Deck 8: Stockholders Equity

Question 1

A contract between a corporation and the state in which it was created and identifies the corporation's principal rights and obligations is called

A) articles of incorporation.
B) consent decree.
C) corporate by-laws.
D) corporate charter.
E) corporate indenture.

Answer 1

corporate charter.

Question 2

Which of the following is not a benefit of listing corporate stock on a stock exchange?

A) Increased ability to raise cash
B) Decrease in personal liability for stockholders
C) Improvement in organizational image
D) Increased access to institutional investment funds
E) All of the above are benefits.

Answer 2

Decrease in personal liability for stockholders

Question 3

An IPO refers to the

A) initial public offering of a corporation's stock.
B) institutional perception component of a corporation by pension fund managers.
C) investigation, procurement, and optimization of a new corporation's stock by the SEC.
D) indenture, par value, and opportunity cost related to a corporation's stock.
E) none of the above.

Answer 3

initial public offering of a corporation's stock.

Question 4

Corporate shareholders

A) have unlimited liability.
B) must pay a corporation's debts if the corporation is unable to do so.
C) are unaffected by the death or withdrawal of other shareholders.
D) are never taxed on dividend distributions by the corporation.
E) generally experience difficulty when transferring ownership of their shares.

Question 5

The maximum number of shares that a corporation may issue is called the number of

A) authorized shares.
B) common shares.
C) outstanding shares.
D) preferred shares.
E) issued shares.

Question 6

The class of stock comprising the residual ownership interest in a corporation is called

A) common stock.
B) issued stock.
C) preferred stock.
D) treasury stock.
E) collateralized stock.

Question 7

The class of stock that has certain advantages relative to the residual ownership interest in a corporation is called

A) common stock.
B) issued stock.
C) preferred stock.
D) treasury stock.
E) collateralized stock.

Question 8

A variety of types of stock exist. Which of the following indicate the classification of stock on the balance sheet?

Question 9

Oliver Inc. is authorized to issue 3,000,000 shares of common stock. Oliver sold 600,000 shares and later bought back 10,000 of those shares. How many shares of Oliver's common stock are issued?

A) 590,000
B) 600,000
C) 2,400,000
D) 3,000,000
E) 3,590,000

Question 10

Cresson Publishing is authorized to issue 2,000,000 shares of common stock. Cresson sold 800,000 shares and later bought back 1,500 of those shares. How many shares of Cresson's common stock are held in the treasury?

A) 1,500
B) 798.500
C) 801,500
D) 1,200,000
E) 1,201,500

Question 11

Taewon Corp. is authorized to issue 5,000,000 shares of common stock. The company sold 1,300,000 shares and repurchased 145,000 of those shares. Which of the following describes the correct amount of the type of shares indicated?

Question 12

When it began operations in 2009, Nyob Corp. issued 250,000 shares of common stock. During 2010, Nyob issued an additional 150,000 shares of common stock and purchased 50,000 of its common stock and held it in treasury. The company is authorized to issue 500,000 shares. How many shares of Nyob's common stock were outstanding at the end of 2010?

A) 50,000
B) 150,000
C) 200,000
D) 350,000
E) 450,000

Question 13

Which of the following statements about rights and privileges of common and preferred shareholders is false?

A) In most states, common shareholders have preemptive rights.
B) Common shareholders have the right to share proportionately in any dividends or distribution of earnings.
C) If a corporation goes out of business, preferred shareholders are entitled to share proportionately in the remaining assets after all other debts have been paid.
D) Preferred stockholders are usually entitled to receive a specified annual rate or amount of cash dividend each year.
E) If a corporation does not pay a dividend in a given year on a cumulative preferred stock, that dividend accumulates and must be paid in a future year before common stockholders can receive a dividend.

Question 14

On January 1, 2010, Brian Brezina owned 25% of Wilder Corporation's 5,000,000 issued and outstanding shares of common stock. If Wilder issues another 1,000,000 shares and Brezina exercises his full preemptive right, how many shares will Brezina own?

A) 250,000
B) 750,000
C) 1,250,000
D) 1,500,000
E) Cannot be calculated without knowing how many shares other stockholders purchase.

Question 15

The issuance of which of the following types of stock could never affect an additional paid-in capital account?

