Theory II Exam II Chapter 15

On June 30, 2014, when Ermler Co.'s stock was selling at $65 per share, its capital accounts were as follows: Capital stock (par value $50; 50,000 shares issued) $2,500,000 Premium on capital stock 600,000 Retained earnings 4,200,000 If a 100% stock dividend were declared and distributed, capital stock would be

$5,000,000. ((50,000 × $50) + $2,500,000 = $5,000,000.)

Which of the following represents the total number of shares that a corporation may issue under the terms of its charter?

Authorized shares

The residual interest in a corporation belongs to the

Common stockholders

EFFECT Paid the cash dividend declared in item 2 above.

Decrease assets decrease liabilities

T or F: 6. Companies allocate the proceeds received from a lump-sum sale of securities based on the securities' par values.

False

T or F: Earned capital consists of additional paid-in capital and retained earnings.

False

T/F 8. Treasury stock is a company's own stock that has been reacquired and retired.

False

T/F 9. The cost method records all transactions in treasury shares at their cost and reports the treasury stock as a deduction from capital stock.

False

EFFECT Declared a cash dividend.

Increase liabilities Decrease SE Decrease RE

What effect does the issuance of a 2-for-1 stock split have on each of the following?

Par Value per Share= Decrease Retained Earnings=No effect

Which of the following statements about property dividends is NOT true?

The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred.

Which of the following is not a legal restriction related to profit distributions by a corporation?

The amount distributed in any one year can never exceed the net income reported for that year.

T or F: 3. Common stock is the residual corporate interest the bears the ultimate risks of loss.

True

A "secret reserve" will be created if

a capital expenditure is charged to expense

Total stockholders' equity represents

a claim against a portion of the total assets of a company

At the date of declaration of a small common stock dividend, the entry should NOT include

a credit to Common Stock

Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as

a footnote

A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to

a paid-in capital account

Direct cost incurred to sell stock suck as underwriting costs should be accounted for as

a reduction of additional paid-in capital

The balance in Common Stock Dividend Distributable should be reported as a(n)

addition to capital stock

S24. In a corporate form of business organization, legal capital is best defined as a. the amount of capital the state of incorporation allows the company to accumulate over its existence. b. the par value of all capital stock issued. c. the amount of capital the federal government allows a corporation to generate. d. the total capital raised by a corporation within the limits set by the Securities and Exchange Commission.

b

121. On July 1, 2010, Nall Co. issued 2,500 shares of its $10 par common stock and 5,000 shares of its $10 par convertible preferred stock for a lump sum of $125,000. At this date Nall's common stock was selling for $24 per share and the convertible preferred stock for $18 per share. The amount of the proceeds allocated to Nall's preferred stock should be a. $62,500. b. $75,000. c. $90,000. d. $68,750.

b 121. b ($24 × 2,500) + ($18 × 5,000) = $150,000. $90,000 ————— × $125,000 = $75,000. $150,000

76. Glavine Company issues 6,000 shares of its $5 par value common stock having a market value of $25 per share and 9,000 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $288,000. The proceeds allocated to the common stock is a. $30,000 b. $130,909 c. $150,000 d. $157,091

b [(6,000 × $25) ÷ [(6,000 × $25) + (9,000 × $20)]] × $288,000 = $130,909.

Use the following information for questions 71 and 72. Presented below is information related to Hale Corporation: Common Stock, $1 par $4,300,000 Paid-in Capital in Excess of Par—Common Stock 550,000 Preferred 8 1/2% Stock, $50 par 2,000,000 Paid-in Capital in Excess of Par—Preferred Stock 400,000 Retained Earnings 1,500,000 Treasury Common Stock (at cost) 150,000 72. The total paid-in capital (cash collected) related to the common stock is a. $4,300,000. b. $4,850,000. c. $5,250,000. d. $4,700,000.

b. $4,300,000 + $550,000 = $4,850,000.

