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Week 10 Quiz 7: Chapter 15
STOCKHOLDERS’ EQUITY
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. A
corporation is incorporated in only one state regardless of the number of
states in which it operates.
2. The
preemptive right allows stockholders the right to vote for directors of the
company.
3. Common
stock is the residual corporate interest that bears the ultimate risks of loss.
4. Earned
capital consists of additional paid-in capital and retained earnings.
5. True
no-par stock should be carried in the accounts at issue price without any
additional paid-in capital reported.
6. Companies
allocate the proceeds received from a lump-sum sale of securities based on the
securities’ par values.
7. Companies
should record stock issued for services or noncash property at either the fair
value of the stock issued or the fair value of the consideration received.
8. Treasury
stock is a company’s own stock that has been reacquired and retired.
9. The
cost method records all transactions in treasury shares at their cost and
reports the treasury stock as a deduction from capital stock.
10. When
a corporation sells treasury stock below its cost, it usually debits the
difference between cost and selling price to Paid-in Capital from Treasury
Stock.
11. Participating
preferred stock requires that if a company fails to pay a dividend in any year,
it must make it up in a later year before paying any common dividends.
12. Callable
preferred stock permits the corporation at its option to redeem the outstanding
preferred shares at stipulated prices.
13. The
laws of some states require that corporations restrict their legal capital from
distribution to stockholders.
14. The
SEC requires companies to disclose their dividend policy in their annual
report.
15. All
dividends, except for liquidating dividends, reduce the total stockholders’
equity of a corporation.
16. Dividends
payable in assets of the corporation other than cash are called property
dividends or dividends in kind.
17. When
a stock dividend is less than 20-25 percent of the common stock outstanding, a
company is required to transfer the fair value of the stock issued from
retained earnings.
18. Stock
splits and large stock dividends have the same effect on a company’s retained
earnings and total stockholders’ equity.
19. The
rate of return on common stock equity is computed by dividing net income by the
average common stockholders’ equity.
20. The
payout ratio is determined by dividing cash dividends paid to common
stockholders by net income available to common stockholders.
True-False Answers—Conceptual
MULTIPLE CHOICE—Conceptual
21. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
22. The pre-emptive right of a common stockholder is the right to
a. share proportionately in corporate assets
upon liquidation.
b. share proportionately in any new issues of
stock of the same class.
c. receive cash dividends before they are
distributed to preferred stockholders.
d. exclude preferred stockholders from voting
rights.
23. The pre-emptive right enables a stockholder to
a. share proportionately in any new issues of
stock of the same class.
b. receive cash dividends before other classes
of stock without the pre-emptive right.
c. sell capital stock back to the corporation at
the option of the stockholder.
d. receive the same amount of dividends on a
percentage basis as the preferred stockholders.
S24. In
a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of
incorporation allows the company to accumulate over its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government
allows a corporation to generate.
d. the total capital raised by a corporation
within the limits set by the Securities and Exchange Commission.
S25. Stockholders
of a business enterprise are said to be the residual owners. The term residual
owner means that shareholders
a. are entitled to a dividend every year in
which the business earns a profit.
b. have the rights to specific assets of the
business.
c. bear the ultimate risks and uncertainties and
receive the benefits of enterprise ownership.
d. can negotiate individual contracts on behalf
of the enterprise.
26. Total stockholders' equity represents
a. a claim to specific assets contributed by the
owners.
b. the maximum amount that can be borrowed by
the enterprise.
c. a claim against a portion of the total assets
of an enterprise.
d. only the amount of earnings that have been
retained in the business.
27. A primary source of stockholders' equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.
28. Stockholders' equity is generally classified into two major
categories:
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.
29. The accounting problem in a lump sum issuance is the allocation
of proceeds between the classes of securities. An acceptable method of
allocation is the
a. pro forma method.
b. proportional method.
c. incremental method.
d. either the proportional method or the
incremental method.
30. When a corporation issues its capital stock in payment for
services, the least appropriate basis
for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis
for recording the transaction.
31. Direct costs incurred to sell stock such as underwriting costs
should be accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in
which the stock is issued.
