Peters Midterm Ch 12-17

Dixie Company reports the following amounts for 2020. Net income$300,000Average, stockholders' equity2,000,000Preferred dividends84,000Par value preferred stock400,000 The 2020 rate of return on common stockholders' equity is

13.5% ($300,000 - $84,000) / ($2,000,000 - $400,000) = 13.5%.[(Net income - Preferred stock dividends) ÷ (Average stockholders' equity - Par value of preferred stock) = Return on common stockholders' equity]

Louisa Santiago purchases 50% of Leo Lemon's capital interest in the K & L partnership for $22,000. If the capital balance of Kate Kildare and Leo Lemon are $40,000 and $30,000, respectively, Santiago's capital balance following the purchase is

15,000

A $2200 face value bond with a quoted price of 98 is selling for

2156 $2200 × .98 = $2156.(Face value bond payable × Selling price = Sale price)

If a partner has a capital deficiency and does not have the personal resources to eliminate it,

the other partners will have to absorb the capital deficiency on the basis of their respective income sharing ratios.

If everything else is held constant, earnings per share is increased by: (a)the payment of a cash dividend to common shareholders. (b)the payment of a cash dividend to preferred shareholders. (c)the issuance of new shares of common stock. (d)the purchase of treasury stock.

the purchase of treasury stock.

In the liquidation of a partnership, any gain or loss on the realization of noncash assets should be allocated

to the partners on the basis of their income ratios.

In the stockholders' equity section, the cost of treasury stock is deducted from: (a)total paid-in capital and retained earnings. (b)retained earnings. (c)total stockholders' equity. (d)common stock in paid-in capital.

total paid-in capital and retained earnings.

The advantages of a partnership do not include:

unlimited liability.

Which of the following is not a necessary action that the partnership must take upon the death of a partner?

Discontinue business operations.

Corporations report which of the following in a separate section of the income statement?

income tax expense

Corporation income statements may be the same as the income statements for unincorporated companies except for: (a)gross profit. (b)income tax expense. (c)operating income. (d)net sales.

income tax expense.

Premium on Bonds Payable

is considered to be a reduction in the cost of borrowing.

A hybrid form of business organization with certain features like a corporation is a(n)

limited liability company

When a credit to a new partner's capital account is less than his/her investment in the firm, the difference is allocated to the old partners

on the basis of their income ratios.

The NBC Company reports net income of $60,000. If partners N, B, and C have an income ratio of 50%, 30%, and 20%, respectively, C's share of the net income is:

$12,000. C's income is computed by multiplying the partnership income ($60,000) by partner C's income ratio (20%) = $12,000

Using the data in Practice Multiple-Choice Question 12.6, what is B's share of net income if the percentages are applicable after each partner receives a $10,000 salary allowance?

$19,000. After allocating the salary allowance to each partner, $30,000 will be available to divide according to the income ratio [$60,000 − ($10,000 × 3)]. Partner B's share of the remainder is $9,000 ($30,000 × 30%). Partner B's total share of income is equal to $19,000 (salary allowance of $10,000 1 B's share of the remainder $9,000

During 2020, Talon Inc. had sales revenue $376,000, gross profit $176,000, operating expenses $66,000, cash dividends $30,000, other expenses and losses $20,000. Its corporate tax rate is 30%. What was Talon's income tax expense for the year? (a)$18,000. (b)$52,800. (c)$112,800. (d)$27,000.

$27,000. Income before income taxes = Gross profit($176,000) − Operating expenses ($66,000) − Other expenses and losses ($20,000) = $90,000. Talon's income tax expense therefore=$27,000 ($90,000 × .30)

The income statement for Nadeen, Inc. shows income before income taxes $700,000, income tax expense $210,000, and net income $490,000. If Nadeen has 100,000 shares of common stock outstanding throughout the year, earnings per share is: (a)$7.00. (b)$4.90. (c)$2.10. (d)No correct answer is given.

