Ch 11 self-test

Wynola, Inc. issued 1,000 shares of common stock at $10 per share. If the stock has a par value of $4 per share, which of the following will be part of the journal entry to record the issuance? A. Credit to Common Stock for $4,000 B. Debit to Cash for $4,000 C. Credit to Paid-in Capital in Excess of Par Value for $10,000 D. Debit to Retained Earnings for $6,000

A: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value.

Ernest, an individual, receives $100 from Vernon Corp. in dividends and is in the 28% tax bracket. Vernon Corp. already paid corporate taxes on the $100 at a 20% tax rate. How much in personal taxes will Ernest need to pay? A. $0 B. $28 C. $8 D. $20

B: One of the disadvantages of a corporate structure is the corporation pays its own tax burden on net income and then the stockholders pay income tax on the dividends they receive.

Which one of the following is not a right of preferred stockholders? A. Priority in relation to dividends B. Priority voting rights C. Priority to the assets in the event of liquidation D. Priority to dividends, assets and voting rights.

B: Preferred stockholders normally have a priority in relation to dividends.

Harrison, Inc. issued 600 shares of common stock at $10 per share. If the stock was no-par value stock, which of the following will be part of the journal entry to record the issuance? A. Debit to Cash for $600 B. Credit to Paid-in Capital in Excess of Par for $600 C. Credit to Common Stock for $6,000 D. Debit to Paid-in Capital $6,000

C: The journal entry will increase the cash account for the total issue price and increase the common stock account for the same amount.

The stockholders of a corporation have unlimited liability. T or F

False

The par value of corporate shares issued represents a corporation's legal capital. T or F

T

When treasury stock is purchased, the number of outstanding shares decreases. T or F

T

A corporation sold 1,000 shares of its $2.00 par value common stock for $10.00 per share and later repurchased 100 of those shares for $12.00 per share. Which of the following will be debited to record the repurchase of the 100 shares? A. Common Stock for $1,200 B. Treasury Stock for $1,200 C. Treasury Stock for $200 D. Cash for $1,200

B: The journal entry will increase the treasury stock account (a contra stockholders' equity account) and will decrease the cash account for the total cost to acquire.

Which one of the following statements is incorrect? A. Dividends cannot be paid on common stock while any dividend on preferred stock is in arrears. B. Dividends in arrears on preferred are not considered a liability. C. Dividends may be paid on common stock while dividends are in arrears on preferred stock. D. When preferred stock is noncumulative, any dividend passed in a year is lost forever.

C: Dividends may not be paid on common stock as long as preferred dividends are in arrears.

How are dividends in arrears reported in the financial statements? A. As a liability B. As an expense C. In a footnote D. As an equity item

C: Dividends in arrears are not a liability because they have not been declared. The declaration by the board of directors creates the liability.

Which of the following increases when a corporation purchases treasury stock? A. Number of shares authorized B. Number of shares issued C. Number of treasury shares D. Number of outstanding shares

C: Shares authorized is the maximum number of shares a corporation is authorized to sell.

If 1,000 shares of $5 par common stock are reacquired by a corporation for $12 a share, by how much will total stockholders' equity be reduced? A. $5,000 B. $12,000 C. $0 D. $7,000

B: Stockholders' equity is reduced by the cost of acquiring the treasury stock.

If a corporation issues 1,000 shares of $3 par common stock for $7 a share, how much is the legal capital? A. $7,000 B. $3,000 C. $4,000 D. $0

B: The legal capital is the par value per share times the number of shares issued.

DT Inc. issued 3,000 shares of $5 par value common stock for $6 per share. Which of the following is one part of the journal entry to record the issuance? A. Debit to Paid-in Capital in Excess of Par Value for $3,000 B. Debit to Cash for $15,000 C. Credit to Common Stock for $15,000 D. Credit to Common Stock for $18,000

C: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value.

Which of the following represents the amount per share of stock that must be retained in the business for the protection of corporate creditors? A. Legal capital B. Par value C. Market value D. Stated value

A: Market value is the selling price of a share of stock on a given day.

Harrison, Inc. issued 4,000 shares of common stock at $12 per share. If the stock has a par value of $0.50 per share, which of the following will be part of the journal entry to record the issuance? A. Credit to Common Stock for $2,000 B. Debit to Cash for $4,000 C. Credit to Paid-in Capital in Excess of Par Value for $48,000 D. Debit to Retained Earnings for $46,000

A: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value.

Which of these is not a major advantage of a corporation? A. Separate legal existence B. Continuous life C. Government regulations D. Transferable ownership rights

C

A corporation has cumulative preferred stock on which it pays dividends of $20,000 per year. The dividends are in arrears for two years. If the corporation plans to distribute $90,000 as dividends in the current year, how much will the common stockholders receive? A. $20,000 B. $30,000 C. $40,000 D. $60,000

B: Preferred stockholders receive an allocation for each of the past two years and an allocation for the current year. The balance remaining goes to the common stockholders.

Which one of the following decreases when a corporation purchases treasury stock? A. Authorized shares B. Issued shares C. Treasury shares D. Outstanding shares

D

M-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2014. No dividends were declared in 2012 or 2013. If M-Bot wants to pay $375,000 of dividends in 2014, how much will common stockholders receive? A. $0 B. $295,000 C. $215,000 D. $135,000

D: Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the two years in arrears and the current year.

What method is normally used to account for treasury stock? A. Stated value method B. Legal value method C. Par value method D. Cost method

D: Treasury stock is normally accounted for using the cost method.

Which of these statements is false? A. Ownership of common stock gives the owner a voting right. B. The stockholders' equity section begins with paid-in capital amounts. C. The authorization of capital stock does not result in a formal accounting entry. D. Legal capital is intended to protect stockholders.

D: When capital stock is authorized, no formal accounting entry is required.

Which of the following is a feature associated only with preferred stock? A. Dividend preference B. Preference to assets in the event of liquidation C. Cumulative dividends D. All of the answer choices are correct

D: preferred stockholders have priority over common stockholders in receiving dividends.

A cumulative dividend feature means that preferred stockholders must be paid only current-year dividends before common stockholders receive dividends. T or F

This statement is false. A cumulative dividend feature means that preferred stockholders must be paid current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends.

Dividends in arrears are reported as a current liability on the balance sheet. T or F

This statement is false. No liability is recorded for undeclared dividends in arrears because only declared dividends are a legal obligation.

Dynatech issues 1,000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, which accounts are credited? A. Common Stock $10,000 and Gain on Stock Sale $2,000 B. Common Stock $12,000 C. Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000 D. Common Stock $10,000 and Retained Earnings $2,000

c: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value.

The 13th Street Grill issued 10,000 of $1 par value common stock for $5 per share. Which of the following will be part of the journal entry to record the issuance? A. A debit of $10,000 to Common Stock B. A debit of $50,000 to Common Stock C. A credit of $10,000 to Common Stock D. A credit of $50,000 to Common Stock

c: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value.