Deck 10: Stockholders Equity

Question 1

The par value of shares issued is normally recorded in the:

A) Additional Paid-in Capital account.
B) Common Stock account.
C) Retained Earnings account.
D) Treasury Stock account.

Answer 1

B

Question 2

The disadvantages of the corporate form of business include:

A) Lack of mutual agency.
B) Additional taxes.
C) Limited liability.
D) Ability to raise capital.

Answer 2

B

Question 3

Outstanding common stock refers to the total number of shares:

A) Issued.
B) Issued plus treasury stock.
C) Issued less treasury stock.
D) Authorized.

Answer 3

C

Question 4

Outstanding common stock is:

A) Stock that is performing well on the New York Stock Exchange.
B) Stock that has been authorized by the state for issue.
C) Stock issued plus treasury stock.
D) Stock in the hands of stockholders.

Question 5

In terms of total sales, assets, and earnings, the dominant form of business organization is the:

A) Sole proprietorship.
B) Partnership.
C) Corporation.
D) Limited liability company (LLC).

Question 6

Advantages of the corporate form of business include which of the following? I. Double taxation
II) Ability to raise capital
III) Lack of mutual agency
IV) More paperwork
V) Limited liability

A) II.
B) II., III., V.
C) I., II., III.
D) II., IV., V.

Question 7

Which of the following is a reason that a corporation would prefer to issue stock instead of bonds?

A) Dividend payments can be deducted for income tax purposes but interest payments cannot.
B) Expansion is accomplished without surrendering ownership control.
C) The risk of going bankrupt is less.
D) All of the above are reasons for issuing stock.

Question 8

South Beach Apparel issued 10,000 shares of $1 par value stock for $5 per share. What is true about the journal entry to record the issuance?

A) Debit Common Stock $10,000.
B) Credit Cash $50,000.
C) Credit Common Stock $50,000.
D) Credit Additional Paid-In Capital $40,000.

Question 9

Which of the following accounts is not reported in the stockholders' equity section of the balance sheet?

A) Treasury Stock.
B) Common Stock.
C) Sales Revenue.
D) Retained Earnings.

Question 10

Authorized common stock refers to the total number of shares:

A) Outstanding.
B) Issued.
C) Issued and outstanding.
D) That can be issued.

Question 11

Issued stock refers to the number of shares:

A) Outstanding plus treasury shares.
B) Authorized.
C) In the hand of stockholders.
D) That may be issued under state law.

Question 12

Which of the following stages of equity financing comes last in the traditional order of progression?

A) Investment by friends and family of the founders.
B) Investment by the founders of the business.
C) Initial public offering (IPO).
D) Outside investment by "angel" investors and venture capital firms.

Question 13

Common stockholders usually have all of the following rights except:

A) To receive dividends when declared.
B) To share in the distribution of assets.
C) To elect board of directors.
D) To participate in the day-to-day operations.

Question 14

The par value of common stock represents:

A) The legal capital per share of stock assigned when the corporation was first established.
B) The liquidation value of a share.
C) The market value of a share of stock.
D) The amount received when the stock was issued.

Question 15

Which of the following statements regarding the corporate form of business is correct?

A) The disadvantages are that generating capital is difficult and that owners have limited liability.
B) Disadvantages are that the business is subject to government regulations and double taxation on its income.
C) One disadvantage is that ownership is easy to transfer.
D) All of the other options are correct.

Question 16

If a company issues 1,000 shares of $1 par value common stock for $30 per share, what would be the effect on the accounting equation?

A) Increase assets and increase liabilities.
B) Increase assets and increase revenue.
C) Increase assets and increase stockholders' equity.
D) Increase assets and decrease stockholders' equity.

Question 17

Jade Jewelers issued 15,000 shares of $1 par value stock for $20 per share. What is true about the journal entry to record the issuance?

A) Credit Common Stock $300,000.
B) Credit Cash $300,000.
C) Credit Common Stock $15,000.
D) Debit Additional Paid-In Capital $285,000.

Question 18

The correct order from the smallest number of shares to the largest number of shares is:

A) Authorized, issued, and outstanding.
B) Outstanding, issued, and authorized.
C) Issued, outstanding, and authorized.
D) Issued, authorized, and outstanding.