Assume common stock is the only class of stock outstanding in the Manley Corp. Total stockholders' equity divided by the number of common stock shares outstanding is called

book value per share

A primary source of stockholders' equity is

both income retained by the corporation and contributions by stockholders

21. The residual interest in a corporation belongs to the a. management. b. creditors. c. common stockholders. d. preferred stockholders.

c

26. Total stockholders' equity represents a. a claim to specific assets contributed by the owners. b. the maximum amount that can be borrowed by the enterprise. c. a claim against a portion of the total assets of an enterprise. d. only the amount of earnings that have been retained in the business.

c

S25. Stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders a. are entitled to a dividend every year in which the business earns a profit. b. have the rights to specific assets of the business. c. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership. d. can negotiate individual contracts on behalf of the enterprise.

c

74. Norton Company issues 4,000 shares of its $5 par value common stock having a market value of $25 per share and 6,000 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $192,000. What amount of the proceeds should be allocated to the preferred stock? a. $172,000 b. $120,000 c. $104,727 d. $90,000

c (4,000 × $25) + (6,000 × $20) = $220,000 ($120,000 ÷ $220,000) × $192,000 = $104,727.

77. Wheeler Company issued 5,000 shares of its $5 par value common stock having a market value of $25 per share and 7,500 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $240,000. The proceeds allocated to the preferred stock is a. $215,000 b. $150,000 c. $130,909 d. $109,091

c [(7,500 × $20) ÷ [(5,000 × $25) + (7,500 × $20)]] × $240,000 = $130,909.

The payout ration can be calculated by dividing

cash dividends by net income less preferred dividends

75. Berry Corporation has 50,000 shares of $10 par common stock authorized. The following transactions took place during 2010, the first year of the corporation's existence: Sold 5,000 shares of common stock for $18 per share. Issued 5,000 shares of common stock in exchange for a patent valued at $100,000. At the end of the Berry's first year, total paid-in capital amounted to a. $40,000. b. $90,000. c. $100,000. d. $190,000.

d (5,000 × $18) + $100,000 = $190,000.

An entry is NOT made on the

date of record

In January 2014, Finley Corporation, a newly formed company issued, 10,000 shares of its $10 par common stock for $15 per share. On July 2014, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares

decreased total stockholder's equity

Stockholders' equity is generally classified into two major categories:

earned capital and contributed capital.

The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is

either the proportional method or the incremental method

The issuer of a 5% common stock dividend to common stockholders should transfer from retained earnings to paid-in capital an amount equal to the

fair value of the shares issued

According to FASB, redeemable preferred stock should be

included as a liability

EFFECT Recorded accrued interest earned on a note receivable.

increase assets increase SE Increase RE increase NI

Treasury shares are shares........but not............

issued but not outstanding.

A dividend which is a return to stockholders of a portion of their original investments is a

liquidating dividend

Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements?

liquidation preferences

Cash dividends are paid on the basis of the number of shares

outstanding

"Gains" on sales of treasury stock (using the cost method) should be credited to

paid-in capital from treasury stock

Stock that has a fixed per-share amount printed on each stock certificate is called

par-value stock

At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as a result of the

purchase of treasury stock

The cumulative feature of preferred stock

requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders

If management wishes to "capitalize" part of the earnings, it may issue a

stock dividend

Which dividends do not reduce stockholders' equity?

stock dividends

A feature common to both stock splits and stock dividends is

that there is no effect on total stockholders' equity

A feature common to both stock splits and stock dividends is

that there is no effect on total stockholders' equity.

In a corporate form of business organization, legal capital is best defined as

the par value of all capital issued

Dividends are not paid on

treasury stock

EFFECT Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance.

Decrease asset Decrease SE Decrease RE Decrease NI

T or F: 2. The preemptive right allows stockholders the right to vote for directors of the company.

False

EFFECT Approved a retained earnings restriction.

No effect

EFFECT Declared and distributed a stock split.

No effect

Manning Company issued 10,000 shares of its $5 par value common stock having a fair value of $25 per share and 15,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $530,000. How much of the proceeds would be allocated to the common stock?

240909 ((10,000 × $25) + (15,000 × $20) = $550,000; ($250,000 ÷ $550,000) × $530,000 = $240,909)

A corporation declared a dividend, a portion of which was liquidating. How would this distribution affect each of the following?

APIC Decrease, Retained Earnings Decrease

T or F: 5. True no-par stock should be carried in the accounts at issue price without any additional paid-in capital reported.

