Deck 18: Shareholders Equity

Question 1

Two of the three primary account classifications within shareholders' equity are:

A) Preferred stock and retained earnings.
B) The par of common stock and retained earnings.
C) Paid-in capital and retained earnings.
D) Preferred and common stock.

Answer 1

C

Question 2

The Model Business Corporation Act:

A) Uses the words "common" and "preferred" in describing distinguishing characteristics of stock.
B) Defines legal capital as the amount of net assets not available for distribution to shareholders.
C) Provides guidance for choosing an appropriate par for new issues of stock.
D) Has affected the laws of most states.

Answer 2

D

Question 3

Cash dividends become a binding liability as of the record date.

Answer 3

False

Question 4

Details of each class of stock must be reported:

A) On the face of the balance sheet only.
B) In disclosure notes only.
C) On the face of the balance sheet or in disclosure notes.
D) On the face of the balance sheet and in disclosure notes.

Question 5

Corporations are formed in accordance with:

A) The Model Business Corporation Act.
B) Federal statutes.
C) The laws of individual states.
D) Federal trade commission regulations.

Question 6

In terms of business volume, the dominant form of business organization is the:

A) Partnership.
B) Corporation.
C) Limited liability company.
D) Proprietorship.

Question 7

Dividends in arrears on cumulative preferred stock are liabilities to be paid at a later date.

Question 8

The net assets of a corporation are equal to:

A) Contributed capital.
B) Retained earnings.
C) Shareholders' equity.
D) None of these answer choices are correct.

Question 9

Investors should be wary of stock buybacks during down times because the resulting decrease in shares and increase in earnings per share can be used to mask a slowdown in earnings growth.

Question 10

Stock designated as preferred usually has preferential rights over other classes of stock relative to dividends and liquidating distributions.

Question 11

Paid-in capital must consist solely of amounts invested by shareholders.

Question 12

Treasury stock transactions never increase retained earnings or net income.

Question 13

Issued stock refers to the number of shares:

A) Outstanding plus treasury shares.
B) Shares issued for cash.
C) Owned by shareholders.
D) That may be issued under state law.

Question 14

Noncash assets received as consideration for the issue of stock are always valued based on the fair value of the stock.

Question 15

Stock dividends cause a reduction in retained earnings, but they never reduce total shareholders' equity.

Question 16

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 held in the corporate treasury.
D) Stock owned by shareholders.

Question 17

The corporate charter sometimes is known as (a):

A) Articles of incorporation.
B) Statement of organization.
C) By-laws.
D) Registration statement.

Question 18

Restrictions on retained earnings must be disclosed in the body of the balance sheet.

Question 19

Under GAAP, the declaration of a property dividend may require the recognition of a gain or loss if the fair value of the property is different from its book value on the declaration date.

Question 20

Mandatorily redeemable preferred stock is reported as a liability.

Question 21

The following partial information is taken from the comparative balance sheet of Levi Corporation:

- What was the amount of Levi's net income for the year 2018?

A) $0.
B) $40 million.
C) $62 million.
D) Cannot be determined from the given information.

Question 22

Yellow Enterprises reported the following ($ in 000s) as of December 31, 2018. All accounts have normal balances. During 2019 ($ in 000s), net income was $9,000; 25% of the treasury stock was resold for $450; cash dividends declared were $600; cash dividends paid were $500.

- What ($ in 000s) was shareholders' equity as of December 31, 2019?

A) $38,100.
B) $37,450.
C) $38,450.
D) $38,350.

Question 23

When preferred stock carries a redemption privilege, the shareholders may:

A) Purchase new shares as they become available.
B) Exchange their preferred shares for common shares.
C) Surrender the preferred shares for a specified amount of cash.
D) Purchase treasury shares ahead of common shareholders.

Question 24

The changes in account balances for Elder Company for 2018 are as follows: Assuming the only changes in retained earnings in 2018 were for net income and a $50,000 dividend, what was net income for 2018?

A) $40,000.
B) $60,000.
C) $70,000.
D) $90,000.