Question 19

When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry for this issuance would include:

A) A debit to Cash for $25,000.
B) A debit to Additional Paid-in Capital for $25,000.
C) A credit to Common Stock for $250,000.
D) A credit to Additional Paid-in Capital for $225,000.

Question 20

Advantages of the corporate form that have led to the growth of this form of business ownership include all of the following except:

A) Ease of raising capital.
B) Low government regulation.
C) Limited liability.
D) Lack of mutual agency.

Question 21

Hayes Corporation issues 100 shares of its $1 par value common stock for $15 per share. The entry to record the issuance will not include a:

A) Debit to Cash $1,500.
B) Credit to Additional Paid-In Capital $1,400.
C) Credit to Common Stock of $100.
D) All of the other options would be includeD.The journal entry would be:

Question 22

California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2011. All remaining shares are common stock. The company was not able to pay dividends in 2011, but plans to pay dividends of $100,000 in 2012. Assuming the preferred stock is cumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2012?

A) $40,000 to preferred stockholders and $60,000 to common stockholders.
B) $80,000 to preferred stockholders and $20,000 to common stockholders.
C) $20,000 to preferred stockholders and $80,000 to common stockholders.
D) $100,000 to preferred stockholders and $0 to common stockholders.

Question 23

Which of the following financing alternatives has the highest preference of payment in a case where the company liquidates its assets?

A) Common Stock.
B) Preferred Stock.
C) Bonds.
D) They have equal preference.

Question 24

Which of the following is TRUE regarding the accounting for treasury stock?

A) Treasury stock is reported on the balance sheet in the equity section.
B) The purchase and sale of treasury stock has no impact on the income statement.
C) Treasury stock represents a negative equity account.
D) All of the above are true.

Question 25

Treasury Stock:

A) has a normal credit balance.
B) decreases stockholders' equity.
C) is recorded as an investment.
D) increases stockholders' equity.

Question 26

The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2011. All remaining shares are common stock. The company was not able to pay dividends in 2011, but plans to pay dividends of $18,000 in 2012. Assuming the preferred stock is noncumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2012?

A) $6,000 to preferred stockholders and $12,000 to common stockholders.
B) $18,000 to preferred stockholders and $0 to common stockholders.
C) $12,000 to preferred stockholders and $6,000 to common stockholders.
D) $9,000 to preferred stockholders and $9,000 to common stockholders.

Question 27

Treasury Stock is normally reported as:

A) A reduction of total stockholders' equity.
B) An asset account.
C) A liability account.
D) An expense account.

Question 28

The Surf's Up issues 1,000 shares of 6%, $100 par value preferred stock at the beginning of 2011. All remaining shares are common stock. The company was not able to pay dividends in 2011, but plans to pay dividends of $18,000 in 2012. Assuming the preferred stock is cumulative, how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2012?

A) $6,000 to preferred stockholders and $12,000 to common stockholders.
B) $18,000 to preferred stockholders and $0 to common stockholders.
C) $12,000 to preferred stockholders and $6,000 to common stockholders.
D) $9,000 to preferred stockholders and $9,000 to common stockholders.

Question 29

Preferred stock:

A) is always recorded as a liability.
B) is always recorded as part of stockholders' equity.
C) can have features of both liabilities and stockholders' equity.
D) is not included in either liabilities or stockholders' equity.

Question 30

A company issued 1,000 shares of $1 par value preferred stock for $5 per share. What is true about the journal entry to record the issuance?

A) Debit Preferred Stock $5,000.
B) Credit Cash $5,000.
C) Credit Preferred Stock $5,000.
D) Credit Additional Paid-In Capital $4,000.

Question 31

What would be the impact on the accounting equation when a company purchases treasury stock?

A) Increase assets and increase stockholders' equity.
B) Decrease assets and increase stockholders' equity.
C) Decrease assets and decrease stockholders' equity.
D) No effect on the accounting equation.

Question 32

When treasury stock is purchased, what is the effect on total stockholders' equity?

A) Decrease.
B) Increase.
C) No effect.
D) Cannot tell from the given information.

Question 33

Which of the following is not a potential feature of preferred stock?

A) Convertible.
B) Redeemable.
C) Cumulative.
D) They all are potential features of preferred stock.

Question 34

Which of the following has the highest expected return to the investor?

