Deck 11: Reporting and Interpreting Owners Equity

Question 1

Total stockholders' equity of Grasse Company is not affected when a stockholder sells shares of Grasse Company stock to another stockholder.

Answer 1

True
Explanation: A stock transaction between investors doesn't affect the stockholders' equity of Grasse Company.

Question 2

The issue of $1 par value common stock for $10 per share results in a $9 credit to the capital in excess of par value account for each share issued.

Answer 2

True
Explanation: The capital in excess of par value account is credited for $9; the excess of the selling price ($10) over the par value ($1) of the issued shares.

Question 3

Net income increases when treasury stock is sold for an amount in excess of its cost.

Answer 3

False
Explanation: Treasury stock transactions do not affect net income.

Question 4

The dividend yield ratio is dividends per share divided by the number of shares outstanding.

Question 5

Common stockholders have voting rights and can declare cash dividends.

Question 6

The issue of $5 par value common stock for $10 per share results in a $10 credit to the common stock account for each share issued.

Question 7

Total assets remain the same when a company uses cash to purchase treasury stock.

Question 8

Most investors that are retired prefer to receive their return on investment in the form of stock price appreciation rather in dividends.

Question 9

Earnings per share increases when a company purchases treasury stock.

Question 10

Outstanding shares of stock are those shares which a corporation has the ability to issue as documented in its charter in the state where incorporated.

Question 11

A company's assets and stockholders' equity decrease when a cash dividend is declared by its board of directors.

Question 12

Net income decreases when treasury stock is sold for an amount less than its cost.

Question 13

Stockholders' equity decreases when a company purchases treasury stock.

Question 14

Treasury stock is a corporation's own stock that was issued and then repurchased,and is still held by the corporation.

Question 15

Shares of stock held as treasury stock do not have voting rights or the right to receive dividends.

Question 16

The dividend yield ratio increases when a cash dividend is paid.

Question 17

Total stockholders' equity increases when treasury stock is sold for an amount less than its cost.

Question 18

The dividend yield ratio increases when the market price per share increases.

Question 19

Earnings per share are calculated by dividing net income by the number of outstanding shares of common stock at year-end.

Question 20

There would be 100,000 shares of common stock outstanding when the number of shares authorized was 150,000,issued shares totaled 120,000,and 20,000 shares were being held in the treasury.

Question 21

When a company issues common stock in exchange for cash,a cash inflow from a financing activity is reported.

Question 22

The declaration of a common stock dividend by a corporation's board of directors creates a liability on the declaration date.

Question 23

Which of the following statements is false?

A)Stockholders have a residual claim on assets in the event of liquidation.
B)Shares of stock held in the treasury are deducted from the number of issued shares in the determination of the number of outstanding shares.
C)Common stockholders have voting rights at annual stockholder meetings.
D)Corporations are governed by their stockholders.

Question 24

Rye Company has provided the following information:
Number of issued common shares,225,000;
Net income,$500,000;
Number of authorized common shares,400,000;
Number of treasury shares,25,000.
What is Rye's earnings per share?

A)$2.50
B)$1.25
C)$2.22
D)$1.33

Question 25

Which of the following represents the maximum number of shares of stock issuable to the public?

A)Authorized shares
B)Issued shares
C)Outstanding shares
D)Treasury shares

Question 26

The declaration and distribution of a 2-for-1 stock split results in a reduction of retained earnings.

Question 27

Which of the following statements regarding earnings per share (EPS)is correct?

A)It equals net income divided by the number of authorized common shares.
B)It equals net income divided by the number of outstanding common shares.
C)It equals net income divided by the number of issued common shares.
D)It equals net income divided by the number of treasury shares.

Question 28

A company's assets and liabilities decrease when they pay a previously declared cash dividend.

Question 29

RKJ Company has provided the following:
100,000 shares of $5 par value common stock are authorized;
70,000 shares have been issued;
65,000 shares are outstanding.
Which of the following statements is correct?

A)RKJ has 35,000 shares of treasury stock.
B)RKJ has 30,000 shares of treasury stock.
C)RKJ can reissue an additional 35,000 shares of common stock.
D)RKJ can issue an additional 30,000 shares of common stock.

Question 30

A stock split results in the reduction of the par or stated value per share and a proportionate increase in the number of shares outstanding.

Question 31

When a company pays its previously declared cash dividend,an investing cash outflow is reported.

Question 32

Kirova Company has provided the following information:
Number of issued common shares,900,000;
Net income,$1,000,000;
Number of authorized common shares,1,000,000;
Number of outstanding common shares,800,000
Number of treasury shares,100,000.
What is Kirova's earnings per share?

