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TRUE-FALSE STATEMENTS

1. A corporation is not an entity which is separate and distinct from its owners.

2. A corporation can be organized for the purpose of making a profit or it may be not-forprofit.

3. A corporation acts under its own name rather than in the name of its stockholders.

4. If a corporation pays taxes on its income, then stockholders will not have to pay taxes on

the dividends received from that corporation.

5. A corporation must be incorporated in each state in which it does business.

6. A stockholder has the right to vote in the election of the board of directors.

7. A proxy is a legal document that instructs a stockholder’s agent how to vote shares of

stock for the stockholder.

8. As soon as a corporation is authorized to issue stock, an accounting journal entry should

be made recording the total value of the shares authorized.

9. The par value of common stock must always be equal to its market value on the date the

stock is issued.

10. When no-par value stock does not have a stated value, the entire proceeds from the

issuance of the stock becomes legal capital.

11. A corporation can issue more shares than it is authorized in its charter, if the board of

directors approves of an increase in the number of authorized shares.

12. The market value of a corporation's stock is determined by the number of shares that the

corporation has been authorized to issue.

13. Each stockholder in a corporation has a separate capital account in the stockholders'

equity section of the balance sheet.

14. The stockholders' equity section of a corporation's balance sheet consists of (1) paid-in

capital, (2) retained earnings, and (3) drawings.

15. Dividends are declared out of retained earnings.

16. When a corporation has only one class of capital stock, it is identified as preferred stock.

17. Retained earnings are a part of stockholders' equity.

18. Retained earnings is usually subtracted from paid-in capital to arrive at total stockholders'

equity.

19. Stock can be issued only in exchange for cash.

20. The par value of stock issued for noncash assets is never a factor in determining the cost

of the assets received.

21. The acquisition of treasury stock by a corporation increases total assets and total

stockholders' equity.

22. Treasury stock should not be classified as a current asset.

23. Treasury stock purchased for $25 per share that is reissued at $20 per share, results in a

Loss on Sale of Treasury Stock being recognized on the income statement.

24. Treasury stock is a contra stockholders' equity account.

25. The number of common shares outstanding can never be greater than the number of

shares issued.

26. Preferred stock has contractual preference over common stock in certain areas.

27. Preferred stockholders generally do not have the right to vote for the board of directors.

28. Dividends in arrears on cumulative preferred stock are considered a liability.

29. In published annual reports, subdivisions within the stockholders' equity section are

seldom presented, but additional information is frequently included in the footnotes to the

financial statements.

30. The term “Capital surplus” can be used instead of “Additional Paid-in Capital”.

31. A successful corporation can have a continuous and perpetual life.

32. Organizational costs are capitalized by debiting an intangible asset entitled Organization

Costs.

33. The cash proceeds from issuing par value stock may be equal to or greater than, but not

less than par value.

34. The cost of a noncash asset acquired in exchange for common stock should be either the

fair market value of the consideration given up or the consideration received, whichever is

more clearly determinable.

35. Under the cost method, Treasury Stock is debited at the price paid to reacquire the

shares, and the same amount is credited to Treasury Stock when the shares are sold.

36. In the stockholders’ equity section, paid-in capital and retained earnings are reported and

the specific sources of paid-in capital are identified.

MULTIPLE CHOICE QUESTIONS

37. Which one of the following is a privately held corporation?

a. Intel

b. General Electric

c. Caterpillar Inc.

d. Cargill Inc.

38. The dominant form of business organization in the United States in terms of dollar sales

volume, earnings, and employees is

a. the sole proprietorship.

b. the partnership.

c. the corporation.

d. not known.

39. Under the corporate form of business organization

a. a stockholder is personally liable for the debts of the corporation.

b. stockholders' acts can bind the corporation even though the stockholders have not

been appointed as agents of the corporation.

c. the corporation's life is stipulated in its charter.

d. stockholders wishing to sell their corporation shares must get the approval of other

stockholders.

40. Stockholders of a corporation directly elect

a. the president of the corporation.

b. the board of directors.

c. the treasurer of the corporation.

d. all of the employees of the corporation.

41. The chief accounting officer in a company is known as the

a. controller.

b. treasurer.

c. vice-president.

d. president.

42. A factor which distinguishes the corporate form of organization from a sole proprietorship

or partnership is that a

a. corporation is organized for the purpose of making a profit.

b. corporation is subject to more federal and state government regulations.

c. corporation is an accounting economic entity.

d. corporation’s temporary accounts are closed at the end of the accounting period.

43. Which one of the following would not be considered an advantage of the corporate form of

organization?

a. Limited liability of owners

b. Separate legal existence

c. Continuous life

d. Government regulation

44. The concept of an "artificial being" refers to which form of business organization?

a. Partnership

b. Sole proprietorship

c. Corporation

d. Limited partnership

Ans: c, 45. The two ways that a corporation can be classified by purpose are

a. general and limited.

b. profit and not-for-profit.

c. state and federal.

d. publicly held and privately held.

46. The two ways that a corporation can be classified by ownership are

a. publicly held and privately held.

b. stock and non-stock.

c. inside and outside.

d. majority and minority.

47. Which of the following would not be true of a privately held corporation?

a. It is sometimes called a closely held corporation.

b. Its shares are regularly traded on the New York Stock Exchange.

c. It does not offer its shares for sale to the general public.

d. It is usually smaller than a publicly held company.

48. Which of the following is not true of a corporation?

a. It may buy, own, and sell property.

b. It may sue and be sued.

c. The acts of its owners bind the corporation.

d. It may enter into binding legal contracts in its own name.

49. Ed Tresh has invested $400,000 in a privately held family corporation. The corporation

does not do well and must declare bankruptcy. What amount does Tresh stand to lose?

a. Up to his total investment of $400,000.

b. Zero.

c. The $400,000 plus any personal assets the creditors demand.

d. $200,000.

50. Which of the following statements reflects the transferability of ownership rights in a

corporation?

a. If a stockholder decides to transfer ownership, he must transfer all of his shares.

b. A stockholder may dispose of part or all of his shares.

c. A stockholder must obtain permission from the board of directors before selling shares.

d. A stockholder must obtain permission from at least three other stockholders before

selling shares.

51. A corporate board of directors does not generally

a. select officers.

b. formulate operating policies.

c. declare dividends.

d. execute policy.

52. A typical organization chart showing delegation of authority would show

a. stockholders delegating to the board of directors.

b. the board of directors delegating to stockholders.

c. the chief executive officer delegating to the board of directors.

d. the controller delegating to the chief executive officer.

53. The officer who is generally responsible for maintaining the cash position of the

corporation is the

a. controller.

b. treasurer.

c. cashier.

d. internal auditor.

54. The chief accounting officer in a corporation is the

a. treasurer.

b. president.

c. controller.

d. vice-president of finance.

55. The ability of a corporation to obtain capital is

a. enhanced because of limited liability and ease of share transferability.

b. less than a partnership.

c. restricted because of the limited life of the corporation.

d. about the same as a partnership.

56. Which of the following statements concerning taxation is accurate?

a. Partnerships pay state income taxes but not federal income taxes.

b. Corporations pay federal income taxes but not state income taxes.

c. Corporations pay federal and state income taxes.

d. Only the owners must pay taxes on corporate income.

57. Which of the following statements is not considered a disadvantage of the corporate form

of organization?

a. Additional taxes

b. Government regulations

c. Limited liability of stockholders

d. Separation of ownership and management

58. What is ordinarily the first step in the formation of a corporation?

a. Development of by-laws for the corporation

b. Issuance of the corporate charter

c. Application for incorporation to the appropriate Secretary of State

d. Registration with the SEC

59. Which one of the following is not an ownership right of a stockholder in a corporation?

a. To vote in the election of directors

b. To declare dividends on the common stock

c. To share in assets upon liquidation

d. To share in corporate earnings

60. If no-par stock is issued without a stated value, then

a. the par value is automatically $1 per share.

b. the entire proceeds are considered to be legal capital.

c. there is no legal capital.

d. the corporation is automatically in violation of its state charter.

61. If a stockholder cannot attend a stockholder's meeting, he may delegate his voting rights

by means of

a. an absentee ballot.

b. a proxy.

c. a certified letter.

d. a telegram.

62. If a corporation has only one class of stock, it is referred to as

a. classless stock.

b. preferred stock.

c. solitary stock.

d. common stock.

63. The term residual claim refers to a stockholders’ right to

a. receive dividends.

b. share in assets upon liquidation.

c. acquire additional shares when offered.

d. exercise a proxy vote.

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

a. The company's anticipated future earnings

b. The par value of the stock

c. The current state of the economy

d. The expected dividend rate per share

65. If an investment firm underwrites a stock issue, the

a. risk of being unable to sell the shares stays with the issuing corporation.

b. corporation obtains cash immediately from the investment firm.

c. investment firm has guaranteed profits on the sale of the stock.

d. issuance of stock is likely to be directly to creditors.

66. The par value of a stock

a. is legally significant.

b. reflects the most recent market price.

c. is selected by the SEC.

d. is indicative of the worth of the stock.

67. A corporation has the following account balances: Common stock, $1 par value, $40,000;

Paid-in Capital in Excess of Par Value, $1,350,000. Based on this information, the

a. legal capital is $1,390,000.

b. number of shares issued are 40,000.

c. number of shares outstanding are 1,390,000.

d. average price per share issued is $3.48.

68. The authorized stock of a corporation

a. only reflects the initial capital needs of the company.

b. is indicated in its by-laws.

c. is indicated in its charter.

d. must be recorded in a formal accounting entry.

69. Owners' equity for a corporation is identified as each of the following except

a. corporate capital.

b. paid-in capital.

c. partners' equity.

d. stockholders' equity.

70. Retained earnings

a. is unique to the corporate form of business.

b. is an optional account in the partnership form of business.

c. reflects cash paid in by stockholders to date.

d. is closed at the end of the year.

71. Dividends are declared out of

a. Capital Stock.

b. Paid-in Capital in Excess of Par Value.

c. Retained Earnings.

d. Treasury Stock.

72. Retained earnings is

a. always equal to the amount of cash that the corporation has generated from

operations.

b. a part of the paid-in capital of the corporation.

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

d. closed at the end of each accounting period.

73. When stock is issued for legal services, the transaction is recorded by debiting

Organization Expense for the

a. stated value of the stock.

b. par value of the stock.

c. market value of the stock.

d. book value of the stock.

74. If Vickers Company issues 4,000 shares of $5 par value common stock for $140,000,

a. Common Stock will be credited for $140,000.

b. Paid-In Capital in Excess of Par Value will be credited for $20,000.

c. Paid-In Capital in Excess of Par Value will be credited for $120,000.

d. Cash will be debited for $120,000.

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

credited to

a. Cash.

b. Retained Earnings.

c. Paid-in Capital in Excess of Par Value.

d. Legal Capital.

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

corporation at

a. fair market value.

b. cost.

c. zero.

d. a nominal amount.

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

a. Paid-In Capital in Excess of Par Value is credited.

b. Paid-In Capital in Excess of Par Value is debited if a debit balance exists in the

account.

c. Paid-In Capital in Excess of Par Value is debited if a credit balance exists in the

account.

d. Retained Earnings is credited.

78. The sale of common stock below par

a. is a common occurrence in most states.

b. is not permitted in most states.

c. is a practice that most stockholders encourage.

d. requires that a liability be recorded for the difference between the sales price and the

par value of the shares.

79. Paid-In Capital in Excess of Stated Value

a. is credited when no-par stock does not have a stated value.

b. is reported as part of paid-in capital on the balance sheet.

c. represents the amount of legal capital.

d. normally has a debit balance.

80. A separate paid-in capital account is used to record each of the following except the

issuance of

a. no-par stock.

b. par value stock.

c. stated value stock.

d. treasury stock above cost.

81. Dailey Company is a publicly held corporation whose $1 par value stock is actively traded

at $22 per share. The company issued 2,000 shares of stock to acquire land recently

advertised at $55,000. When recording this transaction, Dailey Company will

a. debit Land for $55,000.

b. credit Common Stock for $44,000.

c. debit Land for $44,000.

d. credit Paid-In Capital in Excess of Par Value for $53,000.

82. Simon Company issued 4,000 shares of its $5 par value common stock in payment of its

attorney's bill of $35,000. The bill was for services performed in helping the company

incorporate. Simon should record this transaction by debiting

a. Legal Expense for $20,000.

b. Legal Expense for $35,000.

c. Organization Expense for $20,000.

d. Organization Expense for $35,000.

83. In the financial statements, organization costs appears

a. immediately below Retained Earnings in the stockholders' equity section.

b. in the income statement.

c. as part of paid-in capital in the stockholders' equity section.

d. as an intangible asset.

84. Which of the following represents the largest number of common shares?

a. Treasury shares

b. Issued shares

c. Outstanding shares

d. Authorized shares

85. New Corp. issues 2,000 shares of $10 par value common stock at $14 per share. When

the transaction is recorded, credits are made to

a. Common Stock $20,000 and Paid-in Capital in Excess of Stated Value $8,000.

b. Common Stock $28,000.

c. Common Stock $20,000 and Paid-in Capital in Excess of Par Value $8,000.

d. Common Stock $20,000 and Retained Earnings $8,000.