A) Common Stock.
B) Preferred Stock.
C) Bonds.
D) They all have similar expected returns.

Question 35

When treasury stock is purchased, what is the effect on assets and stockholders' equity?

A) Assets and stockholders' equity increase.
B) Assets and stockholders' equity decrease.
C) Assets increase and stockholders' equity decrease.
D) Assets decrease and stockholders' equity increase.

Question 36

When treasury stock is resold at a price above cost:

A) A gain account is credited.
B) A loss is reported.
C) A revenue account is credited.
D) Additional Paid-in Capital is increased.

Question 37

Preferred stock is called preferred because it usually has two preferences over common stock. These preferences relate to:

A) Dividends and voting rights.
B) Par value and dividends.
C) The preemptive right and voting rights.
D) Dividends and distribution of assets if the corporation is dissolved.

Question 38

When treasury stock is resold at a price below cost:

A) Additional Paid-in Capital is decreased.
B) Additional Paid-in Capital is increased.
C) A gain is reported on the income statement.
D) A loss is reported on the income statement.

Question 39

Which of the following statements about treasury stock transactions is true?

A) Treasury stock is recorded as an asset by the acquiring company.
B) Only losses on the sale of treasury stock are recorded on the income statement.
C) Stockholders' equity is reduced when treasury stock is purchased.
D) Both gains and losses on the sale of treasury stock are recorded on the income statement.

Question 40

California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2011. All remaining shares are common stock. The company was not able to pay dividends in 2011, but plans to pay dividends of $100,000 in 2012. Assuming the preferred stock is noncumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2012?

A) $40,000 to preferred stockholders and $60,000 to common stockholders.
B) $80,000 to preferred stockholders and $20,000 to common stockholders.
C) $20,000 to preferred stockholders and $80,000 to common stockholders.
D) $100,000 to preferred stockholders and $0 to common stockholders.

Question 41

On December 2, Coley Corp. reacquired 1,000 shares of its $2 par value common stock for $27 each. On December 20, Coley Corp. reissued 400 shares for $15 each. Which of the following is correct regarding the journal entry for the reissued shares?

A) Debit Cash $15,000.
B) Credit Treasury Stock $10,800.
C) Credit Paid in Capital - Treasury Stock $5,200.
D) Credit Treasury Stock $6,000.

Question 42

When treasury stock is resold at a gain, the difference between its cost and the cash received when resold:

A) Increases net income.
B) Increases stockholders' equity.
C) Has no effect on net income or stockholders' equity.
D) Increases net income but decreases stockholders' equity.

Question 43

Crossroads Mall had 100,000 outstanding shares of common stock. On June 16, 2012, Crossroads repurchased 20,000 shares of its own stock at $30 per share. On July 23, 2012, Crossroads resold 10,000 shares at $28 per share. What net effect did the repurchase and the resell of common stock have on the accounting equation?

A) Increase in assets and decrease in stockholders' equity.
B) Decrease in assets and increase in stockholders' equity.
C) Increase in assets and increase in stockholders' equity.
D) Decrease in assets and decrease in stockholders' equity.

Question 44

Retained Earnings represent a company's:

A) Net income less dividends since the company first started.
B) Undistributed net assets.
C) Extra paid-in capital.
D) Undistributed cash.

Question 45

On November 6, Coleman Corp. reacquired 1,000 shares of its $2 par value common stock for $27 each. On November 20, Coleman Corp. reissued 400 shares for $30 each. Which of the following is correct regarding the effect of the journal entry for the reissued shares?

A) Assets decrease.
B) Liabilities decrease.
C) Expenses increase.
D) Stockholders' Equity increases.

Question 46

The issuer of a 100% common stock dividend (large stock dividend) to common stockholders should debit stock dividends for an amount equal to the

A) Book value of the shares issued.
B) Par value of the shares issued.
C) Market value of the shares issued.
D) Minimum legal requirements.

Question 47

On February 22, Brett Corporation reacquired 200 shares of its $5 par value common stock for $25 each. On March 15, the company reissued 70 shares for $30 each. What is true of the journal entry for reissuing their shares?

A) Credit Cash $1,750.
B) Credit Additional Paid in Capital $350.
C) Debit Treasury Stock $1,750.
D) Credit Treasury Stock $2,100.

