informed buyer. C) Total assets of the company, as reported in the accounting records, divided by the number of shares of stock outstanding. D) Total stockholders' equity divided by the number of shares authorized.

A) Net assets divided by the number of shares outstanding.

Shares that have been sold and are in the hands of stockholders are called: A) Outstanding B) Issued C) Treasury D) Underwritten

A) Outstanding

In a corporation's organization chart, who has/have the highest position? A) Stockholders B) Board of Directors C) CEO D) President

A) Stockholders

Which of the following would usually be the greatest amount? A) The number of shares authorized B) The number of shares issued C) The number of shares outstanding D) The number of shares of Treasury Stock

A) The number of shares authorized

Which of the following apply to closely held corporations? A) There is no organized market for buying and selling the company's shares. B) The company must prepare and issue its financial statements in conformity with generally accepted accounting principles. C) The company must have its financial statements audited by an independent firm of CPAs. D) The company's financial information must be submitted to the Securities and Exchange Commission.

A) There is no organized market for buying and selling the company's shares.

The net assets of a corporation are equal to: A) Total assets − total liabilities. B) Total assets − retained earnings. C) Total assets + total liabilities. D) Total assets + retained earnings.

A) Total assets − total liabilities.

Public corporations are required by law or regulation to perform all of the following except: A) Submit much of their financial information to the SEC for review. B) Make regularly scheduled dividend payments to all stockholders. C) Have their annual financial statements audited by an independent CPA. D) Disclose their financial information to the public.

B) Make regularly scheduled dividend payments to all stockholders.

When no-par stock is issued: A) The entire amount received is credited to the Additional Paid-in Capital account. B) The issue price is credited to the Capital Stock account. C) There is no legal capital created because there is no par or stated value. D) The transaction usually involves only an exchange for non-cash assets or services, since the stock has no value on the stock exchanges.

B) The issue price is credited to the Capital Stock account.

The rights of a common stockholder do not include the right: A) To vote for directors. B) To withdraw a share of corporate net assets proportionate to the person's stockholdings. C) To receive a proportionate share of corporate assets upon liquidation after creditors have been paid. D) To share in profits when the board of directors declares a dividend.

B) To withdraw a share of corporate net assets proportionate to the person's stockholdings.

During the year ended December 31, Year 1, Riverside Corporation reacquired 700 shares of its own common stock at a price of $20 per share. During Year 2, the company reissued 500 shares of that treasury stock. The following items are shown in the stockholders' equity section of the company's balance sheet as of December 31, Year 2: Treasury stock (200 shares, at $20 cost) $4,000 Additional paid-in capital: treasury stock $1,000 What was the reissuance price of the 700 shares that were reissued during Year 2? A) $2 per share above its par value B) $2 per share C) $2 per share above its cost D) $22 per share above its cost

C) $2 per share above its cost When treasury shares are reissued, the Treasury Stock account is credited for the cost of the shares reissued, and Additional Paid-in Capital: Treasury Stock Transactions is debited or credited for any difference between cost and the reissue price. Difference between reissue price and cost = Balance of Additional Paid-In Capital: Treasury Stock account of $1,000 ÷ 500 shares = $2 per share (that is, reissue price is higher than cost)

On September 1, Year 1, Maryland Corporation's common stock was selling at a market price of $170 per share. On that date, Maryland announced a 6 for 2 stock split. At what price would you expect the stock to trade immediately after the split goes into effect? A) $85.00 per share B) $510.00 per share C) $56.67 per share D) $170.00 per share

C) $56.67 per share $170 × 2 ÷ 6 = 56.67

On April 1, Year 1, Jetter Corporation reacquired 2,000 shares of its own $10 par stock for $120,000 cash. On October 15, Year 1, 600 of the treasury shares were reissued at a price of $65 per share. The reacquisition of the 2,000 shares on April 1, Year 1, causes: A) No change in total assets of Jetter Corporation. B) No change in the number of shares of Jetter Corporation stock outstanding. C) A reduction in total assets and in total stockholders' equity of Jetter Corporation. D) Jetter Corporation to show a new asset, "Treasury Stock", for $120,000.

C) A reduction in total assets and in total stockholders' equity of Jetter Corporation.