86. If Kiner Company issues 3,000 shares of $5 par value common stock for $70,000, the

account

a. Common Stock will be credited for $15,000.

b. Paid-in Capital in Excess of Par Value will be credited for $15,000.

c. Paid-in Capital in Excess of Par Value will be credited for $70,000.

d. Cash will be debited for $55,000.

87. Kerwin Packaging Corporation began business in 2010 by issuing 30,000 shares of $5 par

common stock for $8 per share and 10,000 shares of 6%, $10 par preferred stock for par.

At year end, the common stock had a market value of $10. On its December 31, 2010

balance sheet, Kerwin Packaging would report

a. Common Stock of $300,000.

b. Common Stock of $150,000.

c. Common Stock of $240,000.

d. Paid-In Capital of $150,000.

88. Kim, Inc. issued 8,000 shares of stock at a stated value of $10/share. The total issue of

stock sold for $15 per share. The journal entry to record this transaction would include a

a. debit to Cash for $80,000.

b. credit to Common Stock for $80,000.

c. credit to Paid-in Capital in Excess of Par Value for $40,000.

d. credit to Common Stock for $120,000.

89. S. Lawyer performed legal services for E. Corp. Due to a cash shortage, an agreement

was reached whereby E. Corp. would pay S. Lawyer a legal fee of approximately $10,000

by issuing 5,000 shares of its common stock (par $1). The stock trades on a daily basis

and the market price of the stock on the day the debt was settled is $1.80 per share.

Given this information, the journal entry for E. Corp. to record this transaction is:

a. Legal Expense 9,000

Common Stock 9,000

b. Legal Expense 10,000

Common Stock 10,000

c. Legal Expense 10,000

Common Stock 5,000

Paid-in Capital in Excess of Par – Common 5,000

d. Legal Expense 9,000

Common Stock 5,000

Paid-in Capital in Excess of Par – Common 4,000

90. Johnson Company issued 600 shares of no-par common stock for $10,200. Which of the

following journal entries would be made if the stock has no stated value?

a. Cash 10,200

Common Stock 10,200

b. Cash 10,200

Common Stock 600

Paid-in Capital in Excess of Par 9,600

c. Cash 10,200

Common Stock 600

Paid-in Capital in Excess of Stated Value 9,600

d. Common Stock 10,200

Cash 10,200

91. Dawson Company issued 500 shares of no-par common stock for $4,500. Which of the

following journal entries would be made if the stock has a stated value of $2 per share?

a. Cash 4,500

Common Stock 4,500

b. Cash 4,500

Common Stock 1,000

Paid-in Capital in Excess of Par 3,500

c. Cash 4,500

Common Stock 1,000

Paid-in Capital in Excess of Stated Value 3,500

92. Retro Company is authorized to issue 10,000 shares of 8%, $100 par value preferred

stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If

Retro issues 5,000 shares of common stock to pay its recent attorney’s bill of $20,000 for

legal services on a land access dispute, which of the following would be the journal entry

for Retro to record?

a. Legal Expense 5,000

Common Stock 5,000

b. Legal Expense 20,000

Common Stock 20,000

c. Legal Expense 20,000

Common Stock 5,000

Paid-in Capital in Excess of Stated Value – Common 15,000

d. Legal Expense 20,000

Common Stock 5,000

Paid-in Capital in Excess of Par – Preferred 15,000

93. The following data is available for BOX Corporation at December 31, 2010:

Common stock, par $10 (authorized 15,000 shares} $100,000

Treasury Stock (at cost $15 per share) 600

Based on the data, how many shares of common stock are outstanding?

a. 15,000

b. 10,000

c. 14,960

d. 9,960

94. The following data is available for BOX Corporation at December 31, 2010:

Common stock, par $10 (authorized 15,000 shares} $100,000

Treasury Stock (at cost $15 per share) $ 600

Based on the data, how many shares of common stock have been issued?

a. 15,000

b. 10,000

c. 14,960

d. 9,960

95. Andrews, Inc. paid $45,000 to buy back 9,000 shares of its $1 par value common stock.

This stock was sold later at a selling price of $6 per share. The entry to record the sale

includes a

a. credit to Paid-in Capital from Treasury Stock for $9,000.

b. credit to Retained Earnings for $9,000.

c. debit to Paid-in Capital from Treasury Stock for $45,000.

d. debit to Retained Earnings for $45,000.

96. Kendrick Corporation was organized on January 2, 2010. During 2010, Kendrick issued

20,000 shares at $24 per share, purchased 3,000 shares of treasury stock at $26 per

share, and had net income of $300,000. What is the total amount of stockholders’ equity

at December 31, 2010?

a. $640,000

b. $702,000

c. $708,000

d. $720,000

97. Elton Manufacturing Corporation purchased 4,000 shares of its own previously issued $10

par common stock for $92,000. As a result of this event,

a. Elton’s Common Stock account decreased $40,000.

b. Elton’s total stockholders’ equity decreased $92,000.

c. Elton’s Paid-in Capital in Excess of Par Value account decreased $52,000.

d. All of the above.

98. A corporation purchases 30,000 shares of its own $20 par common stock for $35 per

share, recording it at cost. What will be the effect on total stockholders’ equity?

a. Increase by $1,050,000

b. Decrease by $600,000

c. Decrease by $1,050,000

d. Increase by $600,000

99. A corporation purchases 20,000 shares of its own $10 par common stock for $25 per

share, recording it at cost. What will be the effect on total stockholders’ equity?

a. Increase by $200,000

b. Decrease by $500,000

c. Increase by $500,000

d. Decrease by $200,000

100. Beckham Company has 1,000 shares of 6%, $100 par cumulative preferred stock

outstanding at December 31, 2010. No dividends have been paid on this stock for 2009 or

2010. Dividends in arrears at December 31, 2010 total

a. $0.

b. $600.

c. $6,000.

d. $12,000.

101. Ephram Company has 3,000 shares of 5%, $100 par non-cumulative preferred stock

outstanding at December 31, 2010. No dividends have been paid on this stock for 2009 or

2010. Dividends in arrears at December 31, 2010 total

a. $0.

b. $1,500.

c. $15,000.

d. $30,000.

102. Rebel Inc. issued 3,000 shares of no-par common stock with a stated value of $3 per

share. The market price of the stock on the date of issuance was $12 per share. The entry

to record this transaction includes a

a. debit to Cash for $9,000.

b. credit to Common Stock for $36,000.

c. credit to Common Stock for $9,000.

d. debit to Paid-in Capital in Excess of Par Value for $36,000.

103. Rancho Corporation sold 200 shares of treasury stock for $40 per share. The cost for the

shares was $30. The entry to record the sale will include a

a. credit to Gain on Sale of Treasury Stock for $6,000.

b. credit to Paid-in Capital from Treasury Stock for $2,000.

c. debit to Paid-in Capital in Excess of Par Value for $2,000.

d. credit to Treasury Stock for $8,000.

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

a. issued.

b. fully paid for.

c. reacquired.

d. retired.

105. Treasury stock is

a. stock issued by the U.S. Treasury Department.

b. stock purchased by a corporation and held as an investment in its treasury.

c. corporate stock issued by the treasurer of a company.

d. a corporation's own stock which has been reacquired but not retired.

106. The acquisition of treasury stock by a corporation

a. increases its total assets and total stockholders' equity.

b. decreases its total assets and total stockholders' equity.

c. has no effect on total assets and total stockholders' equity.

d. requires that a gain or loss be recognized on the income statement.

107. Treasury stock should be reported in the financial statements of a corporation as a(n)

a. investment.

b. liability.

c. deduction from total paid-in capital.

d. deduction from total paid-in capital and retained earnings.

108. A company would not acquire treasury stock

a. in order to reissue shares to officers.

b. as an asset investment.

c. in order to increase trading of the company's stock.

d. to have additional shares available to use in acquisitions of other companies.

109. Accounting for treasury stock is done by the

a. FIFO method.

b. LIFO method.

c. cost method.

d. lower of cost or market method.

110. Treasury stock is generally accounted for by the

a. cost method.

b. market value method.

c. par value method.

d. stated value method.

111. Treasury Stock is a(n)

a. contra asset account.

b. retained earnings account.

c. asset account.

d. contra stockholders’ equity account.

112. Five thousand shares of treasury stock of Meyer, Inc., previously acquired at $12 per

share, are sold at $18 per share. The entry to record this transaction will include a

a. credit to Treasury Stock for $90,000.

b. debit to Paid-In Capital from Treasury Stock for $30,000.

c. debit to Treasury Stock for $60,000.

d. credit to Paid-In Capital from Treasury Stock for $30,000.

113. Slaton Company originally issued 3,000 shares of $10 par value common stock for

$90,000 ($30 per share). Slaton subsequently purchases 300 shares of treasury stock for

$27 per share and resells the 300 shares of treasury stock for $29 per share. In the entry

to record the sale of the treasury stock, there will be a

a. credit to Common Stock for $8,100.

b. credit to Treasury Stock for $3,000.

c. debit to Paid-In Capital in Excess of Par Value of $9,000.

d. credit to Paid-In Capital from Treasury Stock for $600.

114. Retro Company is authorized to issue 10,000 shares of 8%, $100 par value preferred

stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If

Retro issues 4,000 shares of preferred stock for land with an asking price of $500,000 and

a market value of $440,000, which of the following would be the journal entry for Retro to

record?

a. Land 400,000

Preferred Stock 400,000

b. Land 440,000

Preferred Stock 440,000

c. Land 500,000

Preferred Stock 400,000

Paid-in Capital in Excess of Par-Preferred 100,000

d. Land 440,000

Preferred Stock 400,000

Paid-in Capital Excess of Par-Preferred 40,000

115. Looper, Inc. has 25,000 shares of 6%, $100 par value, noncumulative preferred stock and

50,000 shares of $1 par value common stock outstanding at December 31, 2010. There

were no dividends declared in 2009. The board of directors declares and pays a $250,000

dividend in 2010. What is the amount of dividends received by the common stockholders

in 2010?

a. $0

b. $150,000

c. $250,000

d. $100,000

116. When preferred stock is cumulative, preferred dividends not declared in a period are

a. considered a liability.

b. called dividends in arrears.

c. distributions of earnings.

d. never paid.

117. Which of the following is not a right or preference associated with preferred stock?

a. The right to vote

b. First claim to dividends

c. Preference to corporate assets in case of liquidation

d. To receive dividends in arrears before common stockholders receive dividends

118. Cole Corporation issues 10,000 shares of $50 par value preferred stock for cash at $60

per share. The entry to record the transaction will consist of a debit to Cash for $600,000

and a credit or credits to

a. Preferred Stock for $600,000.

b. Preferred Stock for $500,000 and Paid-in Capital in Excess of Par Value—Preferred

Stock for $100,000.

c. Preferred Stock for $750,000 and Paid-in Capital from Preferred Stock for $100,000.

d. Paid-in Capital from Preferred Stock for $600,000.

119. Cole Corporation issues 10,000 shares of $50 par value preferred stock for cash at $60

per share. In the stockholders' equity section, the effects of the transaction above will be

reported

a. entirely within the capital stock section.

b. entirely within the additional paid-in capital section.

c. under both the capital stock and additional paid-in capital sections.

d. entirely under the retained earnings section.

,

120. Dividends in arrears on cumulative preferred stock

a. are shown in stockholders’ equity of the balance sheet.

b. must be paid before common stockholders can receive a dividend.

c. should be recorded as a current liability until they are paid.

d. enable the preferred stockholders to share equally in corporate earnings with the

common stockholders.

121. Dividends in arrears on cumulative preferred stock

a. are considered to be a non-current liability.

b. are considered to be a current liability.

c. only occur when preferred dividends have been declared.

d. should be disclosed in the notes to the financial statements.

122. If preferred stock is cumulative, the

a. preferred dividends not declared in a given year are called dividends in arrears.

b. preferred stockholders and the common stockholders receive equal dividends.

c. preferred stockholders and the common stockholders receive the same total dollar

amount of dividends.

d. common stockholders will share in the preferred dividends.

123. The Nice Corporation issues 8,000 shares of $100 par value preferred stock for cash at

$110 per share. The entry to record the transaction will consist of a debit to Cash for

$880,000 and a credit or credits to

a. Preferred Stock for $880,000.

b. Paid-in Capital from Preferred Stock for $880,000.

c. Preferred Stock for $800,000 and Retained Earnings for $80,000.

d. Preferred Stock for $800,000 and Paid-in Capital in Excess of Par Value—Preferred

Stock for $80,000.

124. Venco Corporation’s December 31, 2010 balance sheet showed the following:

8% preferred stock, $20 par value, cumulative, 10,000 shares

authorized; 7,500 shares issued $ 150,000

Common stock, $10 par value, 1,000,000 shares authorized;

975,000 shares issued, 960,000 shares outstanding 9,750,000

Paid-in capital in excess of par value—preferred stock 30,000

Paid-in capital in excess of par value—common stock 13,500,000

Retained earnings 3,750,000

Treasury stock (15,000 shares) 315,000

Venco declared and paid a $38,000 cash dividend on December 15, 2010. If the

company’s dividends in arrears prior to that date were $9,000, Triad’s common

stockholders received

a. $29,000.

b. $14,000.

c. $17,000.

d. no dividend.