3. an intangible asset.
a. 1
b. 2
c. 3
d. 1 or 3
32. A "secret reserve" will be created if
a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders' equity is overstated.
P33. Which
of the following represents the total number of shares that a corporation may
issue under the terms of its charter?
a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares
S34. Stock
that has a fixed per-share amount printed on each stock certificate is called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.
S35. Which
of the following is not a legal restriction related to profit distributions by
a corporation?
a. The amount distributed to owners must be in
compliance with the state laws governing corporations.
b. The amount distributed in any one year can
never exceed the net income reported for that year.
c. Profit distributions must be formally
approved by the board of directors.
d. Dividends must be in full agreement with the
capital stock contracts as to preferences and participation.
S36. In
January 2012, Finley Corporation, a newly formed company, issued 10,000 shares
of its $10 par common stock for $15 per share. On July 1, 2012, Finley
Corporation reacquired 1,000 shares of its outstanding stock for $12 per share.
The acquisition of these treasury shares
a. decreased total stockholders' equity.
b. increased total stockholders' equity.
c. did not change total stockholders' equity.
d. decreased the number of issued shares.
P37. Treasury
shares are
a. shares held as an investment by the treasurer
of the corporation.
b. shares held as an investment of the
corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.
38. When treasury stock is purchased for more than the par value of
the stock and the cost method is used to account for treasury stock, what
account(s) should be debited?
a. Treasury stock for the par value and paid-in
capital in excess of par for the excess of the purchase price over the par
value.
b. Paid-in capital in excess of par for the
purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained
earnings for the excess of the purchase price over the par value.
39. “Gains" on sales of treasury stock (using the cost method)
should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.
40. Porter Corp. purchased its own par value stock on January 1,
2012 for $20,000 and debited the treasury stock account for the purchase price.
The stock was subsequently sold for $12,000. The $8,000 difference between the
cost and sales price should be recorded as a deduction from
a. additional paid-in capital to the extent that
previous net "gains" from sales of the same class of stock are included
therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as
to whether or not there have been previous net "gains" from sales of
the same class of stock included therein.
c. retained earnings.
d. net income.
41. How
should a "gain" from the sale of treasury stock be reflected when
using the cost method of recording treasury stock transactions?
a. As ordinary earnings shown on the income
statement.
b. As paid-in capital from treasury stock
transactions.
c. As an increase in the amount shown for common
stock.
d. As an extraordinary item shown on the income
statement.
42. Which of the following best describes a possible result of
treasury stock transactions by a corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is
used.
c. May decrease but not increase retained
earnings.
d. May decrease but not increase net income.
43. Which of the following features of preferred stock makes the
security more like debt than an equity instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative
44. The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to
the par value of the preferred stock.
b. requires that dividends not paid in any year
must be made up in a later year before dividends are distributed to common
shareholders.
c. means that the shareholder can accumulate
preferred stock until it is equal to the par value of common stock at which
time it can be converted into common stock.
d. enables a preferred stockholder to accumulate
dividends until they equal the par value of the stock and receive the stock in
place of the cash dividends.
P45. According
to the FASB, redeemable preferred stock should be
a. included with common stock.
b. included as a liability.
c. excluded from the stockholders’ equity
heading.
d. included as a contra item in stockholders'
equity.
S46. Cumulative
preferred dividends in arrears should be shown in a corporation's balance sheet
as
a. an increase in current liabilities.
b. an increase in stockholders' equity.
c. a footnote.
d. an increase in current liabilities for the
current portion and long-term liabilities for the long-term portion.
47. At the date of the financial statements, common stock shares issued
would exceed common stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.
48. An entry is not made
on the
a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.
49. Cash dividends are paid on the basis of the number of shares
a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury
shares.
50. Which of the following statements about property dividends is not true?
a. A property dividend is usually in the form of
securities of other companies.
b. A property dividend is also called a dividend
in kind.
c. The accounting for a property dividend should
be based on the carrying value (book value) of the nonmonetary assets
transferred.
d. All of these statements are true.
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