$4.90. Earnings per share equals Net income ($700,000 − $210,000) less Preferred dividends ($0) divided by Weighted-average common shares outstanding (100,000) = $4.90 per share.

Each of the following is correct regarding treasury stock except that it has been

retired.

The liquidation of a partnership may result from each of the following except the

retirement of a partner

Under the corporate form of business organization

the corporation's life is stipulated in its charter.

The dominant form of business organization in the United States in terms of dollar sales volume, earnings, and employees is

the corporation.

Ben and Sam Jenkins formed a partnership. Ben contributed $8,000 cash and a used truck that originally cost $35,000 and had accumulated depreciation of $15,000. The truck's fair value was $16,000. Sam, a builder, contributed a new storage garage. His cost of construction was $40,000. The garage has a fair value of $55,000. What is the combined total capital that would be recorded on the partnership books for the two partners?

$79,000. When a partnership is formed, assets invested by the partners are recorded at their fair values. Thus, the combined total capital is $8,000 (cash) + $16,000 (fair value of truck) + $55,000 (fair value of the new storage garage) = $79,000

Cooney Inc. reported net income of $540000 during 2020 and paid dividends of $52000 on common stock. It also has 20000 shares of 6%, $100 par value preferred stock outstanding. Common stockholders' equity was $2400000 on January 1, 2020, and $3200000 on December 31, 2020. The company's return on common stockholders' equity for 2020 is:

15.0% ($540000 - (20000) (0.060) $100)/[($2400000 + $3200000)/2] = 15.0%.[Net income - (Number of shares of preferred stock × Interest rate × Preferred stock par value)] ÷ [(Beginning common stockholders' equity + Ending common stockholders' equity) ÷ 2] = Return on common stockholders' equity

Kincaid is admitted to a partnership with a 25% capital interest by a cash investment of $125,000. If total capital of the partnership is $825,000 before admitting Kincaid, the credit to be made to the Kincaid, Capital account is

237,500 This response is incorrect as it represents the bonus from the transaction (new partner capital credit ($237,500) less cash investment by new partner ($125,000). The correct computation of new partner capital credit => Total capital of old partnership ($825,000) + cash investment by new partner ($125,000) = Total capital of new partnership ($950,000). New partner capital credit = ownership percentage (25%) x $950,000 = $237,500.

Katie Inc. reported net income of $186,000 during 2020 and paid dividends of $26,000 on common stock. It also has 10,000 shares of 6%, $100 par value, noncumulative preferred stock outstanding and paid dividends of $60,000 on preferred stock. Common stockholders' equity was $1,200,000 on January 1, 2020, and $1,600,000 on December 31, 2020. The company's return on common stockholders' equity for 2017 is: (a)10.0%. (b)9.0%. (c)7.1%. (d)13.3%.

9.0%. Return on common stockholders' equity is Net income available to common stockholders divided by Average common stockholders' equity. Net income available to common stockholders is Net income less Preferred dividends = $126,000 [$186,000 − (10,000 × .06 × $100)]. The company's return on common stockholders' equity for the year is therefore 9.0% [$126,000/ ($1,200,000 + $l,600,000)/2)]

The following selected amounts are available for Vizio Company. Retained earnings (beginning)$1600Net loss300Cash dividends declared200Stock dividends declared200 What is its ending retained earnings balance?

900

The entry to record an installment payment on a long-term note payable is

Debit : mortgage payable and interest expense credit: cash

CraneCompany is authorized to issue 10000 shares of 8%, $100 par value preferred stock and 470000 shares of no-par common stock with a stated value of $1 per share. If Crane issues 5000 shares of preferred stock for land with an asking price of $579000 and a market value of $550000, which of the following would be the journal entry for Crane to record?

Debit: Land550000 Credit: Preferred Stock 500000 Paid-in Capital in Excess of Par-Preferred 50000

Which of the following would not cause an increase in partnership capital?