A)$1.43
B)$1.25
C)$1.11
D)$1.00

Question 33

Which of the following statements regarding earnings per share (EPS)is false?

A)It increases when treasury stock is acquired.
B)It increases when net income increases.
C)It decreases when additional shares of common stock are issued.
D)It decreases when the number of shares of common stock authorized increases.

Question 34

When a company reissues treasury stock,it creates a cash inflow from an investing activity because treasury stock is an investment asset on the balance sheet.

Question 35

Which of the following represents the number of shares currently in the hands of investors?

A)Authorized shares
B)Issued shares
C)Outstanding shares
D)Treasury shares

Question 36

The declaration and distribution of a common stock dividend results in a reduction of the issuing corporation's total stockholders' equity.

Question 37

Preferred stock often has a preference in the distribution of assets over common stock in the event of dissolution of the corporation.

Question 38

RKJ Company has provided the following:
100,000 shares of $5 par value common stock are authorized;
70,000 shares were issued for $9 per share;
65,000 shares are outstanding.
Which of the following statements is correct based only on the above facts?

A)Common stock is reported at $630,000 on the balance sheet.
B)Additional-paid in capital is reported at $260,000 on the balance sheet.
C)Common stock is reported at $350,000 on the balance sheet.
D)Treasury stock is reported at $45,000 on the balance sheet.

Question 39

Which of the following statements regarding earnings per share (EPS)is correct?

A)EPS can't be used to compare different size companies.
B)Investors expect a higher EPS for companies with higher stock prices.
C)It is calculated by dividing net income by the number of common shares issued.
D)It increases when the number of shares of common stock outstanding increases.

Question 40

Preferred stockholders don't have voting rights but do have a preference with respect to dividend payments.

Question 41

Which of the following journal entries doesn't reflect the initial cash sale of shares of common stock?

A) Cash
$\quad$$\quad$ Common stock (no par)
B) Cash
$\quad$ Common stock (par value)
$\quad$ Capital in excess of par
C) Cash
$\quad$ Common stock (stated value)
D) Cash
$\quad$ Common stock (stated value)
$\quad$ Gain on sale of stock

Question 42

Which of the following statements is false?

A)Stock splits reallocate amounts between retained earnings and contributed capital accounts.
B)Both stock splits and stock dividends increase the common shares issued.
C)Both stock splits and stock dividends increase the common shares outstanding.
D)Both stock splits and stock dividends have the impact of reducing the market price of the stock.

Question 43

Chicago Clock Corporation issued a 3-for-2 stock split of its common stock,which had a par value of $100 before the split.What dollar amount of retained earnings should be transferred to the common stock account?

A)Par value of $100 per share.
B)Market value per share on the issue date.
C)Half of the previous total amount in the common stock account.
D)Retained earnings aren't transferred to the common stock account.

Question 44

Which of the following journal entries is correct when no-par common stock is initially issued for cash?

A) Cash
$\quad$ Common stock
B) Cash
$\quad$ Common stock
$\quad$ Capital in excess of par
C) Cash
$\quad$ Common stock
$\quad$ Retained earnings
D) Cash
$\quad$ Common stock
$\quad$ Gain on sale of stock

Question 45

Which of the following entries would be recorded when a company reissues 1,000 shares of treasury stock for $50 per share when they were repurchased at a cost of $47 per share and have a $1 par value?
$\begin{array}{lr}\text { A. Cash } & 50,000 \\\text { Treasury Stock } & &47,000 \\\text { Capital in excess of par value } && 3,000\end{array}$

$\begin{array}{lr}\text { B. Cash } & 50,000 \\\text { Treasury Stock } & &47,000 \\\text { Retained earnings \( \quad \)\( \quad \)\( \quad \)\( \quad \)\( \quad \) } && 3,000\end{array}$

$\begin{array}{lrr}\text { C. Cash } & 50,000 & \\\text { Common Stock } & &1,000 \\\text { Capital in excess of par value } && 49,000\end{array}$

$\begin{array}{lrr}\text { D. Cash } & 50,000 & \\\text { Treasury Stock } & &47,000 \\\text { Gain on sale of treasury stock } && 3,000\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 46

On December 15,2009,the board of directors of Cross Corporation declared a cash dividend,payable on January 8,2010 of $.80 per share on the 2,000,000 common shares outstanding.On December 15,2009,Cross Corporation should

A)not prepare a journal entry because the event had no effect on the corporation's financial position until 2010.
B)decrease retained earnings $1.6 million and increase expenses $1.6 million.
C)decrease retained earnings $1.6 million and increase liabilities by $1.6 million.
D)decrease cash $1.6 million and decrease retained earnings $1.6 million.