125. Venco Corporation’s December 31, 2010 balance sheet showed the following:

8% preferred stock, $20 par value, cumulative, 10,000 shares

authorized; 7,500 shares issued $ 150,000

Common stock, $10 par value, 1,000,000 shares authorized;

975,000 shares issued, 960,000 shares outstanding 9,750,000

Paid-in capital in excess of par value—preferred stock 30,000

Paid-in capital in excess of par value—common stock 13,500,000

Retained earnings 3,750,000

Treasury stock (15,000 shares) 315,000

Venco’s total paid-in capital was

a. $23,430,000.

b. $23,745,000.

c. $23,115,000.

d. $13,080,000.

126. Venco Corporation’s December 31, 2010 balance sheet showed the following:

8% preferred stock, $20 par value, cumulative, 10,000 shares

authorized; 7,500 shares issued $ 150,000

Common stock, $10 par value, 1,000,000 shares authorized;

975,000 shares issued, 960,000 shares outstanding 9,750,000

Paid-in capital in excess of par value—preferred stock 30,000

Paid-in capital in excess of par value—common stock 13,500,000

Retained earnings 3,750,000

Treasury stock (15,000 shares) 315,000

Venco’s total stockholders’ equity was

a. $27,570,000.

b. $23,430,000.

c. $27,255,000.

d. $26,865,000.

127. Burgess Corporation began business by issuing 200,000 shares of $5 par value common

stock for $24 per share. During its first year, the corporation sustained a net loss of

$20,000. The year-end balance sheet would show

a. Common stock of $1,000,000.

b. Common stock of $4,800,000.

c. Total paid-in capital of $4,780,000.

d. Total paid-in capital of $3,800,000.

128. Renner Corporation’s December 31, 2010 balance sheet showed the following:

8% preferred stock, $20 par value, cumulative, 20,000 shares

authorized; 15,000 shares issued $ 300,000

Common stock, $10 par value, 2,000,000 shares authorized;

1,950,000 shares issued, 1,930,000 shares outstanding 19,500,000

Paid-in capital in excess of par value – preferred stock 60,000

Paid-in capital in excess of par value – common stock 27,000,000

Retained earnings 7,650,000

Treasury stock (20,000 shares) 630,000

Renner’s total paid-in capital was

a. $46,860,000.

b. $47,490,000.

c. $46,230,000.

d. $27,060,000.

129. Renner Corporation’s December 31, 2010 balance sheet showed the following:

8% preferred stock, $20 par value, cumulative, 20,000 shares

authorized; 15,000 shares issued $ 300,000

Common stock, $10 par value, 2,000,000 shares authorized;

1,950,000 shares issued, 1,930,000 shares outstanding 19,500,000

Paid-in capital in excess of par value – preferred stock 60,000

Paid-in capital in excess of par value – common stock 27,000,000

Retained earnings 7,650,000

Treasury stock (20,000 shares) 630,000

Renner’s total stockholders’ equity was

a. $55,140,000.

b. $46,860,000.

c. $54,510,000.

d. $53,880,000.

130. Adcock Corporation began business by issuing 300,000 shares of $5 par value common

stock for $24 per share. During its first year, the corporation sustained a net loss of

$30,000. The year-end balance sheet would show

a. Common stock of $1,500,000.

b. Common stock of $7,200,000.

c. Total paid-in capital of $7,170,000.

d. Total paid-in capital of $5,700,000.

131. The trial balance of Hackman Inc. includes the following balances: Common Stock,

$26,000; Paid-in Capital in Excess of Par, $64,000; Treasury Stock, $6,000; Preferred

Stock, $20,000. Capital stock totals

a. $46,000.

b. $84,000.

c. $110,000.

d. $116,000.

132. Each of the following is reported for common stock except the

a. par value.

b. shares issued.

c. shares outstanding.

d. liquidation value.

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

a. capital stock.

b. treasury stock.

c. additional paid-in capital.

d. contra to owners' equity.

134. Two classifications appearing in the paid-in capital section of the balance sheet are

a. preferred stock and common stock.

b. paid-in capital and retained earnings.

c. capital stock and additional paid-in capital.

d. capital stock and treasury stock.

135. Information that is not generally reported for each class of stock on the balance sheet is

a. the market value.

b. the par value.

c. shares authorized.

d. shares issued.

136. In published annual reports

a. subdivisions within the stockholders’ equity section are routinely reported in detail.

b. capital surplus is used in place of retained earnings.

c. the individual sources of additional paid-in capital are often combined.

d. retained earnings is often not shown separately.

137. Additional paid-in capital includes all of the following except

a. paid-in capital from treasury stock.

b. paid-in capital in excess of par.

c. paid-in capital in excess of stated value.

d. paid-in capital in excess of book value.

,

138. Which of the following is an incorrect statement about a corporation?

a. A corporation is an entity separate and distinct from its owners.

b. Creditors ordinarily have recourse only to corporate assets in satisfaction of their

claims.

c. A corporation may be formed in writing, orally, or implied.

d. A corporation is subject to numerous state and federal regulations.

139. Capital stock to which the charter has assigned a value per share is called

a. par value stock.

b. no-par value stock.

c. stated value stock.

d. assigned value stock.

140. Legal capital per share cannot be equal to the

a. par value per share of par value stock.

b. total proceeds from the sale of par value stock above par value.

c. stated value per share of no-par value stock.

d. total proceeds from the sale of no-par value stock.

141. When common stock is issued for services or non-cash assets, cost should be

a. only the fair market value of the consideration given up.

b. only the fair market value of the consideration received.

c. the book value of the common stock issued.

d. either the fair market value of the consideration given up or the consideration

received, whichever is more clearly evident.

142. When the selling price of treasury stock is greater than its cost, the company credits the

difference to

a. Gain on Sale of Treasury Stock.

b. Paid-in Capital from Treasury Stock.

c. Paid-in Capital in Excess of Par Value.

d. Treasury Stock.

143. Sandwick Corporation was organized on January 1, 2010, with authorized capital of

500,000 shares of $10 par value common stock. During 2010, Sandwick issued 20,000

shares at $12 per share, purchased 2,000 shares of treasury stock at $13 per share, and

sold 2,000 shares of treasury stock at $14 per share. What is the amount of additional

paid-in capital at December 31, 2010?

a. $0

b. $2,000

c. $40,000

d. $42,000

144. The purchase of treasury stock

a. decreases common stock authorized.

b. decreases common stock issued.

c. decreases common stock outstanding.

d. has no effect on common stock outstanding.

145. Preferred stockholders have a priority over common stockholders as to

a. dividends only.

b. assets in the event of liquidation only.

c. voting rights.

d. both dividends and assets in the event of liquidation.

146. On January 2, 2007, Pacer Corporation issued 30,000 shares of 6% cumulative preferred

stock at $100 par value. On December 31, 2010, Pacer Corporation declared and paid its

first dividend. What dividends are the preferred stockholders entitled to receive in the

current year before any distribution is made to common stockholders?

a. $0

b. $180,000

c. $540,000

d. $720,000

147. Additional paid-in capital includes all of the following except the amounts paid in

a. over par value.

b. over stated value.

c. from treasury stock.

d. for the par value of common stock.

148. In the stockholders' equity section of the balance sheet, the classification of capital stock

consists of

a. additional paid-in capital and common stock.

b. common stock and treasury stock.

c. common stock, preferred stock, and treasury stock.

d. common stock and preferred stock.

BRIEF EXERCISES

BE 149

Identify (by letter) each of the following characteristics as being an advantage, a disadvantage, or

not applicable to the corporate form of business organization.

A = Advantage

D = Disadvantage

N = Not Applicable

Characteristics

_____ 1. Separate legal entity

_____ 2. Taxable entity resulting in additional taxes

_____ 3. Continuous life

_____ 4. Unlimited liability of owners

_____ 5. Government regulation

_____ 6. Separation of ownership and management

_____ 7. Ability to acquire capital

_____ 8. Ease of transfer of ownership

BE 150

On July 6, XOT Corporation issued 2,000 shares of its $1.50 par common stock. The market

price of the stock on that date was $17 per share. Journalize the issuance of the stock.

BE 151

Donnelly Corporation is authorized to issue 1,000,000 shares of $1 par value common stock.

During 2010, the company has the following stock transactions.

Jan. 15 Issued 400,000 shares of stock at $7 per share.

Sept. 5 Purchased 30,000 shares of common stock for the treasury at $8 per share.

Instructions

Journalize the transactions for Donnelly Corporation.

BE 152

An inexperienced accountant for Duran Corporation made the following entries.

July 1 Cash................................................................................... 170,000

Common Stock .......................................................... 170,000

(Issued 25,000 shares of common stock,

par value $6 per share)

Sept. 1 Common Stock ................................................................... 24,000

Retained Earnings .............................................................. 16,000

Cash .......................................................................... 40,000

(Purchased 4,000 shares issued on July 1 for the

treasury at $10 per share)

Instructions

On the basis of the explanation for each entry, prepare the entry that should have been made for

the transactions.

BE 153

On September 5, Bertolli Corporation acquired 2,500 shares of its own $1 par common stock for

$22 per share. On October 15, 1,000 shares of the treasury stock is sold for $25 per share.

Instructions

Journalize the purchase and sale of the treasury stock assuming that the company uses the cost

method.

BE 154

Warren Company had the following transactions.

1. Issued 5,000 shares of common stock with a stated value of $10 for $110,000.

2. Issued 2,000 shares of $100 par preferred stock at $107 for cash.

Instructions

Prepare the journal entries to record the above stock transactions.

BE 155

On February 1, Burchess Corporation issued 5,000 shares of its $20 par value preferred stock for

$24 per share.

Instructions

Journalize the transaction.

BE 156

Jenkins Corporation has the following accounts at December 31: Common Stock, $10 par 7,000

shares issued, $70,000; Paid-in Capital in Excess of Par Value $10,000; Retained Earnings

$45,000; and Treasury Stock—Common, 500 shares, $10,000. Prepare the stockholders' equity

section of the balance sheet.

EXERCISES

Ex. 157

The following selected transactions pertain to Nesley Corporation:

Jan. 3 Issued 100,000 shares, $10 par value, common stock for $22 per share.

Feb. 10 Issued 6,000 shares, $10 par value, common stock in exchange for special purpose

equipment. Nesley Corporation's common stock has been actively traded on the stock

exchange at $25 per share.

Instructions

Journalize the transactions.

Ex. 158

The corporate charter of Gregory Corporation allows the issuance of a maximum of 2,500,000

shares of $1 par value common stock. During its first three years of operation, Gregory issued

1,200,000 shares at $15 per share. It later acquired 20,000 of these shares as treasury stock for

$25 per share.

Instructions

Based on the above information, answer the following questions:

(a) How many shares were authorized?

(b) How many shares were issued?

(c) How many shares are outstanding?

(d) What is the balance of the Common Stock account?

(e) What is the balance of the Treasury Stock account?

Ex. 159

Horner Corporation is authorized to issue 1,000,000 shares of $5 par value common stock.

During 2010, its first year of operation, the company has the following stock transactions.

Jan. 1 Paid the state $2,000 for incorporation fees.

Jan. 15 Issued 500,000 shares of stock at $6 per share.

Jan. 30 Attorneys for the company accepted 500 shares of common stock as payment for

legal services rendered in helping the company incorporate. The legal services are

estimated to have a value of $7,000.

July 2 Issued 100,000 shares of stock for land. The land had an asking price of $900,000.

The stock is currently selling on a national exchange at $8 per share.

Sept. 5 Purchased 15,000 shares of common stock for the treasury at $9 per share.

Dec. 6 Sold 11,000 shares of the treasury stock at $11 per

Instructions

Journalize the transactions for Horner Corporation.

Ex. 160

Prepare the necessary journal entry for each of the following transactions for Renfro Corporation.

(a) Issued 2,000 shares of its $10 par value common stock for $16 per share.

(b) Issued 5,000 shares of its stock for land advertised for sale at $80,000. Renfro's stock is

actively traded at a market price of $15 per share.

Ex. 161

Randolph Corporation issued 5,000 shares of stock.

Instructions

Prepare the entry for the issuance under the following assumptions.

(a) The stock had a par value of $5 per share and was issued for a total of $65,000.

(b) The stock had a stated value of $5 per share and was issued for a total of $65,000.

(c) The stock had a par value of $5 per share and was issued to attorneys for services during incorporation

valued at $65,000.

(d) The stock had a par value of $5 per share and was issued for land worth $65,000.

Ex. 162

1. Name at least three factors that influence the market value of stock.

2. Corporations acquire treasury stock for a variety of purposes. Name three reasons why

treasury stock may be acquired by a corporation.

Ex. 163

The following items were shown on the balance sheet of Herman Corporation on December 31,

2010:

Stockholders’ Equity

Paid-In Capital

Capital Stock

Common stock, $5 par value, 360,000 shares

authorized; ______ shares issued and ______ outstanding .................. $1,550,000

Additional paid-in capital

In excess of par value............................................................................ 165,000

Total paid-in capital.......................................................................... 1,715,000

Retained Earnings............................................................................................. 750,000

Total paid-in capital and retained earnings ............................................ 2,465,000

Less: Treasury stock (18,000 shares) .............................................................. (180,000)

Total stockholders' equity ...................................................................... $2,285,000

Instructions

Complete the following statements and show your computations.

(a) The number of shares of common stock issued was _______________.

(b) The number of shares of common stock outstanding was ____________.

(c) The sales price of the common stock when issued was $____________.

(d) The cost per share of the treasury stock was $_______________.

(e) The average issue price of the common stock was $______________.

(f) Assuming that 25% of the treasury stock is sold at $20 per share, the balance in the

Treasury Stock account would be $_______________.