Drawings

Treasury stock may be repurchased: (a)to reissue the shares to officers and employees under bonus and stock compensation plans. (b)to signal to the stock market that management believes the stock is underpriced. (c)to have additional shares available for use in the acquisition of other companies. (d)More than one of the above.

More than one of the above.

When computing earnings per share,

the dividends for cumulative preferred stock are deducted from net income whether or not preferred dividends have been declared.

Which of the following statements about a cash dividend is incorrect?

Shareholders usually vote to determine the amount of income to be distributed in the form of a dividend.

Which of the following statements about partnership financial statements is true?

The owners' equity statement is called the partners' capital statement.

Which of the following factors does not affect the initial market price of a stock?

The par value of the stock

Which of the following statements concerning leases is true?

The portion of a lease liability expected to be paid in the next year is reported as a current liability.

Total stockholders' equity (in the absence of treasury stock) equals: (a)Total paid-in capital + Retained earnings. (b)Paid-in capital + Capital stock + Retained earnings. (c)Capital stock + Additional paid-in capital − Retained earnings. (d)Common stock + Retained earnings.

Total paid-in capital + Retained earnings.

XYZ, Inc. sells 100 shares of $5 par value treasury stock at $13 per share. If the cost of acquiring the shares was $10 per share, the entry for the sale should include credits to: (a)Treasury Stock $1,000 and Paid-in Capital from Treasury Stock $300. (b)Treasury Stock $500 and Paid-in Capital from Treasury Stock $800. (c)Treasury Stock $1,000 and Retained Earnings $300. (d)Treasury Stock $500 and Paid-in Capital in Excess of Par $800.

Treasury Stock $1,000 and Paid-in Capital from Treasury Stock $300.

Preferred stock may have priority over common stock except in: (a)dividends. (b)assets in the event of liquidation. (c)cumulative dividend features. (d)voting.

Voting

A corporation differs from a proprietorship and a partnership in that

a corporation is considered a separate legal entity for taxation purposes.

Treasury stock is

a corporation's own stock which has been issued and subsequently reacquired but not retired.

Retained earnings is

a part of the stockholders' claim on the total assets of the corporation.

If the present value of lease payments equals or exceeds 90% of the fair value of the leased property, the

conditions are met for the lease to be considered a capital lease.

A factor which distinguishes the corporate form of organization from a sole proprietorship or partnership is that a

corporation is subject to more federal and state government regulations.

To close a partner's drawings account, an entry must be made that:

credits that partner's drawings account and debits that partner's capital account.

Entries for cash dividends are required on the: (a)declaration date and the payment date. (b)record date and the payment date. (c)declaration date, record date, and payment date. (d)declaration date and the record date.

declaration date and the payment date.

In accounting for stock investments between 20% and 50%, the _______ method is used.

equity

If stock is issued for a noncash asset, the asset should be recorded on the books of the corporation at

fair value

Upon formation of a partnership, each partner's initial investment of assets should be recorded at their:

fair values

Each of the following statements is correct except that earnings per share is reported

for both common and preferred stock.

In the liquidation of a partnership, any partner who has a capital deficiency

has a personal debt to the partnership for the amount of the deficiency.

The return on common stockholders' equity is defined as: (a)net income divided by total assets. (b)cash dividends divided by average common stockholders' equity (c)income available to common stockholders divided by average common stockholders' equity. (d)None of these is correct.

income available to common stockholders divided by average common stockholders' equity.

In the stockholders' equity section of the balance sheet, common stock: (a)is listed before preferred stock. (b)is added to total capital stock. (c)is part of paid-in capital. (d)is part of additional paid-in capital.

is part of paid-in capital.

Retained earnings

is unique to the corporate form of business.

The formula for computing earnings per share is net income

less preferred dividends divided by the weighted-average number of common shares outstanding.

Each of the following is reported for common stock except the

liquidation value.

Prior period adjustments

may either increase or decrease retained earnings.

Dividends in arrears on cumulative preferred stock

must be paid before common stockholders can receive a dividend.