Question 48

The corporation's own stock that has been issued and then repurchased by the company is referred to as:

A) Preferred Stock.
B) Authorized Stock.
C) Treasury Stock.
D) Common Stock.

Question 49

The issuer of a 5% common stock dividend (small stock dividend) to common stockholders should debit stock dividends for an amount equal to the

A) Book value of the shares issued.
B) Par or stated value of the shares issued.
C) Market value of the shares issued.
D) Minimum legal requirements.

Question 50

Retained Earnings:

A) has a normal debit balance.
B) decreases stockholders' equity.
C) is equal to the balance in cash.
D) increases stockholders' equity.

Question 51

The Retained Earnings balance reported on the balance sheet typically is not affected by:

A) Net income.
B) Net loss.
C) Dividends paid.
D) Stock splits.

Question 52

Both cash dividends and stock dividends:

A) reduce total assets.
B) reduce total liabilities.
C) reduce total stockholders' equity.
D) reduce retained earnings.

Question 53

The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. What is the entry for the dividend declaration?

A) Dividends $\quad$$\quad$ 9,000
Dividends Payable $\quad$ 9,000
B) $\begin{array}{ll}\text { Dividends } & 9,000\\\text { Cash }& 9,000\end{array}$
C) Dividends $\quad$$\quad$ 10,000
Dividends Payable $\quad$$\quad$ 10,000
D) Dividends $\quad$$\quad$ 10,000
Cash $\quad$$\quad$ 10,000

Question 54

A feature common to both stock splits and stock dividends is

A) That there is no effect on total stockholders' equity.
B) A reduction in the contributed capital of a corporation.
C) A transfer to earned capital of a corporation.
D) An increase in total liabilities of a corporation.

Question 55

Over the first four years of the company's life, it earned the following net income (loss): $6,000; $3,000; $6,000, and ($2,000). If the company's ending retained earnings is $10,000 after year 4, what is the average amount of dividends paid per year?

A) $3,000.
B) $7,000.
C) $0.
D) $750.

Question 56

Rugby Rocks, Inc. had a Retained Earnings balance of $12,000 at December 31, 2010. The company had an average income of $7,500 over the next 3 years, and an ending Retained Earnings balance of $15,000 at December 31, 2013. What was the total amount of dividends paid over the last three years?

A) $4,500.
B) $6,500.
C) $19,500.
D) $27,000.

Question 57

The declaration and issuance of a stock dividend:

A) Does not change total assets, liabilities, or total stockholders' equity.
B) Decreases total stockholders' equity and increases common stock.
C) Decreases assets and decreases total stockholders' equity.
D) Does not change retained earnings or paid-in capital.

Question 58

The balance of Retained Earning at the end of the year represents:

A) current year's profits less payments to owners.
B) total earnings less payments to owners over the life of the company.
C) total contributions from owners less withdrawals over the life of the company.
D) total earnings over the life of the company.

Question 59

The ending Retained Earnings balance of Lambert Inc. increased by $1.5 million from the beginning of the year. The company's net income earned during the year is $3.5 million. What is the amount of dividends Lambert Inc. declared and paid?

A) $1.5 million.
B) $3.5 million.
C) $2.0 million.
D) $5.0 million.

Question 60

Journal entries to record cash dividends are made on the:

A) declaration date, record date, and payment date.
B) record date and payment date.
C) declaration date and payment date.
D) declaration date and record date.

Question 61

Retained Earnings is the amount stockholders have invested in the company.
Paid-in capital is the amount stockholders have invested in the company.

Question 62

Financial information for Retro Designs includes the following selected data: $$\begin{array} { l r } \text { Net income (in millions) } & \$ 145 \\\text { Preferred stock dividends (in millions) } & \$ 25 \\\text { Shares outstanding (in millions) } & 240 \\\text { Stock price } & \$ 10.00\end{array}$$ What is the company's earnings per share?

A) $0.60.
B) $0.71.
C) $0.50.
D) $0.05.

Question 63

Financial information for Retro Designs includes the following selected data: $\begin{array}{lr}\text { Net income (in millions) } & \$ 145 \\\text { Preferred stock dividends (in millions) } & \$ 25 \\\text { Shares outstanding (in millions) } & 240 \\\text { Stock price } & \$ 10.00\end{array}$ What is the company's price-earnings ratio?