Ex. 164

The stockholders’ equity section of Linton Corporation at December 31 is as follows.

LINTON CORPORATION

Balance Sheet (partial)

Paid-in capital

Preferred stock, cumulative, 10,000 shares authorized,

5,000 shares issued and outstanding $ 300,000

Common Stock, no par, 750,000 shares authorized, 300,000 shares issued 1,500,000

Total paid-in capital 1,800,000

Retained earnings 2,050,000

Total paid-in capital and retained earnings 3,850,000

Less: Treasury stock (5,000 common shares) (64,000)

Total stockholders' equity $3,786,000

Instructions

From a review of the stockholders’ equity section, answer the following questions.

(a) How many shares of common stock are outstanding?

(b) Assuming there is a stated value, what is the stated value of the common stock?

(c) What is the par value of the preferred stock?

(d) If the annual dividend on preferred stock is $18,000, what is the dividend rate on preferred

stock?

(e) If dividends of $36,000 were in arrears on preferred stock, what would be the balance in

Retained Earnings?

Ex. 165

On January 1, 2010, the stockholders’ equity section of Lopez Corporation shows: Common stock

($5 par value) $1,500,000; paid-in capital in excess of par value $1,000,000; and retained

earnings $1,200,000. During the year, the following treasury stock transactions occurred.

Mar. 1 Purchased 30,000 shares for cash at $15 per share.

July 1 Sold 6,000 treasury shares for cash at $17 per share.

Sept. 1 Sold 5,000 treasury shares for cash at $14 per share.

Instructions

(a) Journalize the treasury stock transactions.

(b) Restate the entry for September 1, assuming the treasury shares were sold at $12 per share.

Ex. 166

On May 1, Hite Corporation purchased 2,000 shares of its $10 par value common stock at a cash

price of $13/share. On July 15,900 shares of the treasury stock were sold for cash at $15/share.

Instructions

Journalize the two transactions.

Ex. 167

Yunger Corporation has the following stockholders' equity accounts on January 1, 2010:

Common Stock, $10 par value .......................................... $1,500,000

Paid-in Capital in Excess of Par.......................................... 200,000

Retained Earnings.............................................................. 500,000

Total Stockholders' Equity ............................................ $2,200,000

The company uses the cost method to account for treasury stock transactions. During 2010, the

following treasury stock transactions occurred:

April 1 Purchased 10,000 shares at $16 per share.

August 1 Sold 4,000 shares at $18 per share.

October 1 Sold 4,000 shares at $15 per share.

Instructions

(a) Journalize the treasury stock transactions for 2010.

(b) Prepare the Stockholders' Equity section of the balance sheet for Yunger Corporation at

December 31, 2010. Assume net income was $110,000 for 2010.

Ex. 168

Agler Corporation purchased 3,000 shares of its $5 par value common stock for a cash price of

$12 per share. Two months later, Agler sold the treasury stock for a cash price of $10 per share.

Instructions

Prepare the journal entry to record the sale of the treasury stock assuming

(a) No balance in Paid-in Capital from Treasury Stock.

(b) A $4,000 balance in Paid-in Capital from Treasury Stock.

Ex. 169

An inexperienced accountant for Otto Corporation made the following entries.

July 1 Cash................................................................................... 240,000

Common Stock .......................................................... 240,000

(Issued 15,000 shares of no-par common stock, stated value $10 per share)

Sept. 1 Common Stock................................................................... 32,000

Retained Earnings .............................................................. 4,000

Cash .......................................................................... 36,000

(Purchased 2,000 shares issued on July 1 for the treasury at $18 per share)

Dec. 1 Cash................................................................................... 20,000

Common Stock .......................................................... 16,000

Gain on Sale of Stock ................................................ 4,000

(Sold 1,000 shares of the treasury stock at $20 per share)

Instructions

(a) On the basis of the explanation for each entry, prepare the entry that should have been

made for the transactions. (Omit explanations.)

(b) Prepare the correcting entries that should be made to correct the accounts of Otto

Corporation. (Do not reverse the original entry.)

Ex. 170

On January 1, 2010, Fairly Company issued 30,000 shares of $2 par value common stock for

$150,000. On March 1, 2010, the company purchased 6,000 shares of its common stock for $8

per share for the treasury. On June 1, 2010, 1,500 of the treasury shares are sold for $10 per

share. On September 1, 2010, 3,000 treasury shares are sold at $6 per share.

Instructions

Journalize the stock transactions of Fairly Company in 2010.

Solution 170 (Cont.)

Sept. 1 Cash................................................................................... 18,000

Paid-In Capital from Treasury Stock ................................... 3,000

Retained Earnings .............................................................. 3,000

Treasury Stock........................................................... 24,000

Ex. 171

Yount Company originally issued 30,000 shares of $5 par common stock for $210,000 on

January 3, 2010. Yount purchased 1,500 shares of treasury stock for $13,500 on November 2,

2010. On December 6, 2010, 600 shares of the treasury stock are sold for $6,000.

Instructions

Prepare journal entries to record these stock transactions.

Ex. 172

The stockholders' equity section of Ankiel Corporation's balance sheet at December 31, 2009,

appears below:

Stockholders' equity

Paid-in capital

Common stock, $10 par value, 400,000 shares authorized;

250,000 issued and outstanding $2,500,000

Paid-in capital in excess of par 1,200,000

Total paid-in capital 3,700,000

Retained earnings 600,000

Total stockholders' equity $4,300,000

During 2010, the following stock transactions occurred:

Jan. 18 Issued 50,000 shares of common stock at $32 per share.

Aug. 20 Purchased 25,000 shares of Ankiel Corporation's common stock at $26 per share to

be held in the treasury.

Nov. 5 Reissued 9,000 shares of treasury stock for $28 per share.

Instructions

(a) Prepare the journal entries to record the above stock transactions.

(b) Prepare the stockholders' equity section of the balance sheet for Ankiel Corporation at

December 31, 2010. Assume that net income for the year was $100,000 and that no

dividends were declared.

Ex. 173

Tyler Corporation has 100,000 shares of $40 par value preferred stock authorized. During the

year, it had the following transactions related to its preferred stock.

(a) Issued 20,000 shares at $55 per share.

(b) Issued 10,000 shares for equipment having a $700,000 asking price. The stock had a market

value of $65 per share

Instructions

Journalize the transactions.

Ex. 174

Carson Corporation has the following capital stock outstanding at December 31, 2010:

7% Preferred stock, $100 par value, cumulative

15,000 shares issued and outstanding ................................................... $1,500,000

Common stock, no par, $10 stated value, 500,000 shares authorized,

350,000 shares issued and outstanding ................................................. 3,500,000

The preferred stock was issued at $120 per share. The common stock was issued at an average

per share price of $14.

Instructions

Prepare the paid-in capital section of the balance sheet at December 31, 2010.

175

In its first year of operations, Webber Corporation had the following transactions pertaining to its

$10 par value preferred stock.

Feb. 1 Issued 6,000 shares for cash at $41 per share.

Nov. 1 Issued 3,000 shares for cash at $44 per share.

Instructions

(a) Journalize the transactions.

(b) Indicate the amount to be reported for (1) preferred stock, and (2) paid-in capital in excess of

par value—preferred stock at the end of the year.

Ex. 176

Boswell Corporation has the following stockholders' equity accounts:

Preferred Stock

Paid-in Capital in Excess of Par Value—Preferred Stock

Common Stock

Paid-in Capital in Excess of Stated Value—Common Stock

Paid-in Capital from Treasury Stock—Common

Retained Earnings

Treasury Stock—Common

Instructions

Classify each account using the following tabular alignment.

Paid-in Capital Retained

Account Capital Stock Additional Earnings Other

Ex. 177

Eby Corporation issued 200,000 shares of $20 par value, cumulative, 6% preferred stock on

January 1, 2009, for $4,500,000. In December 2011, Eby declared its first dividend of $800,000.

Instructions

(a) Prepare Eby's journal entry to record the issuance of the preferred stock.

(b) If the preferred stock is not cumulative, how much of the $800,000 would be paid to

common stockholders?

(c) If the preferred stock is cumulative, how much of the $800,000 would be paid to common

stockholders?

Ex. 178

The following stockholders’ equity accounts, arranged alphabetically, are in the ledger of Steiner

Corporation at December 31, 2010.

Common Stock ($5 stated value) $2,200,000

Paid-in Capital in Excess of Par Value—Preferred Stock 280,000

Paid-in Capital in Excess of Stated Value—Common Stock 800,000

Preferred Stock (8%, $100 par, noncumulative) 500,000

Retained Earnings 1,334,000

Treasury Stock—Common (10,000 shares) 120,000

Instructions

Prepare the stockholders’ equity section of the balance sheet at December 31, 2010.

Ex. 179

The following information is available for Stewart Corporation:

Common Stock ($10 par) $1,200,000

Paid-in Capital in Excess of Par Value—Preferred 180,000

Paid-in Capital in Excess of Stated Value—Common 650,000

Preferred Stock 550,000

Retained Earnings 800,000

Treasury Stock—Common 50,000

Instructions

Based on the preceding information, calculate each of the following:

(a) Total paid-in capital.

(b) Total stockholders' equity.

Ex. 180

Place each of the items listed below in the appropriate subdivision of the stockholders' equity

section of a balance sheet.

Common stock, $10 stated value

Retained earnings

8% Preferred stock, $100 par value

Paid-in capital in excess of par value

Paid-in capital in excess of stated value

Treasury stock—Common

Paid-in capital from treasury stock

Stockholders' equity

Paid-in capital

Capital stock

Additional paid-in capital

Total additional paid-in capital

Total paid-in capital

Retained earnings

Total paid-in capital and retained earnings

Total stockholders' equity

COMPLETION STATEMENTS

181. A corporation has a separate __________________________ apart from its owners.

182. The major advantages of the corporate form of organization include (1) limited

_________________ of owners, (2) continuous ____________________ and (3) ease of

transferring ___________________.

183. Stockholders elect the _______________, who in turn hire the ______________ of the

company who have day to day responsibility for running the corporation.

184. If a corporation's stock is traded on the major stock exchanges, the corporation must

generally report periodically to a federal agency known as the ____________________.

185. Stockholders generally have the right to share in corporate _______________ and in

______________ upon liquidation.

186. Par value of stock represents the __________________ per share that must be retained

in the business for the protection of corporate ___________________.

187. The stockholders' equity section of a corporation's balance sheet is generally divided in

two major sections: (1) _____________ and (2) _______________.

188. If stock is issued in exchange for noncash assets, the assets should be valued at the

____________________ of the consideration ___________________ or the assets

____________________, whichever is more clearly evident.

189. A corporation's own stock that has been reacquired by the corporation but not canceled is

called ___________________ and is deducted from total _______________________ on

the balance sheet.

190. The _______________ feature of preferred stock gives the preferred stockholders the

right to receive current-year dividends and unpaid prior-year dividends before common

stockholders receive any dividends.

191. Preferred stock has contractual provisions that give it a preference over common stock as

to ___________________ and to ___________________ in the event of liquidation.

192. The paid-in capital section of the balance sheet consists of two classifications:

______________________ and ______________________.

MATCHING

193. Match the items below by entering the appropriate code letter in the space provided.

A. Limited liability F. Preemptive right

B. Capital stock G. Par value

C. Board of directors H. Legal capital

D. Paid-in capital I. Treasury stock

E. Retained earnings J. Cumulative feature

____ 1. Net income retained in the corporation.

____ 2. The amount that must be retained in the business for the protection of creditors

____ 3. Preferred stockholders have a right to receive current and unpaid prior-year dividends

before common stockholders receive any dividends.

____ 4. Creditors only have corporate assets to satisfy their claims.

____ 5. Responsible to stockholders for corporate activity.

____ 6. The amount assigned to each share of stock in the corporate charter.

____ 7. Unit of ownership in a corporation.

____ 8. Enables stockholders to maintain their same percentage ownership when new shares

are issued.

____ 9. Corporation's own stock that has been reacquired by the corporation but not retired.

____ 10. Total amount paid-in on capital stock.

SHORT-ANSWER ESSAY QUESTIONS

S-A E 194

Identify at least six characteristics of the corporate form of business organization. Contrast each

one with the partnership form of organization.

S-A E 195

Companies frequently issue both preferred stock and common stock. What are the major

differences in the rights of stockholders between these two classes of stock?

S-A E 196

Define par value, and discuss its significance in accounting.

S-A E 197

Land appraised at $60,000 is purchased by issuing 1,000 shares of $25 par value common stock.

The market price of the shares at the time of the exchange, based on active trading in the

securities market, is $75 per share. Should the land be recorded at $25,000, $60,000, or

$75,000? Explain.

S-A E 198

Lang, Inc. purchases 1,000 shares of its own previously issued $5 par common stock for

$15,000. The treasury stock is resold by Lang, Inc. for $20,000. What effect does this transaction

have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?

S-A E 199 (Ethics)

Mark Ludwig, the president and CEO of Earth Systems, Inc., a waste management firm, was

recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his

hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading

activity became almost nonexistent. The primary reason for this was concern expressed in the

media over a new untested waste management system implemented by the company. Mr.

Ludwig had been unwilling to submit the procedure to testing before implementation, but he

reluctantly agreed to limited tests after the system was operational. No problems have been

identified by the tests to date.