The account Retained Earnings is: (a)a subdivision of paid-in capital. (b)net income retained in the corporation. (c)reported as an expense in the income statement. (d)closed to capital stock.

net income retained in the corporation.

Prior period adjustments are reported

on the current year's retained earnings statement.

If stock is issued for less than par value, the account

paid-In Capital in Excess of Par is credited.

If common stock is issued for an amount greater than par value, the excess should be credited to

paid-in Capital in Excess of Par.

The owners' equity statement for a partnership is called the

partners' capital statement.

A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal.

portion allocated to interest expense : Decreases Portion allocated to payment of principal : Increases

Raptor Inc. has retained earnings of $500,000 and total stockholders' equity of $2,000,000. It has 100,000 shares of $8 par value common stock outstanding, which is currently selling for $30 per share. If Raptor declares a 10% stock dividend on its common stock: (a)net income will decrease by $80,000. (b)retained earnings will decrease by $80,000 and total stockholders' equity will increase by $80,000. (c)retained earnings will decrease by $300,000 and total stockholders' equity will increase by $300,000. (d)retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000.

retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000.

The contractual interest rate is always stated as a(n)

annual rate

Costs incurred in the formation of a corporation: (a)do not include legal fees. (b)are expensed as incurred. (c)are recorded as an asset. (d)provide future benefits whose amounts and timing are easily determined.

are expensed as incurred.

If the market interest rate is greater than the contractual interest rate, bonds will sell

at a discount

The return on common stockholders' equity is computed by dividing net income available to common stockholders by

average common stockholders' equity.

Each of the following is used in preparing the partners' capital statement except the

balance sheet.

A partnership agreement should include each of the following except:

basis for splitting partnership income taxes.

The lessee has substantially all of the benefits and risks of ownership in a(n)

capital lease

Capital balances in the MEM partnership are Mary, Capital $60,000; Ellen, Capital $50,000; and Mills, Capital $40,000, and income ratios are 5:3:2, respectively. The MEMO partnership is formed by admitting Oleg to the firm with a cash investment of $60,000 for a 25% capital interest. The bonus to be credited to Mills, Capital in admitting Oleg is:

$1,500. Total partnership capital after the investment by Oleg is $210,000 ($60,000 + $50,000 + $40,000 + $60,000). Oleg's share of partnership capital is $52,500 ($210,000 × 25%). The total bonus to the old partners related to Oleg's admission is $7,500 [$60,000 (Oleg's investment) − $52,500 (Oleg's share of partnership capital)]. Mills' share of the total bonus is equal to the total bonus ($7,500) times Mills' income ratio (20%) or $1,500 ($7,500 × 20%),

When authorizing bonds to be issued, the board of directors does not specify the

Selling price

Louisa Santiago purchases 50% of Leo Lemon's capital interest in the K & L partnership for $22,000. If the capital balance of Kate Kildare and Leo Lemon are $40,000 and $30,000, respectively, Santiago's capital balance following the purchase is:

$15,000. Because this is a purchase of a partner's interest, Santiago's capital account will be equal to half of the interest she is purchasing, or $15,000 ($30,000/2).

Assets: Cash 9,000, Accounts receivable 22,000, Inventory 73,000. Liabilities and Owners' Equity: Accounts payable 21,000, Harriet capital 23,000, mike capital 8,000, Elly capital 52,000. Assume that as part of liquidation proceedings, Creekville sells its noncash assets for $60,000. As a result, one of the partners has a capital deficiency which that partner decides not to repay. The amount of cash that would ultimately be distributed to Elly would be:

$34,000. The loss on realization is $35,000 ($22,000 + $73,000 − $60,000). When allocating the $35,000 loss on realization to the partners, Harriet's, Mike's, and Elly's capital accounts will be debited $7,000, $14,000, and $14,000, respectively, as per their income ratios. Mike will now have a capital deficiency of $6,000 ($8,000 − $14,000). Elly's share of this deficiency is $4,000 ($6,000 × 4/6). The amount of cash that would ultimately be distributed to Elly would be $34,000 ($52,000 − $14,000 − $4,000)