Question 47

During 2010,Thomas Corporation repurchased some shares of its own common stock.What effect did this transaction have on 2010 stockholders' equity and earnings per share,respectively? $$\begin{array} { l l l } & \text { Stockholders' Equity } & \text { Earnings Per Share } \\\text { A. } & \text { Decrease } & \text { No effect } \\\text { B. } & \text { Increase } & \text { No effect } \\\text { C. } & \text { Decrease } & \text { Decrease } \\\text { D. } & \text { Decrease } & \text { Increase }\end{array}$$

A)Option A
B)Option B
C)Option C
D)Option D

Question 48

A company has 4 million common shares authorized,2.5 million shares issued and 100,000 treasury shares.The par value is $1 per share and the market price is $30 when the company declares a 4-for-1 stock split.Which of the following is correct?

A)There will be a transfer of $2.4 million from retained earnings to contributed capital.
B)Only the shares outstanding will quadruple to 49.86 million and the par value will be reduced to $.25 per share.
C)The shares authorized, issued, outstanding, and held in treasury will all quadruple while the par value will be reduced to $.25 per share.
D)The company will be unable to declare a 4-for-1 split because they do not have enough authorized shares to issue the needed 49.86 million shares.

Question 49

Watson Company has provided the following data about its common stock:
Par value per share,$1; authorized shares,10,000,000; outstanding shares,4,300,000; and issued shares 4,700,000.How many shares of treasury stock are there?

A)0
B)5,700,000
C)5,300,000
D)400,000

Question 50

Which of the following correctly describes the affect of declaring and distributing a common stock dividend?

A)Total stockholders' equity decreases.
B)Total stockholders' equity remains the same.
C)The number of shares outstanding increases while the par value of each share decreases.
D)The number of shares outstanding decreases while the par value of each share increases.

Question 51

CGJ Company has provided the following:
200,000 shares of $5 par value common stock are authorized;
140,000 shares of common stock were issued for $11 per share;
130,000 shares are outstanding.
Which of the following statements is false?

A)Common stock is reported at $700,000 on the balance sheet.
B)Additional-paid in capital is reported at $840,000 on the balance sheet.
C)Stockholders' equity decreased $110,000 when the treasury stock was purchased.
D)There are 10,000 shares of treasury stock.

Question 52

A company reported the following asset and liability balances at the end of 2009 and 2010: $$\begin{array} { l r r } & 2009 & 2010 \\\text { Total Assets } & \$ 6,800,000 & \$ 7,600,000 \\\text { Total Liabilities } & 3,200,000 & 3,600,000\end{array}$$ During 2010,cash dividends of $50,000 were declared and paid,and common stock was issued for $100,000.How much was the 2010 net income?

A)$400,000
B)$480,000
C)$350,000
D)$300,000

Question 53

Which of the following entries would be recorded when a company reissues 1,000 shares of treasury stock for $40 per share when they were repurchased at a cost of $44 per share and have a $1 par value? $\begin{array}{lr}\text { A. Cash } & 40,000 \\\text { Capital in excess of par value } & 4,000 \\\text { Treasury Stock } && 44,000\end{array}$

$\begin{array}{lrr}\text { B. Cash } & 40,000 & \\\text { Loss on sale of treasury stock } & 4,000 & \\\text { Treasury Stock } & & 44,000\end{array}$

$\begin{array}{lrr}\text { C. Cash } & 40,000 & \\\text { Capital in excess of par value } & 4,000 & \\\text { Common Stock } & & 44,000\end{array}$

$\begin{array}{lrr}\text { D. Cash } & 40,000 & \\\text { Common Stock } & &1,000 \\\text { Capital in excess of par value } && 39,000\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 54

Which of the following statements about earnings per share is correct?

A)Increased net income would cause earnings per share to decrease.
B)Issuance of more common shares would cause earnings per share to increase.
C)Purchasing treasury shares would cause earnings per share to decrease.
D)It is calculated using the number of common shares of stock outstanding.

Question 55

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

A)The total number of shares issued increases when treasury stock is purchased.
B)The total number of shares authorized changes when treasury stock is purchased.
C)Gains and losses on treasury stock transactions are reported on the income statement.
D)A stockholders' equity account is debited when treasury stock is purchased.

Question 56

Irish Corporation issued (sold)10,000 shares of its no par common stock for $70 per share.The bylaws established a stated value of $10 per share.The transaction would increase the common stock account on the balance sheet by how much?