The other members of management called a meeting to determine what they should do. Dick

Markley, the marketing manager, suggested that the company purchase a large number of

shares of treasury stock. In that way, investors might notice that activity had picked up, and might

decide to buy some more shares. This plan would use up most of the company's available cash,

so that there will be no money available for a cash dividend. Earth Systems has paid cash

dividends every quarter for over ten years.

Required:

1. Is Mr. Markley's suggestion ethical? Explain.

2. Is it ethical to discontinue the cash dividend? Explain.

S-A E 200 (Communication)

As part of a Careers in Accounting program sponsored by accounting organizations and

supported by your company, you will be taking a group of high school students through the

accounting department in your company. You will also provide them with various materials to

explain the work of an accountant. One of the materials you will provide is the Stockholders’

Equity section of a recent balance sheet.

Required:

Prepare a sentence or two explaining each major section: Common Stock, Additional Paid-in

Capital, and Retained Earnings. You should try to be brief but clear.

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TRUE-FALSE STATEMENTS

1. Dividends may be declared and paid in cash or stock.

2. Cash dividends are not a liability of the corporation until they are declared by the board of

directors.

3. The amount of a cash dividend liability is recorded on the date of record because it is on

that date that the persons or entities who will receive the dividend are identified.

4. A 10% stock dividend will increase the number of shares outstanding but the book value

per share will decrease.

5. A 3-for-1 common stock split will increase total stockholders' equity but reduce the par or

stated value per share of common stock.

6. Retained earnings represents the amount of cash available for dividends.

7. Net income of a corporation should be closed to retained earnings and net losses should

be closed to paid-in capital accounts.

8. A debit balance in the Retained Earnings account is identified as a deficit.

9. A correction in income of a prior period involves either a debit or credit to the Retained

Earnings account.

10. Prior period adjustments to income are reported in the current year's income statement.

11. Retained earnings that are restricted are unavailable for dividends.

12. Restricted retained earnings are available for preferred stock dividends but unavailable for

common stock dividends.

13. A retained earnings statement shows the same information as a corporation income

statement.

14. A detailed stockholders' equity section in the balance sheet will list the names of

individuals who are eligible to receive dividends on the date of record.

15. Common Stock Dividends Distributable is shown within the Paid-in Capital subdivision of

the stockholders' equity section of the balance sheet.

16. Return on common stockholders’ equity is computed by dividing net income by ending

stockholders’ equity.

17. Many companies prepare a stockholders’ equity statement instead of presenting a

detailed stockholders’ equity section in the balance sheet.

18. A major difference among corporations, proprietorships, and partnerships is that a

corporation's income statement reports income tax expense.

19. A corporation incurs income tax expense only if it pays dividends to stockholders.

20. Income tax expense usually appears as a separate section on a corporation income

statement.

21. Earnings per share is calculated by dividing net income by the weighted average number

of shares of preferred stock and common stock outstanding.

22. Preferred dividends paid are added back to net income in calculating earnings per share

for common stockholders.

23. Earnings per share indicates the net income earned by each share of outstanding

common stock.

24. Earnings per share is reported for both preferred and common stock.

25. Most companies are required to report earnings per share on the face of the income

statement.

26. A dividend based on paid-in capital is termed a liquidating dividend.

27. Common Stock Dividends Distributable is reported as additional paid-in capital in the

stockholders' equity section.

28. A prior period adjustment is reported as an adjustment of the beginning balance of

Retained Earnings.

29. Income tax expense and the related liability for income taxes payable are recorded when

taxes are paid.

30. Earnings per share is reported only for common stock.

MULTIPLE CHOICE QUESTIONS

31. Each of the following decreases retained earnings except a

a. cash dividend.

b. liquidating dividend.

c. stock dividend.

d. All of these decrease retained earnings.

32. Each of the following decreases total stockholders' equity except a

a. cash dividend.

b. liquidating dividend.

c. stock dividend.

d. All of these decrease total stockholders' equity.

33. Which one of the following is not necessary in order for a corporation to pay a cash

dividend?

a. Adequate cash

b. Approval of stockholders

c. Declaration of dividends by the board of directors

d. Retained earnings

34. If a corporation declares a dividend based upon paid-in capital, it is known as a

a. scrip dividend.

b. property dividend.

c. paid dividend.

d. liquidating dividend.

35. The date on which a cash dividend becomes a binding legal obligation is on the

a. declaration date.

b. date of record.

c. payment date.

d. last day of the fiscal year-end.

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

Increase Decrease

a. Stockholders' equity Assets

b. Assets Liabilities

c. Liabilities Stockholders' equity

d. Liabilities Assets

37. The cumulative effect of the declaration and payment of a cash dividend on a company's

financial statements is to

a. decrease total liabilities and stockholders' equity.

b. increase total expenses and total liabilities.

c. increase total assets and stockholders' equity.

d. decrease total assets and stockholders' equity.

38. Common Stock Dividends Distributable is classified as a(n)

a. asset account.

b. stockholders' equity account.

c. expense account.

d. liability account.

39. The effect of a stock dividend is to

a. decrease total assets and stockholders' equity.

b. change the composition of stockholders' equity.

c. decrease total assets and total liabilities.

d. increase the book value per share of common stock.

40. If a corporation declares a 10% stock dividend on its common stock, the account to be

debited on the date of declaration is

a. Common Stock Dividends Distributable.

b. Common Stock.

c. Paid-in Capital in Excess of Par.

d. Retained Earnings.

41. Which one of the following events would not require a formal journal entry on a

corporation's books?

a. 2 for 1 stock split

b. 100% stock dividend

c. 2% stock dividend

d. $1 per share cash dividend

42. Stock dividends and stock splits have the following effects on retained earnings:

Stock Splits Stock Dividends

a. Increase No change

b. No change Decrease

c. Decrease Decrease

d. No change No change

43. Dividends are predominantly paid in

a. earnings.

b. property.

c. cash.

d. stock.

44. If a stockholder receives a dividend that reduces retained earnings by the fair market

value of the stock, the stockholder has received a

a. large stock dividend.

b. cash dividend.

c. contingent dividend.

d. small stock dividend.

45. Of the various dividends types, the two most common types in practice are

a. cash and large stock.

b. cash and property.

c. cash and small stock.

d. property and small stock.

46. Regular dividends are declared out of

a. Paid-in Capital in Excess of Par Value.

b. Treasury Stock.

c. Common Stock.

d. Retained Earnings.

47. A corporation is not committed to a legal obligation when it declares

a. a cash dividend.

b. either a cash dividend or a stock dividend.

c. a stock dividend.

d. a distribution date.

48. Which of the following is not a significant date with respect to dividends?

a. The declaration date

b. The incorporation date

c. The record date

d. The payment date

49. On the dividend record date,

a. a dividend becomes a current obligation.

b. no entry is required.

c. an entry may be required if it is a stock dividend.

d. Dividends Payable is debited.

50. Which of the following statements regarding the date of a cash dividend declaration is not

accurate?

a. The dividend can be rescinded once it has been declared.

b. The corporation is committed to a legal, binding obligation.

c. The board of directors formally authorizes the cash dividend.

d. A liability account must be increased.

51. Dividends Payable is classified as a

a. long-term liability.

b. contra stockholders' equity account to Retained Earnings.

c. current liability.

d. stockholders' equity account.

52. Indicate the respective effects of the declaration of a cash dividend on the following

balance sheet sections:

Total Assets Total Liabilities Total Stockholders' Equity

a. Increase Decrease No change

b. No change Increase Decrease

c. Decrease Increase Decrease

d. Decrease No change Increase

53. Which of the following statements about dividends is not accurate?

a. Many companies declare and pay cash quarterly dividends.

b. Low dividends may mean high stock returns.

c. The board of directors is obligated to declare dividends.

d. A legal dividend may not be a feasible one.

54. The cumulative effect of the declaration and payment of a cash dividend on a company's

balance sheet is to

a. decrease current liabilities and stockholders' equity.

b. increase total assets and stockholders' equity.

c. increase current liabilities and stockholders' equity.

d. decrease stockholders' equity and total assets.

55. The declaration and distribution of a stock dividend will

a. increase total stockholders' equity.

b. increase total assets.

c. decrease total assets.

d. have no effect on total assets.

56. ABC, Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000

shares of $1 par value common stock outstanding at December 31, 2010. What is the

annual dividend on the preferred stock?

a. $50 per share

b. $5,000 in total

c. $500 in total

d. $.50 per share

57. Agler, Inc. has 10,000 shares of 7%, $100 par value, cumulative preferred stock and

100,000 shares of $1 par value common stock outstanding at December 31, 2010. If the

board of directors declares a $60,000 dividend, the

a. preferred shareholders will receive 1/10th of what the common shareholders will

receive.

b. preferred shareholders will receive the entire $60,000.

c. $60,000 will be held as restricted retained earnings and paid out at some future date.

d. preferred shareholders will receive $30,000 and the common shareholders will receive

$30,000.

58. Manner, Inc. has 5,000 shares of 5%, $100 par value, noncumulative preferred stock and

20,000 shares of $1 par value common stock outstanding at December 31, 2010. There

were no dividends declared in 2009. The board of directors declares and pays a $45,000

dividend in 2010. What is the amount of dividends received by the common stockholders

in 2010?

a. $0

b. $25,000

c. $45,000

d. $20,000

59. Lopez, Inc. has 2,000 shares of 4%, $50 par value, cumulative preferred stock and 50,000

shares of $1 par value common stock outstanding at December 31, 2009, and December

31, 2010. The board of directors declared and paid a $3,000 dividend in 2009. In 2010,

$15,000 of dividends are declared and paid. What are the dividends received by the

preferred and common shareholders in 2010?

Preferred Common

a. $9,000 $6,000

b. $7,500 $7,500

c. $5,000 $10,000

d. $4,000 $11,000

60. Norton, Inc. has 10,000 shares of 6%, $100 par value, noncumulative preferred stock and

100,000 shares of $1 par value common stock outstanding at December 31, 2010, and

December 31, 2011. The board of directors declared and paid a $50,000 dividend in 2010.

In 2011, $110,000 of dividends are declared and paid. What are the dividends received by

the preferred and common shareholders in 2011?

Preferred Common

a. $0 $110,000

b. $60,000 $50,000

c. $55,000 $55,000

d. $70,000 $40,000

,

61. The board of directors must assign a per share value to a stock dividend declared that is

a. greater than the par or stated value.

b. less than the par or stated value.

c. equal to the par or stated value.

d. at least equal to the par or stated value.

62. Corporations generally issue stock dividends in order to

a. increase the market price per share.

b. exceed stockholders' dividend expectations.

c. increase the marketability of the stock.

d. decrease the amount of capital in the corporation.

,

63. A stockholder who receives a stock dividend would

a. expect the market price per share to increase.

b. own more shares of stock.

c. expect retained earnings to increase.

d. expect the par value of the stock to change.

64. When stock dividends are distributed,

a. Common Stock Dividends Distributable is decreased.

b. Retained Earnings is decreased.

c. Paid-in Capital in Excess of Par Value is debited if it is a small stock dividend.

d. no entry is necessary if it is a large stock dividend.

65. A small stock dividend is defined as

a. less than 30% but greater than 25% of the corporation's issued stock.

b. between 50% and 100% of the corporation's issued stock.

c. more than 30% of the corporation's issued stock.

d. less than 20–25% of the corporation's issued stock.

66. The per share amount normally assigned by the board of directors to a large stock

dividend is

a. the market value of the stock on the date of declaration.

b. the average price paid by stockholders on outstanding shares.

c. the par or stated value of the stock.

d. zero.

67. The per share amount normally assigned by the board of directors to a small stock

dividend is

a. the market value of the stock on the date of declaration.

b. the average price paid by stockholders on outstanding shares.

c. the par or stated value of the stock.

d. zero.

68. Identify the effect the declaration and distribution of a stock dividend has on the par value

per share.

Par Value per Share

a. Increase

b. Decrease

c. Increase or decrease

d. No effect

69. The declaration of a stock dividend will

a. increase paid-in capital.

b. change the total of stockholders' equity.

c. increase total liabilities.

d. increase total assets.

70. Which of the following show the proper effect of a stock split and a stock dividend?

Item Stock Split Stock Dividend

a. Total paid-in capital Increase Increase

b. Total retained earnings Decrease Decrease

c. Total par value (common) Decrease Increase

d. Par value per share Decrease No change


71. A stock split

a. may occur in the absence of retained earnings.

b. will increase total paid-in capital.

c. will increase the total par value of the stock.

d. will have no effect on the par value per share of stock.

72. Outstanding stock of the Colt Corporation included 20,000 shares of $5 par common stock

and 5,000 shares of 5%, $10 par noncumulative preferred stock. In 2009, Colt declared

and paid dividends of $2,000. In 2010, Colt declared and paid dividends of $6,000. How

much of the 2010 dividend was distributed to preferred shareholders?

a. $3,000

b. $3,500

c. $2,500

d. None of the above

73. Outstanding stock of the Abel Corporation included 20,000 shares of $5 par common

stock and 10,000 shares of 5%, $10 par noncumulative preferred stock. In 2009, Abel

declared and paid dividends of $4,000. In 2010, Abel declared and paid dividends of

$12,000. How much of the 2010 dividend was distributed to preferred shareholders?

a. $7,000

b. $4,000

c. $5,000

d. None of the above

74. On January 1, Castagno Corporation had 800,000 shares of $10 par value common stock

outstanding. On March 31, the company declared a 15% stock dividend. Market value of

the stock was $15/share. As a result of this event,

a. Castagno’s Paid-in Capital in Excess of Par Value account increased $600,000.

b. Castagno’s total stockholders’ equity was unaffected.

c. Castagno’s Retained Earnings account decreased $1,800,000.

d. All of the above.