Capital balances in the MURF partnership are Molly, Capital $50,000; Ursula, Capital $40,000; Ray, Capital $30,000; and Fred, Capital $20,000, and income ratios are 4:3:2:1, respectively. Fred withdraws from the firm following payment of $29,000 in cash from the partnership. Ursula's capital balance after recording the withdrawal of Fred is:

$37,000. The total bonus to Fred from the partnership is $9,000 ($29,000 − $20,000). Because Fred has withdrawn, the income ratio must be restated as 4:3:2. Ursula's share of the bonus paid to Fred is $3,000 {$9,000 × [3/(4 + 3 + 2)]}. Because the bonus is being paid to Fred, Ursula's capital account must be reduced by her share of the bonus. After Fred's withdrawal, Ursula's capital account will have a balance of $37,000 ($40,000 − $3,000)

Encore Inc. declared an $80,000 cash dividend. It currently has 3,000 shares of 7%, $100 par value cumulative preferred stock outstanding. It is one year in arrears on its preferred stock. How much cash will Encore distribute to the common stockholders? (a)$38,000. (b)$42,000. (c)$59,000. (d)None.

$38,000. The preferred stockholders will receive a total of $42,000 in dividends (3,000 × .07 × $100 × 2 years). The common stockholders will receive $38,000 ($80,000 − $42,000)

Assets: Cash 9,000, Accounts receivable 22,000, Inventory 73,000. Liabilities and Owners' Equity: Accounts payable 21,000, Harriet capital 23,000, mike capital 8,000, Elly capital 52,000. Assume that as part of liquidation proceedings, Creekville sells its noncash assets for $85,000. The amount of cash that would ultimately be distributed to Elly would be:

$48,000. The book value of the noncash assets is $95,000 ($22,000 + $73,000). When Creekville sells its noncash assets for $85,000, Creekville realizes a loss of $10,000 on the sale. The income ratio for Elly is 40% (4/10). When allocating the $10,000 loss on realization to the partners, Elly's capital account will be debited for $4,000 ($10,000 × 4/10). The amount of cash that would ultimately be distributed to Elly would be $48,000 ($52,000 − $4,000)

Orlando Company has a beginning balance in retained earnings of $100,000. During the year, it had a net loss of $20,000, paid cash dividends of $3,000, and issued a small stock dividend that had a market value of $7,000 and a par value of $1,000. The ending balance in retained earnings is: (a)$120,000 (b)$80,000 (c)$79,000 (d)$70,000

$70,000 The ending balance in retained earnings is $70,000. It is computed by subtracting from the beginning balance of $100,000 the following items: net loss of $20,000, cash dividends of $3,000, and stock dividends of $7,000. Note that market value of the cash dividend should be used instead of its par value.

A-Team Corporation issued 1,000 shares of $5 par value stock for land. The stock is actively traded at $9 per share. The land was advertised for sale at $10,500. The land should be recorded at: (a)$4,000. (b)$5,000. (c)$9,000. (d)$10,500.

$9,000. Cost is either the fair value of the consideration given up or the fair value of the consideration received, whichever is more clearly determinable. The most clearly determinable value in this noncash transaction is the fair value of the consideration given up of $9,000 ($9 per share × 1,000)

In the liquidation of a partnership, it is necessary to (1) distribute cash to the partners, (2) sell noncash assets, (3) allocate any gain or loss on realization to the partners, and (4) pay liabilities. These steps should be performed in the following order:

(2), (3), (4), (1).

Which of the following would not be recorded in the entry for the formation of a partnership?

Accumulated depreciation

Which of the following can cause a restriction in retained earnings? (a)State laws regarding treasury stock. (b)Long-term debt contract terms. (c)Authorizations by the board of directors in light of planned expansion of corporate facilities. (d)All of these answer choices are correct.