A primary disadvantage of the corporate form of organization is: A) Unlimited personal liability for business debts. B) Ownership is difficult to transfer. C) Corporate earnings are subject to double taxation. D) Corporations may continue its operations without disruption despite the death of an individual stockholder.

C) Corporate earnings are subject to double taxation.

The purchase of treasury stock for cash will: A) Increase stockholders' equity. B) Not increase nor decrease stockholders' equity. C) Decrease stockholders' equity. D) Not change total assets.

C) Decrease stockholders' equity.

Treasury stock: A) Is an asset. B) Increases total stockholders' equity. C) Decreases total stockholders' equity. D) Does not change total stockholders' equity.

C) Decreases total stockholders' equity.

When shares of stock are sold from one investor to another, they will trade at: A) Par value B) Book value C) Market value D) Stated value

C) Market value

Which statement is true about a stock split? A) Total shareholders' equity increases. B) Total shareholders' equity decreases. C) Total shareholders' equity remains the same. D) A change in total stockholders' equity depends upon whether it is a 2-for-1 split or a 3-for-1 split.

C) Total shareholders' equity remains the same.

The term paid-in capital means: A) All assets other than retained earnings. B) Legal capital plus retained earnings. C) Total stockholders' equity minus retained earnings. D) Legal capital minus retained earnings.

C) Total stockholders' equity minus retained earnings.

Most preferred stocks have one or more of the following characteristics, except: A) To receive dividends on a preferred basis. B) Cumulative dividends. C) Voting rights. D) Callable at the option of the corporation.

C) Voting rights.

The advantages of corporations going public include all of the following except: A) Professional management. B) Transferability of ownership. C) Limited shareholder liability. D) Ability to remove assets.

D) Ability to remove assets.

On April 1, Year 1, Jetter Corporation reacquired 2,000 shares of its own $10 par stock for $120,000 cash. On October 15, Year 1, 600 of the treasury shares were reissued at a price of $65 per share. Assuming there are no further transactions involving treasury stock in Year 1, the financial statements of Jetter Corporation for Year 1 will show: A) Treasury Stock of $81,000 among the assets in the balance sheet. B) Gain on Sale of Treasury Stock of $3,000 in the income statement for Year 1. C) Treasury Stock of $120,000 as a deduction in the stockholders' equity section of the December 31, Year 1, balance sheet. D) Additional Paid-In Capital: Treasury Stock Transactions of $3,000 in the December 31, Year 1 balance sheet.

D) Additional Paid-In Capital: Treasury Stock Transactions of $3,000 in the December 31, Year 1 balance sheet.

Which of the following statements regarding preferred stock and preferred stock dividends is not true? A) Companies are inclined to routinely distribute dividends on preferred stock. B) The preferred dividend rate is an important factor in determining the market price of a preferred stock. C) In the long run, a company must be profitable enough to pay dividends. D) Dividends on preferred stock are guaranteed.

D) Dividends on preferred stock are guaranteed.

Treasury stock represents: A) Shares of ownership in the United States Treasury Department. B) A current asset. C) Authorized shares that have never been issued. D) Previously outstanding shares that have been repurchased by the issuing company.

D) Previously outstanding shares that have been repurchased by the issuing company.

Which of the following is not an addition to total paid-in-capital? A) Preferred stock B) Common stock C) Preferred stock and treasury stock D) Retained earnings and treasury stock

D) Retained earnings and treasury stock

If preferred stock is convertible, it is so at the option of the: A) Board of directors B) CEO C) CFO D) Stockholders

D) Stockholders

When a corporation issues capital stock at a price higher than the par value: A) The amount received over par value increases retained earnings. B) The entire issue price is credited to the Capital Stock account. C) The amount received in excess of par value constitutes profit to the issuing corporation. D) The amount received in excess of par value becomes part of paid-in capital.

D) The amount received in excess of par value becomes part of paid-in capital.

The market price of a preferred stock will be affected by: A) The dividend rate. B) The chance that the company will not operate profitably. C) The level of interest rates. D) The dividend rate, the chance that the company will not operate profitably, and the level of interest rates.

D) The dividend rate, the chance that the company will not operate profitably, and the level of interest rates.

The purchase of treasury stock for cash will have which effect upon the following items? (Total assets, total stockholders' equity, shares issued, shares outstanding)

Total Assets - Decrease Total Stockholders' Equity - Decrease Shares Issued - No change Shares Outstanding - Decrease