75. On January 1, Edmiston Corporation had 1,000,000 shares of $10 par value common

stock outstanding. On March 31, the company declared a 20% stock dividend. Market

value of the stock was $15/share. As a result of this event,

a. Edmiston’s Paid-in Capital in Excess of Par Value account increased $1,000,000.

b. Edmiston’s total stockholders’ equity was unaffected.

c. Edmiston’s Retained Earnings account decreased $3,000,000.

d All of the above.

76. Sun Inc. has 5,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000

shares of $1 par value common stock outstanding at December 31, 2010. What is the

annual dividend on the preferred stock?

a. $50 per share

b. $25,000 in total

c. $5,000 in total

d. $0.50 per share

77. Allstate, Inc., has 10,000 shares of 6%, $100 par value, noncumulative preferred stock

and 100,000 shares of $1 par value common stock outstanding at December 31, 2010. If

the board of directors declares a $200,000 dividend, the

a. preferred stockholders will receive 1/10th of what the common stockholders will

receive.

b. preferred stockholders will receive the entire $200,000.

c. $60,000 will be held as restricted retained earnings and paid out at some future date.

d. preferred stockholders will receive $60,000 and the common stockholders will receive

$140,000.

78. Archer, Inc., has 10,000 shares of 5%, $100 par value, noncumulative preferred stock and

40,000 shares of $1 par value common stock outstanding at December 31, 2010. There

were no dividends declared in 2009. The board of directors declares and pays a $120,000

dividend in 2010. What is the amount of dividends received by the common stockholders

in 2010?

a. $0

b. $50,000

c. $20,000

d. $70,000

79. Luther Inc., has 2,000 shares of 6%, $50 par value, cumulative preferred stock and

100,000 shares of $1 par value common stock outstanding at December 31, 2010, and

December 31, 2009. The board of directors declared and paid a $5,000 dividend in 2009.

In 2010, $24,000 of dividends are declared and paid. What are the dividends received by

the preferred stockholders in 2010?

a. $17,000

b. $12,000

c. $7,000

d. $6,000

80. Anders, Inc., has 5,000 shares of 5%, $100 par value, cumulative preferred stock and

20,000 shares of $1 par value common stock outstanding at December 31, 2011. There

were no dividends declared in 2009. The board of directors declares and pays a $45,000

dividend in 2010 and in 2011. What is the amount of dividends received by the common

stockholders in 2011?

a. $15,000

b. $25,000

c. $45,000

d. $0

81. Cuther Inc., has 1,000 shares of 6%, $50 par value, cumulative preferred stock and

50,000 shares of $1 par value common stock outstanding at December 31, 2009, and

December 31, 2010. The board of directors declared and paid a $2,000 dividend in 2009.

In 2010, $12,000 of dividends are declared and paid. What are the dividends received by

the common stockholders in 2010?

a. $8,000

b. $6,000

c. $4,000

d. $3,000

82. On January 1, Swanson Corporation had 60,000 shares of $10 par value common stock

outstanding. On March 17, the company declared a 15% stock dividend to stockholders

of record on March 20. Market value of the stock was $13 on March 17. The entry to

record the transaction of March 17 would include a

a. credit to Retained Earnings for $27,000.

b. credit to Cash for $117,000.

c. credit to Common Stock Dividends Distributable for $90,000.

d. debit to Common Stock Dividends Distributable for $90,000.

83. On January 1, Swanson Corporation had 60,000 shares of $10 par value common stock

outstanding. On March 17, the company declared a 15% stock dividend to stockholders

of record on March 20. Market value of the stock was $13 on March 17. The stock was

distributed on March 30. The entry to record the transaction of March 30 would include a

a. credit to Cash for $90,000.

b. debit to Common Stock Dividends Distributable for $90,000.

c. credit to Paid-in Capital in Excess of Par Value for $27,000.

d. debit to Retained Earnings for $27,000.

84. On January 1, Sandford Corporation had 80,000 shares of $10 par value common stock

outstanding. On June 17, the company declared a 15% stock dividend to stockholders of

record on June 20. Market value of the stock was $15 on June 17. The entry to record the

transaction of June 17 would include a

a. debit to Retained Earnings for $180,000.

b. credit to Cash for $180,000.

c. credit to Common Stock Dividends Distributable for $180,000.

d. credit to Common Stock Dividends Distributable for $60,000.

85. On January 1, Sanford Corporation had 80,000 shares of $10 par value common stock

outstanding. On June 17, the company declared a 15% stock dividend to stockholders of

record on June 20. Market value of the stock was $15 on June 17. The stock was

distributed on June 30. The entry to record the transaction of June 30 would include a

a. credit to Common Stock for $120,000.

b. debit to Common Stock Dividends Distributable for $180,000.

c. credit to Paid-in Capital in Excess of Par Value for $60,000.

d. debit to Retained Earnings for $60,000.

86. Colson Inc. declared a $160,000 cash dividend. It currently has 6,000 shares of 7%, $100

par value cumulative preferred stock outstanding. It is one year in arrears on its preferred

stock. How much cash will Colson distribute to the common stockholders?

a. $76,000.

b. $84,000.

c. $118,000.

d. None.

87. Ludwick Inc. has retained earnings of $800,000 and total stockholders' equity of

$2,000,000. It has 200,000 shares of $5 par value common stock outstanding, which is

currently selling for $30 per share. If Ludwick declares a 10% stock dividend on its

common stock:

a. net income will decrease by $100,000.

b. retained earnings will decrease by $100,000 and total stockholders' equity will

increase by $100,000.

c. retained earnings will decrease by $600,000 and total stockholders' equity will

increase by $600,000.

d. retained earnings will decrease by $600,000 and total paid-in capital will increase by

$600,000.

88. On December 31, 2010, Springer, Inc. has 3,000 shares of 6% $100 par value cumulative

preferred stock and 45,000 shares of $10 par value common stock outstanding. On

December 31, 2010, the directors declare a $12,000 cash dividend. The entry to record

the declaration of the dividend would include:

a. a credit of $6,000 to Retained Earnings.

b. a note in the financial statements that dividends of $6 per share are in arrears on

preferred stock for 2010.

c. a debit of $12,000 to Common Stock.

d. a credit of $12,000 to Dividends Payable.

89. Franklin, Inc. declares a 10% common stock dividend when it has 30,000 shares of $10

par value common stock outstanding. If the market value of $24 per share is used, the

amounts debited to Retained Earnings and credited to Paid-in Capital in Excess of Par

Value are:

Paid-in Capital in

Retained Earnings Excess of Par Value

a. $30,000 $0

b. $72,000 $42,000

c. $72,000 $30,000

d. $30,000 $42,000

90. Shannon Manufacturing declared a 10% stock dividend when it had 250,000 shares of $3

par value common stock outstanding. The market price per common share was $12 per

share when the dividend was declared. The entry to record this dividend declaration

includes a credit to

a. Retained Earnings for $75,000.

b. Paid-in Capital in Excess of Par for $225,000.

c. Common Stock for $75,000.

d. Common Stock Dividends Distributable for $300,000.

91. The following selected amounts are available for Sanders Company.

Retained earnings (beginning) $800

Net loss 100

Cash dividends declared 100

Stock dividends declared 50

What is its ending retained earnings balance?

a. $650

b. $700

c. $550

d. $600

92. Turquoise and Topaz Sisters had retained earnings of $15,000 on the balance sheet but

disclosed in the footnotes that $2,000 of retained earnings was restricted for plant

expansion and $1,000 was restricted for bond repayments. Cash of $2,000 had been set

aside for the plant expansion. How much of retained earnings is available for dividends?

a. $12,000

b. $13,000

c. $15,000

d. $10,000

93. Irwin, Inc. had 300,000 shares of common stock outstanding before a stock split occurred,

and 900,000 shares outstanding after the stock split. The stock split was

a. 3-for-9.

b. 9-for-1.

c. 1-for-9.

d. 3-for-1.

94. Restricting retained earnings for the cost of treasury stock purchased is a

a. contractual restriction.

b. legal restriction.

c. stock restriction.

d. voluntary restriction.

95. A prior period adjustment that corrects income of a prior period requires that an entry be

made to

a. an income statement account.

b. a current year revenue or expense account.

c. the retained earnings account.

d. an asset account.

96. If the board of directors authorizes a $100,000 restriction of retained earnings for a future

plant expansion, the effect of this action is to

a. decrease total assets and total stockholders' equity.

b. increase stockholders' equity and decrease total liabilities.

c. decrease total retained earnings and increase total liabilities.

d. reduce the amount of retained earnings available for dividend declarations.

97. A credit balance in retained earnings represents

a. the amount of cash retained in the business.

b. a claim on specific assets of the corporation.

c. a claim on the aggregate assets of the corporation.

d. the amount of stockholders' equity exempted from the stockholders' claim on total

assets.

98. A net loss

a. occurs if operating expenses exceed cost of goods sold.

b. is not closed to Retained Earnings if it would result in a debit balance.

c. is closed to Retained Earnings even if it would result in a debit balance.

d. is closed to the paid-in capital account of the stockholders' equity section of the

balance sheet.

99. Prior period adjustments are reported

a. in the footnotes of the current year's financial statements.

b. on the current year's balance sheet.

c. on the current year's income statement.

d. on the current year's retained earnings statement.

100. Retained earnings are occasionally restricted

a. to set aside cash for dividends.

b. to keep the legal capital associated with paid-in capital intact.

c. due to contractual loan restrictions.

d. if preferred dividends are in arrears.

101. Retained earnings is increased by each of the following except

a. net income.

b. prior period adjustments.

c. some disposals of treasury stock.

d. All of these increase retained earnings.

102. A prior period adjustment for understatement of net income will

a. be credited to the Retained Earnings account.

b. be debited to the Retained Earnings account.

c. show as a gain on the current year's Income Statement.

d. show as an asset on the current year's Balance Sheet.

103. The retained earnings statement

a. is the owners' equity statement for a corporation.

b. will show an addition to the beginning retained earnings balance for an

understatement of net income in a prior year.

c. will not reflect net losses.

d. will, in some cases, fail to reconcile the beginning and ending retained earnings

balances.

104. In the stockholders' equity section of the balance sheet,

a. Common Stock Dividends Distributable will be classified as part of additional paid-in

capital.

b. Common Stock Dividends Distributable will appear in its own subsection of the stockholders'

equity.

c. Additional Paid-in Capital appears under the subsection Paid-in Capital.

d. Dividends in arrears will appear as a restriction of Retained Earnings.

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

to common stockholders by

a. ending total stockholders' equity.

b. ending common stockholders' equity.

c. average total stockholders' equity.

d. average common stockholders' equity.

106. The return on common stockholders’ equity is computed by dividing

a. net income by ending common stockholders’ equity.

b. net income by average common stockholders’ equity.

c. net income less preferred dividends by ending common stockholders’ equity.

d. net income less preferred dividends by average common stockholders’ equity.

107. Lang Inc. reported net income of $270,000 during 2010 and paid dividends of $26,000 on

common stock. It also has 10,000 shares of 6%, $100 par value preferred stock

outstanding. Common stockholders' equity was $1,200,000 on January 1, 2010, and

$1,600,000 on December 31, 2010. The company's return on common stockholders'

equity for 2010 is:

a. 17.4%

b. 15.0%

c. 13.1%

d. 19.3%

108. Harris Corporation had net income of $230,000 and paid dividends of $50,000 to common

stockholders and $20,000 to preferred stockholders in 2010. Harris Corporation’s common

stockholders’ equity at the beginning and end of 2010 was $870,000 and $1,130,000,

respectively. There are 100,000 weighted-average shares of common stock outstanding.

Harris Corporation’s return on common stockholders’ equity was

a. 23%.

b. 21%.

c. 18%.

d. 16%.

109. Harris Corporation had net income of $230,000 and paid dividends of $50,000 to common

stockholders and $20,000 to preferred stockholders in 2010. Harris Corporation’s common

stockholders’ equity at the beginning and end of 2010 was $870,000 and $1,130,000,

respectively. There are 100,000 weighted-average shares of common stock outstanding.

Harris Corporation’s earnings per share for 2010 was

a. $2.30.

b. $2.10.

c. $1.80.

d. $1.60.

110. Assume that all balance sheet amounts for Remington Company represent average

balance figures.

Stockholders’ equity—common $150,000

Total stockholders’ equity 200,000

Sales 100,000

Net income 27,000

Number of shares of common stock 10,000

Common stock dividends 10,000

Preferred stock dividends 4,000

What is the return on common stockholders’ equity ratio for Remington?

a. 18.0%

b. 15.3%

c. 11.3%

d. 8.7%

111. Assume that all balance sheet amounts for Remington Company represent average

balance figures.

Stockholders’ equity—common $150,000

Total stockholders’ equity 200,000

Sales 100,000

Net income 27,000

Number of shares of common stock 10,000

Common stock dividends 10,000

Preferred stock dividends 4,000

What is the earnings per share for Remington?

a. $2.70

b. $2.30

c. $1.70

d. $1.30

112. A corporation differs from a proprietorship and a partnership in that

a. assets and liabilities are presented differently on the balance sheet.