A) Preferred stock
B) Par value stock
C) No-par stock
D) Common stock
E) Treasury stock

Question 16

Common features of preferred stock include which of the following?

Question 17

Deville Corporation issued 1,000 shares of $12 par-value common stock for $20 per share. The journal entry for this transaction includes a debit to Cash for

A) $12,000 and a credit to Common Stock for $12,000.
B) $20,000 and a credit to Common Stock for $20,000.
C) $12,000, a debit to Additional Paid-In Capital for $8,000, and a credit to Common Stock for $20,000.
D) $20,000, a credit to Common Stock for $12,000, and a credit to Paid-in Capital.
E) $20,000, a credit to Common Stock for $12,000, and a credit to Gain on Sale of Stock for $8,000.

Question 18

Par value of a share of stock represents the

A) market value for which the stock will originally be sold.
B) book value of each share at the date of incorporation.
C) premium paid to acquire the share on a stock exchange rather than "over the counter."
D) maximum legal amount for which the share may be sold.
E) none of the above.

Question 19

Redwing Corporation issued 500 shares of $1 par value common stock for $22 per share. Because of this transaction, Redwing's

A) cash account balance will increase by $500.
B) common stock account balance will increase by $11,000.
C) additional paid-in capital account balance will increase by $10,500.
D) common stock account should be debited for $500.
E) cash account should be credited for $11,000.Use the following information to answer questions 20 - 21:Grambling Corporation issued 500 shares of common stock for $22 per share.

Question 20

Use the following information to answer questions
Grambling Corporation issued 500 shares of common stock for $22 per share.

-If the common stock is no par value, how should Grambling record this transaction?

A)
B)
C)
D)
E)

Question 21

Use the following information to answer questions
Grambling Corporation issued 500 shares of common stock for $22 per share.

-If the common stock has a $5 par value, how should Grambling record this transaction?

A)
B)
C)
D)
E)

Question 22

Bellview Corporation' first issuance of its $1 par value preferred stock was 400 shares for equipment with a fair market value of $25,000. How should Bellview journalize this transaction?

A)
B)
C)
D)
E)

Question 23

McCallister Corp. acquired a machine in exchange for 100 shares of $2 par-value common stock. The fair market value of McCallister's stock at the time of the exchange was $53 per share. The company selling the machine to McCallister showed a book value of that machine of $4,000. Because of this transaction, McCallister's

A) equipment account increased by $200.
B) common stock account increased by $5,300.
C) additional paid-in capital account increased by $2,000.
D) additional paid-in capital account increased by $5,100.
E) net income increased by $1,300.

Question 24

When stock is issued for services or property other than cash, the general rule applied is

A) either the fair market value of the stock issued or of the non-cash consideration received, whichever is more clearly determinable.
B) the fair market value of the non-cash consideration.
C) the fair market value of stock issued.
D) the net realizable value of the non-cash consideration.
E) a negotiated value that fairly presents the current market value of the goods exchanged.

Question 25

Dakora Corp. issued 1,000 shares of its $10 par common stock to Kiora as compensation for 500 hours of appraisal services performed. Kiora's billing rate is $50 per hour for appraisal services. On the date of issuance, the stock was trading for $30 per share. By what amount, if any, should Dakora's additional paid-in capital account increase?

A) $20,000
B) $30,000
C) $40,000
D) $50,000
E) none of the above

Question 26

Treasury stock

A) is subject to preemptive right rules.
B) is owned by the issuing corporation.
C) decreases stockholders' equity.
D) should be shown as an asset on the issuing corporation's balance sheet.
E) all of the above

Question 27

A corporation's purchase of treasury stock causes

A) stockholders' equity to increase.
B) stockholders' equity to decrease.
C) current assets to increase.
D) net income to decrease.
E) total assets to remain the same as prior to the purchase because cash decreases and investments increase.

Question 28

Treasury stock is

A) stock owned by the US Treasury Department.
B) shares repurchased and not retired.
C) included in outstanding shares.
D) is part of authorized but unissued stock.
E) classified as a long-term investment account.

Question 29

Brown Corp. recently purchased 2,000 shares of its own $0.50 par value common stock in the market for $32.50 per share. Brown uses the cost method to account for treasury stock. Based on this transaction, Brown's

A) common stock account decreased by $1,000.
B) treasury stock account increased by $1,000.
C) additional paid-in on capital on common stock account increased by $64,000.
D) treasury stock increased by $65,000.
E) additional paid-in capital on treasury stock account increased by $64,000.