True

27. A primary source of stockholders' equity is a. income retained by the corporation. b. appropriated retained earnings. c. contributions by stockholders. d. both income retained by the corporation and contributions by stockholders.

d

The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding

decreases retained earnings but does not change total stockholders' equity

When a corporation issues its capital stock in payment for services, the least appropriate basis or recording the transaction is the

par value of the shares issued

Younger Comp has outstanding both common stock and nonparticipating, noncumulative preferred stock. The liquidation value of the preferred is equal to its par vale. The book value per share of the common stock is unaffected by

the payment of a previously declared cash dividend on the common stock

Hernandez Company has 560,000 shares of $10 par value common stock outstanding. During the year, Hernandez declared a 10% stock dividend when the market price of the stock was $30 per share. Four months later Hernandez declared a $.50 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by

$1,988,000. (560,000 ×.10 × $30 = $1,680,000 $1,680,000 + (560,000 × 1.10 × $.50) = $1,988,000.)

Written, Inc. has outstanding 600,000 shares of $2 par common stock and 120,000 shares of no-par 8% preferred stock with a stated value of $5. The preferred stock is cumulative and nonparticipating. Dividends have been paid in every year except the past two years and the current year. Assuming that $126,000 will be distributed as a dividend in the current year, how much will the preferred stockholders receive?

$126,000. (120,000 × $5 × .08 × 3 = $144,000 > $126,000.)

Horton Co. was organized on January 2, 2014, with 500,000 authorized shares of $10 par value common stock. During 2014, Horton had the following capital transactions: January 5-issued 375,000 shares at $14 per share. July 27-purchased 25,000 shares at $11 per share. November 25-sold 18,000 shares of treasury stock at $13 per share. Horton used the cost method to record the purchase of the treasury shares. What would be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2014?

$36,000. (18,000 × $2 = $36,000.)

On January 1, 2014, Dodd, Inc., declared a 15% stock dividend on its common stock when the fair value of the common stock was $30 per share. Stockholders' equity before the stock dividend was declared consisted of: Common stock, $10 par value, authorized 200,000 shares; issued and outstanding 120,000 shares $1,200,000 Additional paid-in capital on common stock 150,000 Retained earnings 700,000 Total stockholders' equity $2,050,000 What was the effect on Dodd's retained earnings as a result of the above transaction?

$540,000 decrease (120,000 × .15 × $30 = $540,000.)

The stockholders' equity section of Gunkel Corporation as of December 31, 2014, was as follows: Common stock, par value $2; authorized 20,000 shares; issued and outstanding 10,000 shares $20,000 Paid-in capital in excess of par 30,000 Retained earnings 95,000 $145,000 On March 1, 2015, the board of directors declared a 15% stock dividend, and accordingly 1,500 additional shares were issued. On March 1, 2015, the fair value of the stock was $6 per share. For the two months ended February 28, 2015, Gunkel sustained a net loss of $15,000. What amount should Gunkel report as retained earnings as of March 1, 2015?

$71,000 ($95,000 - $15,000 - (1,500 × $6) = $71,000.)

EFFECT Recorded accrued interest expense on a note payable.

Increase liabilities decrease SE decrease RE Decrease NI

Which of the following best describes a possible result from treasury stock transactions by a corporation?

May decrease but not increase retained earnings

How should cumulative preferred dividends in arrears be shown in a corporation's statement of financial position?

Note disclosure

Quirk Corp issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued?

Par Value

At December 31, 2014 and 2015, Plank Corp. had outstanding 4,000 shares of $100 par value 8% cumulative preferred stock and 20,000 shares of $10 par value common stock. At December 31, 2014, dividends in arrears on the preferred stock were $16,000. Cash dividends declared in 2015 totaled $60,000. What amounts were payable on each class of stock?

Preferred Stock 48,000, Common Stock 12,000 (($400,000 × .08) + $16,000 = $48,000 $60,000 - $48,000 = $12,000.)

Which of the following features of preferred stock makes it more like a debt than an equity instrument?

Redeemable

In 2014, Hobbs Corp. acquired 12,000 shares of its own $1 par value common stock at $18 per share. In 2015, Hobbs issued 8,000 of these shares at $25 per share. Hobbs uses the cost method to account for its treasury stock transactions. What accounts and what amounts should Hobbs credit in 2015 to record the issuance of the 8,000 shares?