Question 25

A statement of comprehensive income does not include:

A) Gains resulting from the return on pension assets exceeding expectations.
B) Gains and losses on unsold held-to-maturity debt securities.
C) Adjustments from foreign currency translation.
D) Prior service cost of pensions.

Question 26

As of December 31, 2018, Warner Corporation reported the following: During 2019, half of the treasury stock was resold for $240,000; net income was $600,000; cash dividends declared were $1,500,000; and stock dividends declared were $500,000.

- What would shareholders' equity be as of December 31, 2019?

A) Amount is not shown.
B) $5,760,000.
C) $5,820,000.
D) $6,760,000.

Question 27

Accumulated other comprehensive income is reported:

A) In the balance sheet as an asset.
B) In the balance sheet as a liability.
C) In the balance sheet as a component of shareholders' equity.
D) In the statement of comprehensive income.

Question 28

Heidi Aurora Imports issued shares of the company's Class B stock. Heidi Aurora Imports should report the stock in the company's statement of financial position:

A) Among liabilities if the shares are mandatorily redeemable or redeemable at the option of the shareholder.
B) As equity unless the shares are mandatorily redeemable.
C) As equity unless the shares are redeemable at the option of the issuer.
D) Among liabilities unless the shares are mandatorily redeemable.

Question 29

The following partial information is taken from the comparative balance sheet of Levi Corporation:

- What was the average price of the additional treasury shares purchased by Levi during 2018?

A) $11 per share.
B) $12 per share.
C) $12.50 per share.
D) None of these answer choices are correct.

Question 30

As of December 31, 2018, Warner Corporation reported the following: During 2019, half of the treasury stock was resold for $240,000; net income was $600,000; cash dividends declared were $1,500,000; and stock dividends declared were $500,000.

-The 2019 sale of half of the treasury stock would:

A) Reduce income before tax by $60,000.
B) Reduce retained earnings by $60,000.
C) Increase total shareholders' equity by $300,000.
D) Reduce retained earnings by $40,000.

Question 31

Yellow Enterprises reported the following ($ in 000s) as of December 31, 2018. All accounts have normal balances. During 2019 ($ in 000s), net income was $9,000; 25% of the treasury stock was resold for $450; cash dividends declared were $600; cash dividends paid were $500.

- What ($ in 000s) was shareholders' equity as of December 31, 2018?

A) $29,600.
B) $35,600.
C) $30,400.
D) $28,600.

Question 32

The following partial information is taken from the comparative balance sheet of Levi Corporation:

- How many of Levi's common shares were outstanding on 12/31/2017?

A) 14 million.
B) 9 million.
C) 5 million.
D) None of these answer choices are correct.

Question 33

Characteristics 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) Ease of ownership transfer.

Question 34

A statement of comprehensive income does not include:

A) Net income.
B) Losses resulting from the return on pension assets exceeding expectations.
C) Losses from changes in estimates regarding the PBO.
D) Prior service cost.

Question 35

The following partial information is taken from the comparative balance sheet of Levi Corporation:

-What was the average price (rounded to the nearest dollar) of the additional shares issued by Levi in 2018?

A) $5 per share.
B) $26 per share.
C) $39 per share.
D) Cannot be determined from the given information.

Question 36

The changes in account balances for Allen Inc. for 2018 are as follows: Assuming the only changes in retained earnings in 2018 were for net income and a $25,000 dividend, what was net income for 2018?

A) $30,000.
B) $20,000.
C) $15,000.
D) $5,000.

Question 37

Accumulated other comprehensive income:

A) is a liability.
B) might include prior service cost from pension plan amendments.
C) includes unrealized gains and losses on equity securities.
D) is reported in the income statement.

Question 38

Roberto Corporation was organized on January 1, 2018. The firm was authorized to issue 100,000 shares of $5 par common stock. During 2018, Roberto had the following transactions relating to shareholders' 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 shareholders' equity at the end of 2018?

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

Question 39

As of December 31, 2018, Warner Corporation reported the following: During 2019, half of the treasury stock was resold for $240,000; net income was $600,000; cash dividends declared were $1,500,000; and stock dividends declared were $500,000.