A) 20.0.
B) 15.0.
C) 6.9.
D) 0.05.

Question 64

Return on equity is calculated as:

A) Net income divided by average stockholders' equity.
B) Net income divided by ending stockholders' equity.
C) Net income divided by average market value of equity.
D) Net income divided by ending market value of equity.

Question 65

Which of the following statements is not true regarding earnings per share?

A) Earnings per share is useful in comparing earnings performance across companies at the same point in time.
B) Earnings per share is useful in comparing earnings performance for the same company over time.
C) Earnings per share is calculated as net income minus dividends on preferred stock all divided by the average number of common shares outstanding.
D) Earnings per share is forecasted by financial analysts.

Question 66

Angel investors are investors that focus on companies at or near bankruptcy.
Angel investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture.

Question 67

Owners in a sole proprietorship or a partnership can be held personally liable for debts the company has incurred, over and beyond the investment they have made.

Question 68

Earnings per share (EPS)

A) is useful in comparing earnings performance across companies.
B) is useful in comparing earnings performance for the same company over time.
C) is useful in both comparing earnings performance across companies and in comparing earnings performance for the same company over time.
D) is not useful in comparing earnings performance across companies or in comparing earnings performance for the same company over time.

Question 69

Limited liability means that even in the event of bankruptcy, stockholders in a corporation can lose no more than the amount they invested in the company.

Question 70

All publicly held corporations are regulated by the Securities and Exchange Commission.

Question 71

Paid-in Capital is the amount stockholders have invested in the company.

Question 72

Panhandle Corporation was organized on January 3, 2012. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2012, Panhandle had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share.
Issued 20,000 shares of common stock at $8 per share.
Reported a net income of $100,000.
Paid dividends of $50,000.
What is total paid-in capital at the end of 2012?

A) $420,000.
B) $370,000.
C) $470,000.
D) $320,000.

Question 73

Large stock dividends and stock splits are issued primarily to:

A) Lower the trading price of the stock per share.
B) Increase the number of authorized shares.
C) Increase legal capital.
D) Increase the number of outstanding shares.

Question 74

Why doesn't stockholders' equity equal the market value of equity?

A) Stockholders' equity usually does equal the market value of equity.
B) Investors tend to incorrectly price the market value of equity.
C) It's related to the use of historical cost to report many long-term assets and the expensing of value generating costs such as research and development and advertising.
D) It's due to incorrect entries prepared by accountants.

Question 75

The PE ratio:

A) tends to be higher for growth stocks.
B) tends to be higher for value stocks.
C) indicates how a stock is trading in relation to cumulative earnings over the life of the company.
D) typically is less than 1.

Question 76

Roberto Corporation was organized on January 1, 2012. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2012, Roberto had the following transactions relating to stockholders' equity: Issued 10,000 shares of common stock at $7 per share.
Issued 20,000 shares of common stock at $8 per share.
Reported a net income of $100,000.
Paid dividends of $50,000.
Purchased 3,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8).
What is total stockholders' equity at the end of 2012?

A) $270,000.
B) $300,000.
C) $250,000.
D) $200,000.

Question 77

How does the stockholders' equity section in the balance sheet differ from the statement of stockholders' equity?

A) The stockholders' equity section is more detailed than the statement of stockholders' equity.
B) The stockholders' equity section shows balances at a point in time, whereas the statement of stockholders' equity shows activity over a period of time.
C) The stockholders' equity section shows activity over a period of time, whereas the statement of stockholders' equity is at a point time.
D) There are no differences between them.

Question 78

Assets plus liabilities equal stockholders' equity.
Assets equal liabilities plus stockholders' equity.

Question 79

The statement of stockholders' equity shows

A) Only the ending balance in each stockholders' equity account.
B) How each equity account changed over time.
C) Only the beginning balance in each stockholders' equity account.
D) Less information than the stockholders' equity section in the balance sheet.

Question 80

The Common Stock account on a company's balance sheet is measured as:

A) The number of common shares outstanding x the stock's par value per share.
B) The number of common shares outstanding x the stock's current market value per share.
C) The number of common shares issued x the stock's par value per share.
D) The number of common shares issued x the stock's current market value per share.