All of these answer choices are correct.

ABC Corporation issues 1,000 shares of $10 par value common stock at $13 per share. In recording the transaction, credits are made to: (a)Common Stock $10,000 and Paid-in Capital in Excess of Stated Value $3,000. (b)Common Stock $13,000. (c)Common Stock $10,000 and Paid-in Capital in Excess of Par $3,000. (d)Common Stock $10,000 and Retained Earnings $3,000.

Common Stock $10,000 and Paid-in Capital in Excess of Par $3,000.

Which of the following is not reported under additional paid-in capital? (a)Paid-in capital in excess of par. (b)Common stock. (c)Paid-in capital in excess of stated value. (d)Paid-in capital from treasury stock.

Common stock.

Which of the following statements about small stock dividends is true? (a)A debit to Retained Earnings should be made for the par value of the shares issued. (b)A small stock dividend decreases total stockholders' equity. (c)Market price per share should be assigned to the dividend shares. (d)A small stock dividend ordinarily will have an effect on par value per share of stock.

Market price per share should be assigned to the dividend shares.

Bagley invests personally owned equipment, which originally cost $220000 and has accumulated depreciation of $60000 in the Bagley and Eggers partnership. Both partners agree that the fair value of the equipment was $120000. The entry made by the partnership to record Bagley's investment should be

Equipment120000 Bagley, Capital 120000

Which of the following is not a major advantage of a corporate form of organization? (a)Separate legal existence. (b)Continuous life. (c)Government regulations. (d)Transferable ownership rights.

Government regulations.

Which of the following statements about partnerships is incorrect?

If the partnership agreement does not specify the manner in which net income is to be shared, it is distributed according to capital contributions.

The effect of the declaration of a cash dividend by the board of directors is to

Increase Liabilities Decrease Stockholders' equity

Which of the following statements about a 3-for-1 stock split is true? (a)It will triple the market price of the stock. (b)It will triple the amount of total stockholders' equity. (c)It will have no effect on total stockholders' equity. (d)It requires the company to distribute cash.

It will have no effect on total stockholders' equity.

Which of the following statements is false? (a)Ownership of common stock gives the owner a voting right. (b)The stockholders' equity section begins with paid-in capital. (c)The authorization of capital stock does not result in a formal accounting entry. (d)Legal capital applies to par value stock but not to no-par value stock.

Legal capital applies to par value stock but not to no-par value stock.

Burnell, Inc. has 5000 shares of 4%, $50 par value, cumulative preferred stock and 100000 shares of $1 par value common stock outstanding at December 31, 2019. The board of directors declared and paid a $8000 dividend in 2019. In 2020, $30000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2020?

Preferred 12000 Common 18000

Lucroy Corporation issues 100 shares of $10 par value preferred stock at $12 per share. In recording the transaction, credits are made to: (a)Preferred Stock $1,200. (b)Preferred Stock $1,000 and Retained Earnings $200. (c)Preferred Stock $1,000 and Paid-in Capital in Excess of Preferred Value $200. (d)Preferred Stock $1,000 and Paid-in Capital in Excess of Par—Preferred Stock $200.

Preferred Stock $1,000 and Paid-in Capital in Excess of Par—Preferred Stock $200.

Which of the following is not a characteristic of a partnership?

Taxable entity

In the stockholders' equity section, Common Stock Dividends Distributable is reported as a(n): (a)deduction from total paid-in capital and retained earnings. (b)addition to additional paid-in capital. (c)deduction from retained earnings. (d)addition to capital stock.

addition to capital stock.

In the stockholders' equity section of the balance sheet,

additional Paid-in Capital appears under the subsection Paid-in Capital.

Paid-in capital from treasury stock would appear on a balance sheet under the category

additional paid-in capital.

A major disadvantage of a corporation is: (a)limited liability of stockholders. (b)additional taxes. (c)transferable ownership rights. (d)separate legal existence.

additional taxes.