-What was shareholders' equity as of December 31, 2018?

A) $7,020,000.
B) $6,440,000.
C) $6,420,000.
D) $6,400,000.

Question 40

The common stock account in a company's balance sheet is measured as:

A) The number of common shares outstanding multiplied by the stock's par per share.
B) The number of common shares outstanding multiplied by the stock's current market price per share.
C) The number of common shares issued multiplied by the stock's par per share.
D) None of these answer choices are correct.

Question 41

Common shareholders usually have all of the following rights except:

A) To share in the profits.
B) To share in assets upon liquidation.
C) To elect a board of directors.
D) To participate in the day-to-day operations.

Question 42

The shareholders' equity of Red Corporation includes $200,000 of $1 par common stock and $400,000 par of 6% cumulative preferred stock. The board of directors of Red declared cash dividends of $50,000 in 2018 after paying $20,000 cash dividends in 2017 and $40,000 in 2016. What is the amount of dividends common shareholders will receive in 2018?

A) $18,000.
B) $22,000.
C) $26,000.
D) $28,000.

Question 43

Rick Co. had 30 million shares of $1 par common stock outstanding at January 1, 2018. In October 2018, Rick Co.'s Board of Directors declared and distributed a 1% common stock dividend when the market value of its common stock was $60 per share. In recording this transaction, Rick would:

A) Debit retained earnings for $18 million.
B) Credit paid-in capital-excess of par for $18 million.
C) Credit common stock for $18 million.
D) None of these answer choices are correct

Question 44

Olsson Corporation received a check from its underwriters for $72 million. This was for the issue of one million of its $5 par stock that the underwriters expect to sell for $72 per share. Which is the correct entry to record the issue of the stock?

A)
B) $\begin{array}{|l|r|r|}\hline \text { Cash } & 72,000,000 & \\\hline \text { Deferred stock issue revenue } & & 20,000,000 \\\hline \text { Common stock } & & 5,000,000 \\\hline \text { Paid-in capital\_excess of par } & & 47,000,000 \\\hline\end{array}$
C) $\begin{array}{|l|l|l|}\hline \text { Cash } & 72,000,000 & \\\hline \text { Common stock } & & 72,000,000 \\\hline\end{array}$
D) $\begin{array}{|l|r|r|}\hline \text { Cash } & 72,000,000 & \\\hline \text { Common stock } & & 5,000,000 \\\hline \text { Paid-in capital\_excess of par } & & 67,000,000 \\\hline\end{array}$

Question 45

Share issue costs refer to the costs of obtaining the legal, promotional, and accounting services necessary to effect the sale of shares. The costs reduce the net cash proceeds from selling the shares and thus paid-in capital-excess of par, and are:

A) Not recorded separately.
B) Recorded as an asset.
C) Recorded as a liability.
D) Amortized over time.

Question 46

The 12/31/2018 balance sheet of Despot Inc. included the following: In January 2018, Despot recorded a transaction with this journal entry:

- In February 2018, Despot declared cash dividends of $12 million to be paid in April of that year. What effect did the April transaction have on Despot's accounts?

A) Decreased assets and liabilities.
B) Decreased assets and shareholders' equity.
C) Increased liabilities and decreased shareholders' equity.
D) None of these answer choices are correct

Question 47

When more than one security is sold for a single price and the total selling price is not equal to the sum of the market prices, the cash received is allocated between the securities based on:

A) Relative book values.
B) Par amounts
C) Relative market values.
D) The earnings per share.

Question 48

The preemptive right refers to the shareholder's right to:

A) Maintain a proportional ownership interest in the corporation.
B) Vote for members of the board of directors.
C) Receive a share of dividends.
D) Share in profits proportionally with all other stockholders.

Question 49

The shareholders' equity of Green Corporation includes $200,000 of $1 par common stock and $400,000 par of 6% cumulative preferred stock. The board of directors of Green declared cash dividends of $50,000 in 2018 after paying $20,000 cash dividends in each of 2017 and 2016. What is the amount of dividends common shareholders will receive in 2018?