Question 30

April Co. purchased 3,500 shares of its $20 par value common stock for $24 per share. What journal entry should April make to record the acquisition of this stock?

A)
B)
C)
D)
E)

Question 31

Atlanta Corp. recently sold 3,000 shares of treasury stock for $51 per share. The stock had been purchased for $27 per share. The par value of Atlanta's common stock is $1 per share. Based on this transaction, Atlanta's

A) common stock account increased by $3,000.
B) additional paid-in capital on treasury stock account increased by $72,000.
C) gain on sale of treasury stock account increased by $72,000.
D) additional paid-in capital on common stock account increased by $72,000.
E) both a and c.

Question 32

On July 1, 2010, Augusta Company reacquired 5,000 shares of its $30 par value common stock for $33 per share. On July 31, 2010, Augusta sold 1,000 shares of those shares to company employees for $31 per share. What journal entry should Augusta make to record the sale of the stock on July 31, 2010?

A)
B)
C)
D)
E)

Question 33

Gatlin Corporation recently sold 10,000 shares of its treasury stock. After this transaction, Gatlin's total number of

A) issued shares increased by 10,000 shares.
B) issued shares decreased by 10,000 shares.
C) outstanding shares decreased by 10,000 shares.
D) authorized shares increased by 10,000 shares.
E) authorized shares remained the same.

Question 34

Dividends

A) cannot be issued unless retained earnings has a credit balance.
B) are declared by the corporate CEO.
C) appear as a debit balanced account on the balance sheet.
D) appear as a debit balanced account on the income statement.
E) are typically paid on the date of declaration to the individuals holding stock on that date.

Question 35

Bermuda Corp. declared a cash dividend on its common stock on November 1, 2010. The dividend is payable on January 31, 2011. How does the declaration of a dividend affect the following account balances on December 31, 2010?

Question 36

Generally, before a company can distribute cash dividends to its shareholders, certain requirements must be fulfilled. Which of the following must be met? #1 A credit balance in the Retained Earnings Account
#2 A formal dividend authorization by the board of directors
#3 The company must have sufficient cash available to pay the dividend

A) #1 only
B) #2 only
C) #3 only
D) #1 and 2
E) all 3 must be met

Question 37

On November 1, 2010, Livebird Industries declares a cash dividend of $2 per share. At that time, the company had 25,000 shares of authorized and 20,000 shares of outstanding common stock. The dividend is payable to shareholders of record on November 15, to be paid December 1, 2010. On November 1, the company would

A) make no accounting entry because the dividends have not yet been paid.
B) debit Dividends-Common Stock for $40,000.
C) debit Dividends-Common Stock for $50,000.
D) debit Cash Dividends Payable for $40,000.
E) debit Cash Dividends Payable for $50,000.

Question 38

Use the following information to answer questions
On April 10, Milo Corp. declared a cash dividend of $0.25 per share to stockholders of record on April 30. The dividend is payable on May 15. Milo had 200,000 shares of common stock authorized, 160,000 shares of common stock issued, and 157,000 shares of common stock outstanding on April 10.

-On April 10, Milo Corp. will record a(an)

A) liability for $40,000.
B) expense for $40,000.
C) liability for $39,250.
D) expense for $39,250.
E) none of the above.

Question 39

Use the following information to answer questions
On April 10, Milo Corp. declared a cash dividend of $0.25 per share to stockholders of record on April 30. The dividend is payable on May 15. Milo had 200,000 shares of common stock authorized, 160,000 shares of common stock issued, and 157,000 shares of common stock outstanding on April 10.

-On May 15, Milo Corp. will debit a(an)

A) liability and credit Retained Earnings.
B) expense and credit Retained Earnings
C) stockholders' equity account and credit Cash.
D) dividends account and credit Cash.
E) none of the above.

Question 40

On June 10, Hurley Corporation had 100.000 shares of $1 par value common stock outstanding and declared a 10% stock dividend. The market value of Hurley's common stock at the date of the declaration is $24 per share. The stock dividend is payable to all stockholders of record on June 25. What journal entry is necessary on the date of declaration?