Treasury Stock 144,000; APIC 56,000

Gannon Company acquired 10,000 shares of its own common stock at $20 per share on February 5, 2014, and sold 5,000 of these shares at $27 per share on August 9, 2015. The fair value of Gannon's common stock was $24 per share at December 31, 2014, and $25 per share at December 31, 2015. The cost method is used to record treasury stock transactions. What account(s) should Gannon credit in 2015 to record the sale of 5,000 shares?

Treasury Stock for $100,000 and Paid-in Capital from Treasury Stock for $35,000. (5,000 × $20 = $100,000;5,000 × $7 = $35,000.)

On September 1, 2014, Valdez Company reacquired 20,000 shares of its $10 par value common stock for $15 per share. Valdez uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit

Treasury Stock for $300,000 (20,000 × $15 = $300,000)

When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited?

Treasury stock for the purchase price

T or F: 1. A corporation is incorporated in only one state regardless of the number of states in which it operates.

True

T or F: 7. Companies should record stock issued for services or noncash property at either the fair value of the stock issued or the fair value of the consideration received.

True

T/F 10. 10. When a corporation sells treasury stock below its cost, it usually debits the difference between cost and selling price to Paid-in Capital from Treasury Stock.

True

23. The pre-emptive right enables a stockholder to a. share proportionately in any new issues of stock of the same class. b. receive cash dividends before other classes of stock without the pre-emptive right. c. sell capital stock back to the corporation at the option of the stockholder. d. receive the same amount of dividends on a percentage basis as the preferred stockholders.

a

30. When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the a. market value of the services received. b. par value of the shares issued. c. market value of the shares issued. d. Any of these provides an appropriate basis for recording the transaction.

a

31. Direct costs incurred to sell stock such as underwriting costs should be accounted for as 1. a reduction of additional paid-in capital. 2. an expense of the period in which the stock is issued. 3. an intangible asset. a. 1 b. 2 c. 3 d. 1 or 3

a

Use the following information for questions 71 and 72. Presented below is information related to Hale Corporation: Common Stock, $1 par $4,300,000 Paid-in Capital in Excess of Par—Common Stock 550,000 Preferred 8 1/2% Stock, $50 par 2,000,000 Paid-in Capital in Excess of Par—Preferred Stock 400,000 Retained Earnings 1,500,000 Treasury Common Stock (at cost) 150,000 71. The total stockholders' equity of Hale Corporation is a. $8,600,000. b. $8,750,000. c. $7,100,000. d. $7,250,000.

a $4,300,000 + $400,000 + $550,000 + $2,000,000 + $1,500,000 - $150,000

Porter Corp. purchased its own par value stock on January 1, 2104 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from

additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings

73. Manning Company issued 10,000 shares of its $5 par value common stock having a market value of $25 per share and 15,000 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $480,000. How much of the proceeds would be allocated to the common stock? a. $50,000 b. $218,182 c. $250,000 d. $255,000

b (10,000 × $25) + (15,000 × $20) = $550,000 ($250,000 ÷ $550,000) × $480,000 = $218,182.

Common stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders

bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership

When a corporation sells stock to investors, the transaction will increase _________ but not ____________.

contributed capital, earned capital

120. A corporation was organized in January 2007 with authorized capital of $10 par value common stock. On February 1, 2010, shares were issued at par for cash. On March 1, 2010, the corporation's attorney accepted 7,000 shares of common stock in settlement for legal services with a fair value of $90,000. Additional paid-in capital would increase on February 1, 2010 March 1, 2010 a. Yes No b. Yes Yes c. No No d. No Yes

d

28. Stockholders' equity is generally classified into two major categories: a. contributed capital and appropriated capital. b. appropriated capital and retained earnings. c. retained earnings and unappropriated capital. d. earned capital and contributed capital.

d

29. The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the a. pro forma method. b. proportional method. c. incremental method. d. either the proportional method or the incremental method.

d

EFFECT Declared a stock dividend.

increase PIC decrease RE

The rate of return on common stock equity is calculated by dividing

net income less preferred dividends by average common stockholders' equity

EFFECT Distributed the stock dividend declared in item 8.

no effect

The pre-emptive right enables a stockholder to

none of these

Houser Corporation owns 4,000,000 shares of stock in Baha Corp. On Dec 31, 2014, Houser distributed these shares of stock as a dividend to its stockholders. This is an example of a

property dividend

The pre-emptive right of a common stockholder is the right to

share proportionately in any new issues of stock of the same class