A) $18,000.
B) $26,000.
C) $28,000.
D) $32,000.

Question 50

The par amount of common stock represents:

A) The arbitrary dollar amount assigned to a share of stock.
B) The liquidation value of a share.
C) The book value of a share of stock.
D) The amount received when the stock was issued.

Question 51

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

A) Paid-in capital in excess of par account.
B) Common stock account.
C) Retained earnings account.
D) Appropriated retained earnings account.

Question 52

The owners of a corporation are its shareholders. If a corporation has only one class of shares, they typically are labeled common shares. Each of the following are ownership rights held by common shareholders, unless specifically withheld by agreement, except:

A) The right to vote on policy issues.
B) The right to share in profits when dividends are declared (in proportion to the percentage of shares owned by the shareholder).
C) The right to dividends equal to a stated rate time par (if dividends are paid).
D) The right to share in the distribution of any assets remaining at liquidation after other claims are satisfied.

Question 53

The 12/31/2018 balance sheet of Despot Inc. included the following: In January 2018, Despot recorded a transaction with this journal entry:

- The transaction was for the:

A) Issue of 2 million shares of common stock at par.
B) Issue of common stock for $150 million in cash.
C) Receipt of $20 per share for a new stock issue.
D) All of these answer choices are correct.

Question 54

Authorized common stock refers to the total number of shares:

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

Question 55

Poodle Corporation was organized on January 3, 2018. The firm was authorized to issue 100,000 shares of $5 par common stock. During 2018, Poodle 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 2018?

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

Question 56

Paid-in capital in excess of par is reported:

A) As a reduction of shareholders' equity.
B) As a noncurrent asset.
C) As a noncurrent liability.
D) As an increase in shareholders' equity.

Question 57

When stock traded on an active exchange is issued for a machine:

A) No entry is recorded until restrictions are lifted.
B) An asset is recorded for the fair value of the stock.
C) An asset is recorded for the appraised value of the machine.
D) Paid-in capital is increased by the appraised value of the machine.

Question 58

Which of the following transactions decreases retained earnings?

A) A property dividend.
B) A stock dividend.
C) A cash dividend.
D) All of these answer choices are correct.

Question 59

The 12/31/2018 balance sheet of Despot Inc. included the following: In January 2018, Despot recorded a transaction with this journal entry:

- Despot declared a property dividend to give marketable equity securities to its common stockholders. The securities had cost Despot $7 million and currently have a fair value of $16 million. Which of the following would be included in recording the property dividend declaration?

A) Increase in a liability for $16 million.
B) Decrease in retained earnings for $7 million.
C) Decrease in marketable securities by $16 million.
D) All of these answer choices are correct.

Question 60

When stock is issued in exchange for property, the best evidence of fair value might be any of the following except:

A) The appraised value of the property received.
B) The selling price of the stock in a recent transaction.
C) The price of the stock quoted on the stock exchange.
D) The average book value of outstanding stock.

Question 61

In 2016, Winn, Inc., issued $1 par common stock for $35 per share. No other common stock transactions occurred until July 31, 2018, when Winn acquired some of the issued shares for $30 per share and retired them. Which of the following statements correctly states an effect of this acquisition and retirement?

A) 2018 net income is decreased.
B) Additional paid-in capital is decreased.
C) 2018 net income is increased.
D) Retained earnings is increased.

Question 62

When a property dividend is declared, the reduction in retained earnings is for:

A) The book value of the property on the date of declaration.
B) The book value of the property on the date of distribution.
C) The fair value of the property on the date of distribution.
D) The fair value of the property on the date of declaration.

Question 63

Boxer Company owned 20,000 shares of King Company that were purchased in 2016 for $500,000. On May 1, 2018, Boxer declared a property dividend of 1 share of King for every 10 shares of Boxer stock. On that date, there were 50,000 shares of Boxer stock outstanding. The market value of the King stock was $30 per share on the date of declaration and $32 per share on the date of distribution. By how much is retained earnings reduced by the property dividend?

A) $0.
B) $150,000.
C) $160,000.
D) $300,000.