A)
B)
C)
D)
E)

Question 41

Anderson Corp. declared a 5% stock dividend on its 20,000 outstanding shares of $1 par value common stock, which had a fair value of $5 per share on the declaration date. The accounting entry on the declaration date would include a

A) debit to Paid-In Capital of $1,000.
B) credit to Paid-In Capital of $4,000.
C) debit to Stock Dividends of $4,000.
D) credit to Common Stock of $5,000.
E) credit to Stock Dividends of $5,000.

Question 42

An increase in the number of shares of a company's stock accompanied by a proportionate reduction in the stock's par value is a

A) cash dividend.
B) reverse split.
C) stock dividend.
D) stock split.
E) treasury stock.

Question 43

A company has 300,000 shares outstanding of common stock with a par value of $2 per share. A 2:1 stock split is declared. After the split, the company will have

A) 150,000 shares of $4 par value stock.
B) 300,000 shares of $4 par value stock.
C) 600,000 shares of $2 par value stock.
D) 600,000 shares of $1 par value stock.
E) answer cannot be determined without knowing the market value of the stock after the split.

Question 44

A company has 400,000 outstanding shares of $3 par value common stock. A 1:2 stock split is declared. After the split, the company will have

A) 800,000 shares of $6 par value stock.
B) 200,000 shares of $6 par value stock.
C) 200,000 shares of $3 par value stock.
D) 800,000 shares of $3 par value stock.
E) answer cannot be determined without knowing the market value of the stock after the split.

Question 45

After a stock split,

A) total stockholders' equity will decline.
B) total stockholders' equity will increase.
C) Retained Earnings will decrease.
D) Additional Paid-in Capital will increase.
E) none of the above.

Question 46

How will the Retained Earnings account be affected by each of the following?

Question 47

An example of a prior period adjustment is recording

A) a change in the estimated useful life of an asset.
B) the sale of treasury stock that was originally purchased one year earlier.
C) a liability for a lawsuit related to a product sold four years ago.
D) a correction for depreciation expense that went unrecorded two years earlier.
E) all of the above

Question 48

During 2008, Radar Corporation's accountant improperly capitalized $50,000 of research and development costs. During 2010, Radar discovered the error. Correction of this error will

A) affect current period net income.
B) not affect Radar's stockholders' equity.
C) increase current period research and development expense.
D) cause Retained Earnings to increase.
E) cause Retained Earnings to decrease.

Question 49

Use the following information to answer questions
Hanks Corporation's Retained Earnings account balance at December 31, 2009 and December 31, 2010 was $200,000 and $250,000, respectively. During 2010, Hanks issued $39,000 of stock, purchased $15,000 of treasury stock, and declared $20,000 of dividends. No other transactions affected stockholders' equity.

-What was Hanks' 2010 net income?

A) $85,000
B) $70,000
C) $50,000
D) $46,000
E) $ 4,000

Question 50

Use the following information to answer questions
Hanks Corporation's Retained Earnings account balance at December 31, 2009 and December 31, 2010 was $200,000 and $250,000, respectively. During 2010, Hanks issued $39,000 of stock, purchased $15,000 of treasury stock, and declared $20,000 of dividends. No other transactions affected stockholders' equity.

-By how much did stockholders' equity of Hanks Corp. change during 2010?

A) +$74,000
B) +$50,000
C) +$ 4,000
D) -$35,000
E) -$15,000

Question 51

Use the following information to answer questions
Marco Co. has 10,000 shares of $50 par value, cumulative preferred stock. The annual dividend on the preferred stock is $3 per share. By the end of 2010, Marco had not declared any dividends for 4 years.

-On its 2010 year-end financial statements, Marco Co.

A) will show a dividends in arrears liability.
B) will show a dividends payable liability.
C) will show a dividends in arrears stockholders' equity account.
D) will accrue a dividend payable.
E) none of the above.

Question 52

Use the following information to answer questions
Marco Co. has 10,000 shares of $50 par value, cumulative preferred stock. The annual dividend on the preferred stock is $3 per share. By the end of 2010, Marco had not declared any dividends for 4 years.

-In December 2011, Marco Co. declared $260,000 of dividends, payable on January 3, 2012. How much of this amount will each class of stockholders receive?