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

c. the cost principle only applies to proprietorships and partnerships.

d the owners of the corporation do not have a claim on the net assets of the business.

113. Income statements for corporations are the same as the statements for proprietorships

except for the reporting of

a. gross profit.

b. income from operations.

c. income tax expense.

d. other revenues and gains.

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

a. cost of goods sold.

b. income tax expense.

c. gross profit.

d. other revenues and gains.

115. Corporation income tax expense is

a. usually accrued in the adjusting entry process.

b. not usually accrued because it is not known what the exact liability will be until the tax

return is filed.

c. not reported in a separate section of a corporate income statement.

d. reported similarly for corporations and partnerships.

116. Wheeler Company reports the following amounts for 2010.

Net income $150,000

Average stockholders' equity 1,000,000

Preferred dividends 42,000

Par value preferred stock 200,000

The 2010 rate of return on common stockholders' equity is

a. 18.8%.

b. 13.5%.

c. 15.0%.

d. 10.8%.

117. During 2010 Silas Inc. had sales revenue $564,000, gross profit $264,000, operating

expenses $99,000, cash dividends $45,000, other expenses and losses $30,000. Its

corporate tax rate is 30%. What was Silas's income tax expense for the year?

a. $27,000

b. $79,200

c. $169,200

d. $40,500

118. Jansen Corporation had 300,000 shares of common stock outstanding during the year.

Jansen declared and paid cash dividends of $200,000 on the common stock and

$160,000 on the preferred stock. Net income for the year was $880,000. What is Jansen's

earnings per share?

a. $1.73

b. $2.27

c. $2.40

d. $2.93

119. The income statement for Roland Inc. shows income before income taxes $700,000,

income tax expenses $210,000, and net income $490,000. If Roland declared $150,000 of

cash dividends on preferred stock and has 100,000 shares of common stock outstanding

throughout the year, earnings per share is:

a. $5.50

b. $3.40

c. $1.50

d. $0.60

120. When computing earnings per share,

a. an adjustment related to preferred stock dividends is made in the numerator and

denominator of the earnings per share formula.

b. an adjustment for the preferred dividends is made in the denominator of the earnings

per share formula.

c. the dividends for cumulative preferred stock are deducted from net income only if the

preferred dividends have been declared.

d. the dividends for cumulative preferred stock are deducted from net income whether or

not preferred dividends have been declared.

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

a. below net income.

b. for both common and preferred stock.

c. on the face of the income statement.

d. based on the weighted-average number of common shares outstanding.

122. West, Inc. has a net income of $500,000 for 2010, and there are 200,000 weightedaverage

shares of common stock outstanding. Dividends declared and paid during the

year amounted to $80,000 on the preferred stock and $120,000 on the common stock.

The earnings per share for 2010 is

a. $2.50.

b. $1.90.

c. $2.10.

d. $1.50.

123. The formula for computing earnings per share is net income

a. divided by the ending common shares outstanding.

b. divided by the weighted-average number of common shares outstanding.

c. less preferred dividends divided by the ending common shares outstanding.

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

outstanding.

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

a. The legality of a cash dividend depends on state corporation laws.

b. The legality of a dividend does not indicate a company's ability to pay a dividend.

c. Dividends are not a liability until declared.

d. Shareholders usually vote to determine the amount of income to be distributed in the

form of a dividend.

125. The date a cash dividend becomes a binding legal obligation to a corporation is the

a. declaration date.

b. earnings date.

c. payment date.

d. record date.

126. Dillon Corporation splits its common stock 2 for 1, when the market value is $40 per

share. Prior to the split, Dillon had 50,000 shares of $10 par value common stock issued

and outstanding. After the split, the par value of the stock

a. remains the same.

b. is reduced to $2 per share.

c. is reduced to $5 per share.

d. is reduced to $20 per share.

127. Which of the following statements about retained earnings restrictions is incorrect?

a. Many states require a corporation to restrict retained earnings for the cost of treasury

stock purchased.

b. Long-term debt contracts may impose a restriction on retained earnings as a condition

for the loan.

c. The board of directors of a corporation may voluntarily create retained earnings

restrictions for specific purposes.

d. Retained earnings restrictions are generally disclosed through a journal entry on the

books of a company.

128. Prior period adjustments

a. may only increase retained earnings.

b. may only decrease retained earnings.

c. may either increase or decrease retained earnings.

d. do not affect retained earnings.

129. Jennifer Company reports the following amounts for 2010:

Net income $135,000

Average stockholders' equity 500,000

Preferred dividends 35,000

Par value preferred stock 100,000

The 2010 rate of return on common stockholders' equity is

a. 25.0%.

b. 22.5%.

c. 27.0%.

d. 33.8%.

130. The return on common stockholders' equity is computed by dividing

a. net income by ending common stockholders' equity.

b. net income by average common stockholders' equity.

c. net income minus preferred dividends by ending common stockholders' equity.

d. net income minus preferred dividends by average common stockholders' equity.

131. Norman Corporation had 250,000 shares of common stock outstanding during the year.

Norman declared and paid cash dividends of $200,000 on the common stock and

$160,000 on the preferred stock. Net income for the year was $880,000. What is

Norman’s earnings per share?

a. $2.08

b. $2.72

c. $2.88

d. $3.52

132. When a corporation has both preferred and common stock outstanding, earnings per

share is computed by dividing net income

a. by ending common shares outstanding.

b. by weighted average common shares outstanding.

c. less preferred dividends by ending common shares outstanding.

d. less preferred dividends by the weighted average of common shares outstanding.

133. In determining earnings per share, dividends for the current year on noncumulative

preferred stock should be

a. disregarded.

b. added back to net income whether declared or not.

c. deducted from net income only if declared.

d. deducted from net income whether declared or not.

BRIEF EXERCISES

BE 134

On November 27, the board of directors of Henderson Company declared a $.40 per share

dividend. The dividend is payable to shareholders of record on December 7 on December 24.

Henderson has 25,500 shares of $1 par common stock outstanding at November 27. Journalize

the entries needed on the declaration and payment dates.

BE 135

On October 10, the board of directors of Pitcher Corporation declared a 10% stock dividend. On

October 10, the company had 10,000 shares of $1 par common stock issued and outstanding

with a market price of $15 per share. The stock dividend will be distributed on October 31 to

shareholders of record on October 25. Journalize the entries needed for the declaration and

distribution of the stock dividend.

BE 136

Devons Company has 24,000 shares of $1 par common stock issued and outstanding. The

company also has 2,000 shares of $100 par 5% cumulative preferred stock outstanding. The

company did not pay the preferred dividends in 2009 or 2010. What amount of dividends must the

company pay the preferred shareholders in 2011 if they wish to pay the common stockholders a

dividend?

BE 137

On November 1, 2010, Neely Corporation’s stockholders’ equity section is as follows:

Common stock, $10 par value $600,000

Paid-in capital in excess of par value 180,000

Retained earnings 200,000

Total stockholders’ equity $980,000

On November 1, Neely declares and distributes a 15% stock dividend when the market value of

the stock is $14 per share.

Instructions

Indicate the balances in the stockholders’ equity accounts after the stock dividend has been

distributed.

BE 138

Match each item/event pair below with the indicated change in the item. An individual

classification may be used more than once, or not at all. For each dividend, assume that both

declaration and payment or distribution has occurred.

Classifications

A. Item increases

B. Item decreases

C. Item is unchanged

D. Direction of change cannot be determined

Item Event

____ 1. Par value per share Stock Split

____ 2. Total retained earnings Stock Dividend

____ 3. Total stockholders’ equity Prior period adjustment increases last year’s

net income

____ 4. Earnings per common share Restriction of retained Earnings

____ 5. Total retained earnings Cash dividend

____ 6. Total paid-in capital Stock dividend

BE 139

Identify which of the following items would be reported as additions (A) or deductions (D) in a

Retained Earnings Statement.

1. Net Income

2. Net Loss

3. Cash Dividends

4. Stock Dividends

5. Prior period adjustments to correct for overstatement of prior years’ net income

6. Prior period adjustments to correct for understatement of prior years’ net income

BE 140

The balance in retained earnings on January 1, 2010, for Blakely Inc., was $600,000. During the

year, the corporation paid cash dividends of $70,000 and distributed a stock dividend of $15,000.

In addition, the company determined that it had overstated its depreciation expense in prior years

by $50,000. Net income for 2010 was $120,000.

Instructions

Prepare the retained earnings statement for 2010.

BE 141

The following information is available for Ritter Corporation:

2010 2009

Average common stockholders’ equity $1,500,000 $1,000,000

Average total stockholders’ equity 2,000,000 1,500,000

Common dividends declared and paid 72,000 50,000

Preferred dividends declared and paid 30,000 30,000

Net income 330,000 270,000

Instructions

Compute the return on common stockholders’ equity ratio for both years. Briefly comment on your

findings.

BE 142

The following information is available for Santo Corporation for the year ended December 31,

2010:

Corrected overstatement of 2009 depreciation expense $ 15,000

Cost of goods sold 700,000

Declared cash dividends 50,000

Operating expenses 170,000

Other expenses and losses 40,000

Other revenues and gains 50,000

Sales 1,000,000

Tax rate 30%

Instructions

Prepare a corporate income statement in good form.

EXERCISES

Ex. 143

The stockholders' equity section of Foley Corporation at December 31, 2009, included the

following:

5% preferred stock, $100 par value, cumulative,

10,000 shares authorized, 8,000 shares issued and outstanding ...... $ 800,000

Common stock, $10 par value, 250,000 shares authorized,

200,000 shares issued and outstanding ........................................... $2,000,000

Dividends were not declared on the preferred stock in 2009 and are in arrears.

On September 15, 2010, the board of directors of Foley Corporation declared dividends on the

preferred stock for 2009 and 2010, to stockholders of record on October 1, 2010, payable on

October 15, 2010.

On November 1, 2010, the board of directors declared a $.75 per share dividend on the common

stock, payable November 30, 2010, to stockholders of record on November 15, 2010.

Instructions

Prepare the journal entries that should be made by Foley Corporation on the dates indicated

below:

September 15, 2010 November 1, 2010

October 1, 2010 November 15, 2010

October 15, 2010 November 30, 2010

Ex. 144

Richman Corporation has 120,000 shares of $5 par value common stock outstanding. It declared

a 10% stock dividend on June 1 when the market price per share was $12. The shares were

issued on June 30.

Instructions

Prepare the necessary entries for the declaration and payment of the stock dividend.

Ex. 145

Kenner Corporation's stockholders' equity section at December 31, 2009 appears below:

Stockholders' equity

Paid-in capital

Common stock, $10 par, 60,000 outstanding $600,000

Paid-in capital in excess of par 150,000

Total paid-in capital $750,000

Retained earnings 150,000

Total stockholders' equity $900,000

On June 30, 2010, the board of directors of Kenner Corporation declared a 20% stock dividend,

payable on July 31, 2010, to stockholders of record on July 15, 2010. The fair market value of

Kenner Corporation's stock on June 30, 2010, was $15.

On December 1, 2010, the board of directors declared a 2 for 1 stock split effective December 15,

2010. Kenner Corporation's stock was selling for $20 on December 1, 2010, before the stock split

was declared. Par value of the stock was adjusted. Net income for 2010 was $190,000 and there

were no cash dividends declared.

Instructions

(a) Prepare the journal entries on the appropriate dates to record the stock dividend and the

stock split.

(b) Fill in the amount that would appear in the stockholders' equity section for Kenner

Corporation at December 31, 2010, for the following items:

1. Common stock $____________

2. Number of shares outstanding _____________

3. Par value per share $____________

4. Paid-in capital in excess of par $____________

5. Retained earnings $____________

6. Total stockholders' equity $____________

Ex. 146

Derek Corporation was organized on January 1, 2009. During its first year, the corporation issued

40,000 shares of $5 par value preferred stock and 400,000 shares of $1 par value common stock.

At December 31, the company declared the following cash dividends:

2009 $ 8,000

2010 $30,000

2011 $70,000

Instructions

(a) Show the allocation of dividends to each class of stock, assuming the preferred stock

dividend is 5% and not cumulative.

(b) Show the allocation of dividends to each class of stock, assuming the preferred stock

dividend is 6% and cumulative.

(c) Journalize the declaration of the cash dividend at December 31, 2011 using the assumption

of part (b).

Ex. 147

On November 1, 2010, Norris Corporation's stockholders' equity section is as follows:

Common stock, $10 par value $ 600,000

Paid-in capital in excess of par value 205,000

Retained earnings 240,000

Total stockholders' equity $1,045,000

On November 1, Norris declares and distributes a 10% stock dividend when the market value of

the stock is $13 per share.

Instructions

Indicate the balances in the stockholders' equity accounts after the stock dividend has been

distributed.

Ex. 148

During 2010, Pine Corporation had the following transactions and events:

1. Issued par value preferred stock for cash at par value.

2. Issued par value common stock for cash at an amount greater than par value.

3. Completed a 2 for 1 stock split in which the $10 par value common stock was changed to $5

par value stock.

4. Declared a small stock dividend when the market value was higher than the par value.

5. Declared a cash dividend.

6. Made a prior period adjustment for understatement of net income.

7. Issued par value common stock for cash at par value.

8. Paid the cash dividend.

9. Issued the shares of common stock required by the stock dividend declaration in 4. above.

Instructions

Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders' equity.