Question 64

Preferred shares that are participating may:

A) Vote for the board of directors.
B) Be exchanged for common stock.
C) Receive extra cash during corporate liquidation.
D) Receive additional dividends beyond the stated amount.

Question 65

When treasury stock is purchased for an amount greater than its par, what is the effect on total shareholders' equity?

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

Question 66

When preferred stock is purchased by the issuing corporation at a price below the original issue price and the stock is retired, the transaction:

A) Increases net income for the year.
B) Increases retained earnings.
C) Increases revenue for the year.
D) Increases paid-in capital--share repurchase.

Question 67

When treasury shares are resold at a price below cost:

A) Paid-in capital and/or retained earnings is reduced.
B) Paid-in capital and/or retained earnings is increased.
C) Retained earnings is always reduced.
D) A loss is reported on the income statement

Question 68

Montgomery & Co., a well-established law firm, provided 500 hours of its time to Fink Corporation in exchange for 1,000 shares of Fink's $5 par common stock. Montgomery's usual billing rate is $700 per hour, and Fink's stock has a book value of $250 per share. By what amount will Fink's paid-in capital-excess of par increase for this transaction?

A) $345,000.
B) $295,000.
C) $350,000.
D) $300,000.

Question 69

When treasury shares are sold at a price above cost:

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

Question 70

The retained earnings balance reported in the balance sheet typically is not affected by:

A) Net income.
B) A prior period adjustment.
C) Dividends paid.
D) Restrictions.

Question 71

On June 1, 2018, Blue Co. distributed to its common stockholders 200,000 outstanding common shares of its investment in Red Inc, an unrelated party. The book value on Blue's books of Red's $1 par common stock was $2 per share. Immediately after the declaration, the market price of Red's stock was $2.50 per share. In its income statement for the year ended June 30, 2018, what amount should Blue report as gain before income taxes on disposal of the stock?

A) $0.
B) $100,000.
C) $400,000.
D) $500,000.

Question 72

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

A) Dividends and voting rights.
B) Par and dividends
C) The preemptive right and voting rights.
D) Assets at liquidation and dividends.

Question 73

Treasury shares are most often reported as:

A) A reduction of total shareholders' equity.
B) A reduction of total paid-in capital.
C) A reduction of retained earnings.
D) An expense in the income statement.

Question 74

Any dividend that is considered to be a liquidating dividend will:

A) Reduce retained earnings.
B) Reduce paid-in capital.
C) Increase paid-in capital.
D) Reduce the common stock account.

Question 75

Retained earnings represent a company's:

A) Undistributed net income.
B) Undistributed net assets.
C) Extra paid-in capital.
D) Undistributed cash.

Question 76

Coy, Inc. initially issued 200,000 shares of $1 par stock for $1,000,000 in 2016. In 2017, the company repurchased 20,000 shares for $200,000. In 2018, 10,000 of the repurchased shares were resold for $160,000. In its balance sheet dated December 31, 2018, Coy, Inc.'s treasury stock account shows a balance of:

A) $0.
B) $40,000.
C) $100,000.
D) $200,000.

Question 77

Which of the following statements is true when dividends are not declared or paid on cumulative preferred stock?

A) The shareholders must be allowed to convert their shares to common stock.
B) The unpaid dividends are accrued as a liability.
C) The unpaid dividends are reported in a note to the financial statements.
D) The unpaid dividends accrue interest until paid.

Question 78

Retained earnings represent:

A) Earned capital.
B) Cash.
C) Assets.
D) Net assets.

Question 79

When dividends are declared in one fiscal year and paid in the next fiscal year, the liability for the dividend should be recorded as of the:

A) Date the dividend is declared.
B) Last day of the fiscal year.
C) Date of record.
D) Date of payment.

Question 80

On October 1, 2018, Chief Corporation declared and issued a 10% stock dividend. Before this date, Chief had 80,000 shares of $5 par common stock outstanding. The market value of Chief Corporation on the date of declaration was $10 per share. As a result of this dividend, Chief's retained earnings will:

A) Decrease by $80,000.
B) Not change.
C) Decrease by $40,000.
D) Increase by $80,000.