Question 53

Vicky Corp. had 500,000 shares of common stock authorized and 410,000 shares outstanding at December 31, 2009. The following events occurred during 2010:
April 1 Declared 5% stock dividend
June 1 Purchased 75,000 shares
Sept. 1 Reissued 25,000 shares
Nov) 1 Declared 2-for-1 stock split
How many shares of common stock did Vicky have outstanding at December 31, 2010?

A) 761,000
B) 819,950
C) 824,100
D) 861,000
E) 950,000

Question 54

Use the following information to answer questions
On December 31, 2009 and 2010, the equity sections of Deveraux Corporation's balance sheet were as follows:

Total shares authorized, issued, and outstanding on December 31, 2010 are listed below. 2010 common and preferred dividends are also listed below.

Deveraux's 2010 net income is $200,000. The market price of the common stock in 2010 was $25 per share.

-What is Deveraux's book value per share at December 31, 2010? (Round to the nearest cent.)

A) $2.23
B) $3.32
C) $3.39
D) $3.71
E) $3.88

Question 55

Use the following information to answer questions
On December 31, 2009 and 2010, the equity sections of Deveraux Corporation's balance sheet were as follows:

Total shares authorized, issued, and outstanding on December 31, 2010 are listed below. 2010 common and preferred dividends are also listed below.

Deveraux's 2010 net income is $200,000. The market price of the common stock in 2010 was $25 per share.

-The dividend yield on the common stock for 2010 was

A) 2.4%
B) 3.4%
C) 4.0%
D) 4.2%
E) 100.0%

Question 56

Use the following information to answer questions
On December 31, 2009 and 2010, the equity sections of Deveraux Corporation's balance sheet were as follows:

Total shares authorized, issued, and outstanding on December 31, 2010 are listed below. 2010 common and preferred dividends are also listed below.

Deveraux's 2010 net income is $200,000. The market price of the common stock in 2010 was $25 per share.

-What is Deveraux's return on equity for 2010?

A) 43.0%
B) 45.1%
C) 46.2%
D) 66.1%
E) 61.9%

Question 57

The stock of all corporations is traded on a stock exchange, although the size of the exchange may vary.

Question 58

The process of reincorporating in a tax haven is called conversion.

Question 59

A corporation's legal existence is compromised upon the death of a stockholder.

Question 60

Regulations for stock traded on the New York Stock Exchange are superseded by the rules of the Securities and Exchange Commission.

Question 61

After the death of a partner, new partnerships may be formed immediately without interrupting business operations.

Question 62

The key disadvantage to the corporate form of business is the double taxation of the entity's earnings.

Question 63

If a corporation's outstanding stock is less that its issued stock, the corporation has authorized but unissued stock.

Question 64

A corporate CEO can also be the chairman of the board of the same company.

Question 65

Under the preemptive right, the owner of 10,000 of the 1,000,000 outstanding shares of Country Bay common stock can purchase an additional 500 shares if Country Bay decides to issue an additional 500,000 shares.

Question 66

Preferred shareholders have a right to receive a specified rate or amount of dividend annually.

Question 67

Preferred shareholders have greater voting power than common shareholders.

Question 68

If a company liquidates and there are substantial remaining assets after liabilities are paid, preferred stockholders have preference over common stockholders in the distribution of those remaining assets.

Question 69

Relative to dividend distributions, convertible preferred stock is treated similarly to common stock.

Question 70

Convertible preferred stock may be exchanged by the stockholder for the issuing corporation's common stock.

Question 71

There is limited, if any, relationship between the par value of a share of stock and its market value.

Question 72

At original issuance, stock can generally sell at significant amounts above or below par value.

Question 73

Corporations may recognize gains and losses on the sale of their own stock.

Question 74

Treasury stock is a debit-balanced current asset account.

Question 75

Buying treasury stock has no impact on the total number of issued shares.

Question 76

It is possible for the sale of treasury stock to reduce Retained Earnings.

Question 77

It is possible for the sale of treasury stock to increase Retained Earnings.

Question 78

Microsoft has continuously paid dividends since it became a publicly-listed company.

Question 79

When a dividend is declared, it becomes a legal liability of the company.

Question 80

The amount of dividend payable is computed as the dividend amount per share times the number of issued shares of stock.