Present your answers in tabular form with the following columns. Use (I) for increase, (D) for

decrease, and (NE) for no effect.

Paid-in Capital

Capital Additional Retained

Item Stock Paid-in Capital Earnings

Ex. 149

The following information is available for Ellis Corporation:

Common Stock ($5 par) $1,500,000

Retained Earnings 900,000

A 15% stock dividend is declared and paid when the market value was $15 per share.

Instructions

Compute each of the following after the stock dividend.

(a) Total stockholders' equity.

(b) Number of shares outstanding.

Ex. 150

On January 1, 2010, Penton Corporation had $2,000,000 of $10 par value common stock

outstanding that was issued at par and retained earnings of $1,000,000. The company issued

200,000 shares of common stock at $12 per share on July 1. On December 15, the board of

directors declared a 15% stock dividend to stockholders of record on December 31, 2010,

payable on January 15, 2011. The market value of Penton Corporation stock was $15 per share

on December 15 and $16 per share on December 31. Net income for 2010 was $500,000.

Instructions

(1) Journalize the issuance of stock on July 1 and the declaration of the stock dividend on

December 15.

(2) Prepare the stockholders' equity section of the balance sheet for Penton Corporation at

December 31, 2010.

Ex. 151

On January 1, 2010, Dolan Corporation had 60,000 shares of $1 par value common stock issued

and outstanding. During the year, the following transactions occurred:

Mar. 1 Issued 25,000 shares of common stock for $400,000.

June 1 Declared a cash dividend of $2.00 per share to stockholders of record on June 15.

June 30 Paid the $2.00 cash dividend.

Dec. 1 Purchased 5,000 shares of common stock for the treasury for $22 per share.

Dec. 15 Declared a cash dividend on outstanding shares of $2.25 per share to stockholders

of record on December 31.

Instructions

Prepare journal entries to record the above transactions.

Ex. 152

Record the following transactions for Grogan Corporation on the dates indicated.

1. On March 31, 2010, Grogan Corporation discovered that Depreciation Expense on factory

equipment for the year ended December 31, 2009, had been recorded twice, for a total

amount of $70,000 instead of the correct amount of $35,000.

2. On June 30, 2010, the company's internal auditors discovered that the April 2010 telephone

bill for $2,500 had erroneously been charged to the Interest Expense account.

3. On August 14, 2010, cash dividends on preferred stock of $110,000 declared on July 1, 2010,

were paid.

Ex. 153

The following information is available for Piper Corporation:

Retained Earnings, December 31, 2010 $1,500,000

Net Income for the year ended December 31, 2011 $ 200,000

The company accountant, in preparing financial statements for the year ending December 31,

2011, has discovered the following information:

The company's previous bookkeeper, who has been fired, had recorded depreciation expense on

a machine in 2009 and 2010 using the double-declining-balance method of depreciation. The

bookkeeper neglected to use the straight-line method of depreciation which is the company's

policy. The cumulative effects of the error on prior years was $20,000, ignoring income taxes.

Depreciation was computed by the straight-line method in 2011.

Instructions

(a) Prepare the entry for the prior period adjustment.

(b) Prepare the retained earnings statement for 2011.

Ex. 154

The following information is available for Trenton Inc.:

Beginning retained earnings $600,000

Cash dividends declared 50,000

Net income for 2010 120,000

Stock dividend declared 15,000

Understatement of last year's depreciation expense 30,000

Instructions

Based on the preceding information, prepare a retained earnings statement for 2010.

Ex. 155

Reese Company reported retained earnings at December 31, 2009, of $310,000. Reese had

160,000 shares of common stock outstanding throughout 2010.

The following transactions occurred during 2010.

1. An error was discovered in 2008, depreciation expense was recorded at $60,000, but the

correct amount was $50,000.

2. A cash dividend of $0.50 per share was declared and paid.

3. A 5% stock dividend was declared and distributed when the market price per share was $15

per share.

4. Net income was $225,000.

Instructions

Prepare a retained earnings statement for 2010.

Ex. 156

Harrington Company reported the following balances at December 31, 2009: common stock

$500,000; paid-in capital in excess of par value $100,000; retained earnings $250,000. During

2010, the following transactions affected stockholders’ equity.

1. Issued preferred stock with a par value of $150,000 for $200,000.

2. Purchased treasury stock (common) for $40,000.

3. Earned net income of $140,000.

4. Declared and paid cash dividends of $75,000.

Instructions

Prepare the stockholders' equity section of Harrington Company's December 31, 2010, balance

sheet.

Ex. 157

On January 1, 2010, Vannon Corporation had Retained Earnings of $378,000. During the year,

Vannon had the following selected transactions:

1. Declared stock dividends of $50,000.

2. Declared cash dividends of $90,000.

3. A 2 for 1 stock split involving the issuance of 200,000 shares of $5 par value common stock

for 100,000 shares of $10 par value common stock.

4. Suffered a net loss of $70,000.

5. Corrected understatement of 2009 net income because of an inventory error of $48,000.

Ex. 158

The following accounts appear in the ledger of Milroy Inc. after the books are closed at December

31, 2010.

Common Stock, $1 par value, 500,000 shares authorized, 400,000 shares

issued $400,000

Common Stock Dividends Distributable 60,000

Paid-in Capital in Excess of Par Value—Common Stock 650,000

Preferred Stock, $100 par value, 6%, 10,000 shares authorized; 2,000 shares

issued 200,000

Retained Earnings 920,000

Treasury Stock (10,000 common shares) 85,000

Paid-in Capital in Excess of Par Value—Preferred Stock 310,000

Instructions

Prepare the stockholders' equity section at December 31, 2010, assuming that retained earnings

is restricted for plant expansion in the amount of $200,000.

Ex. 159

The following information is available for Wenger Corporation:

Beginning common stockholders' equity $700,000

Dividends paid to common stockholders 50,000

Dividends paid to preferred stockholders 30,000

Ending common stockholders' equity 800,000

Net income 180,000

Instructions

Based on the preceding information, calculate return on common stockholders' equity.

Ex. 160

In 2010, Worthington Corporation had net sales of $500,000 and cost of goods sold of $360,000.

Operating expenses were $93,000, and interest expense was $7,500. The corporation's tax rate

is 30%. The corporation declared preferred dividends of $7,000 in 2010, and its average common

stockholders' equity during the year was $200,000.

Instructions

(a) Prepare an income statement for Worthington Corporation.

(b) Compute Worthington Corporation's return on common stockholders' equity for 2010.

Ex. 161

The following financial information is available for Duncan Corporation.

2010 2009

Average common stockholders' equity $1,600,000 $1,200,000

Dividends paid to common stockholders 50,000 30,000

Dividends paid to preferred stockholders 20,000 20,000

Net income 260,000 182,000

The weighted average number of shares of common stock outstanding was 80,000 for 2009 and

100,000 for 2010.

Instructions

Calculate earnings per share and return on common stockholders' equity for 2010 and 2009.

Ex. 162

The following information is available for Queen Corporation for the year ended December 31,

2010: Sales $800,000; Other revenues and gains $72,000; Operating expenses $110,000; Cost

of goods sold $520,000; Other expenses and losses $32,000; Preferred stock dividends $30,000.

The company's tax rate was 20%, and it had 40,000 shares outstanding during the entire year.

Instructions

(a) Prepare a corporate income statement.

(b) Calculate earnings per share.

Ex. 163

Prepare a 2010 income statement for Eaton Corporation based on the following information:

Cost of goods sold $490,000

Operating expenses 100,000

Other expenses and losses 30,000

Sales 700,000

Tax rate 30%

Ex. 164

Henson Corporation gathered the following information for the fiscal year ended December 31,

2010:

Sales $1,600,000

Operating expenses 160,000

Cost of goods sold 960,000

Loss on sale of equipment 40,000

Henson Corporation is subject to a 30% income tax rate.

Instructions

Prepare a partial income statement, beginning with income from operations.

Ex. 165

At December 31, 2010, Starr Company has $500,000 of $100 par value, 6%, cumulative

preferred stock outstanding and $2,000,000 of $10 par value common stock issued. Starr's net

income for the year is $410,000.

Instructions

Compute earnings per share of common stock for 2010 under the following independent

situations. (Round to two decimals.)

(a) The dividend to preferred stockholders was declared, and there has been no change in

the number of shares of common stock outstanding during the year.

(b) The dividend to preferred stockholders was not declared, and 10,000 shares of common

treasury stock were held throughout the year. The preferred stock is cumulative.

Ex. 166

The following information is available for Vincent Corporation:

Dividends paid to common stockholders $ 45,000

Dividends paid to preferred stockholders 20,000

Net income 175,000

Weighted average common shares outstanding 100,000

Instructions

Compute the earnings per share of common stock.

COMPLETION STATEMENTS

167. Three important dates associated with dividends are the: (1)__________________,

(2)__________________, and (3)__________________.

168. The entry to record the declaration of a stock dividend increases _______________, and

decreases ________________.

169. Both a stock split and a stock dividend will _________________ the number of shares

outstanding and have _________________ on total stockholders' equity.

170. Corporations sometimes segregate retained earnings into two categories:

(1)________________ retained earnings and (2)________________ retained earnings.

171. The correction of an error in previously issued financial statements is known as a

_________________.

172. The return on ________________ shows how many dollars of net income were earned

for each dollar invested by owners.

173. The return on common stockholders’ equity is computed by dividing _____________

minus _______________ dividends by average common stockholders’ equity.

174. Income statements for corporations report _______________ in a separate section before

net income.

175. Earnings per share is reported only for ________________.

176. Earnings per share is calculated by dividing _______________ available for common

stockholders by the ________________ number of common shares outstanding.

MATCHING

177. Match the items below by entering the appropriate code letter in the space provided.

A. Deficit F. Return on common stockholders’ equity

B. Prior period adjustment G. Cash dividend

C. Liquidating dividend H. Declaration date

D. Retained earnings restrictions I. Stock dividend

E. Earnings per share J. Stock split

____ 1. A dividend declared out of paid-in capital.

____ 2. Retained earnings currently unavailable for dividends.

____ 3. The correction of an error in previously issued financial statements.

____ 4. A pro rata distribution of cash to stockholders.

____ 5. A debit balance in retained earnings.

____ 6. A pro rata distribution of the corporation's own stock to stockholders.

____ 7. Shows how many dollars of net income were earned for each dollar invested by the

owners.

____ 8. The date the board of directors formally declares the dividend and announces it to

stockholders.

____ 9. The issuance of additional shares of stock to stockholders accompanied by a

reduction in the par or stated value per share.

____ 10. Widely used by stockholders and potential investors in evaluating the profitability of a

company.

SHORT-ANSWER ESSAY QUESTIONS

S-A E 178

The ultimate effect of incurring an expense is to reduce stockholders' equity. The declaration of a

cash dividend also reduces stockholders' equity. Explain the difference between an expense and

a cash dividend and explain why they have the same effect on stockholders' equity.

S-A E 179

A large stock dividend and stock split can frequently have the same effect on the market price of

a corporation's stock. Explain how stock dividends and stock splits affect the market price of a

corporation's stock.

S-A E 180

Why must a corporation have sufficient retained earnings before it may declare cash dividends?

S-A E 181

Three dates are important in connection with cash dividends. Identify these dates, and explain

their significance to the corporation and its stockholders.

Solution 181

The declaration date is the date when the board of directors formally declares the cash dividend

and announces it to stockholders. The declaration commits the corporation to a binding legal

obligation that cannot be rescinded.

The record date is the date that marks the time when ownership of the outstanding shares is

determined from the stockholder records maintained by the corporation. The purpose of this date

is to identify the persons or entities that will receive the dividend.

The payment date is the date on which the dividend checks are mailed to the stockholders.

S-A E 182

Jack Mordica asks, “Since stock dividends don't change anything, why declare them?" What is

your answer to Jack?

S-A E 183

A prior period adjustment is occasionally reported in company financial statements. What is a

prior period adjustment, and how is it reported in the financial statements?

S-A E 184 (Ethics)

Mike Stephenson, the president and CEO of Earth Systems, Inc., a waste management firm, was

recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his

hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading

activity became almost nonexistent. The primary reason for this was concern expressed in the

media over a new untested waste management system implemented by the company. Mr.

Stephenson had been unwilling to submit the procedure to testing before implementation, but he

reluctantly agreed to limited tests after the system was operational. No problems have been

identified by the tests to date.

The other members of management called a meeting to determine what they should do. Roger

Carlson, the marketing manager, suggested that the company purchase a large number of shares

of treasury stock. In that way, investors might notice that activity had picked up, and might decide

to buy some more shares. This plan would use up most of the company's available cash, so that

there will be no money available for a cash dividend. Earth Systems has paid cash dividends

every quarter for over ten years.

Required:

1. Is Mr. Carlson’s suggestion ethical? Explain.

2. Is it ethical to discontinue the cash dividend? Explain.

S-A E 185 (Communication)

As part of a Careers in Accounting program sponsored by accounting organizations and

supported by your company, you will be taking a group of high-school students through the

accounting department in your company. You will also provide them with various materials to

explain the work of an accountant. One of the materials you will provide is the Stockholders’

Equity section of a recent balance sheet.

Required:

Prepare a sentence or two explaining each major section: Common Stock, Additional Paid-in

Capital, and Retained Earnings. You should try to be brief but clear.

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