A)$0
B)$600,000
C)$100,000
D)$700,000

Question 57

A stock dividend

A)results in a transfer of retained earnings to contributed capital.
B)increases the number of shares outstanding and involves a pro rata reduction in the par value per share.
C)is accounted for in exactly the same manner as a stock split.
D)results in a transfer of retained earnings to contributed capital and also increases the number of shares outstanding and involves a pro rata reduction in the par value per share.

Question 58

DORA Company declared and distributed a 10% stock dividend on 20,000 shares of issued and outstanding $5 par value common stock.The market price per share on the declaration date was $9 and was $10 on the distribution date.Which of the following correctly describes the accounting for the declaration and distribution of the stock dividend?

A)Retained earnings decreased $20,000.
B)Capital in excess of par increased $10,000.
C)Common stock increased $18,000.
D)Retained earnings decreased $18,000.

Question 59

The declaration and payment of a cash dividend

A)reduces retained earnings and increases liabilities by the amount of the dividend.
B)reduces retained earnings and increases contributed capital by the same amount.
C)reduces assets and increases liabilities by the amount of the dividend.
D)reduces both assets and retained earnings by the amount of the dividend.

Question 60

Which of the following journal entries is correct when common stock is initially issued for cash at a price in excess of the stock's stated value?

A) Cash
$\quad$ Common stock
B) Cash
$\quad$ Common stock
$\quad$ Capital in excess of par
C) Cash
$\quad$ Common stock
$\quad$ Retained earnings
D) Cash
$\quad$ Common stock
$\quad$ Gain on sale of stock

Question 61

Assume the following capital structure:
Preferred stock,6%,$50 par value,1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009).
Common stock,$100 par value,2,000 shares issued and outstanding.
Total dividends declared and paid in 2010 were $50,000.How much of the 2010 dividend will be paid to the common stockholders assuming the preferred stock is noncumulative?

A)$12,000
B)$3,000
C)$47,000
D)$38,000

Question 62

Slickers,Inc.had the following capital structure during 2010:
Preferred stock,7%,$50 par value,1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009.
Common stock,$100 par value,2,000 shares issued and outstanding.
The total dividends declared and paid during 2010 totaled $25,000.How much of the dividend is paid to the preferred stockholders during 2010 assuming the preferred stock is noncumulative?

A)$3,500
B)$7,000
C)$10,500
D)$14,500

Question 63

A company declares a 40% stock dividend when there were 4 million common shares outstanding with a $1 par value.The current market price is $20 per common share.Which of the following will be the effect of the stock dividend?

A)Retained earnings will decrease by $1.6 million and contributed capital will increase by $1.6 million.
B)Contributed capital will decrease by $1.6 million and retained earnings will increase by $1.6 million.
C)Retained earnings will decrease by $32 million and contributed capital will increase by $32 million.
D)Contributed capital will decrease by $32 million and retained earnings will increase by $32 million.

Question 64

Assume the following capital structure:
Preferred stock,6%,$50 par value,1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009).
Common stock,$100 par value,2,000 shares issued and outstanding.
Total dividends declared and paid in 2010 were $50,000.How much of the 2010 dividend will be paid to the common stockholders assuming the preferred stock is cumulative?

A)$12,000
B)$50,000
C)$47,000
D)$38,000

Question 65

Davidson Company has 10,000,000 common shares issued and 500,000 shares of treasury stock.The stock's par value is $2 per share and its current market price is $25 per share.Which of the following is correct when a 15% stock dividend is declared and distributed?

A)Retained earnings will decrease $37.5 million.
B)Retained earnings will decrease $35.625 million.
C)Retained earnings will decrease $3 million.
D)Retained earnings will decrease $2.85 million.

Question 66

Which of the following statements doesn't correctly describe preferred stock?

A)Preferred shareholders have a preference with respect to dividend payments.
B)Preferred shareholders have a preference with respect to assets in the event of liquidation.
C)Preferred shareholders have voting rights on a per share basis.
D)Preferred stock typically has a fixed dividend rate.

Question 67

Which of the following doesn't correctly describe preferred stock?

A)Preferred stock has a higher priority status relative to common stock.
B)Preferred shareholders are guaranteed to receive dividends.
C)Preferred stock usually does not carry voting rights.
D)Preferred stockholders receive dividends in arrears only if the shares are cumulative.

Question 68

Assume the following capital structure:
Preferred stock,6%,$50 par value,1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009).
Common stock,$100 par value,2,000 shares issued and outstanding.
Total dividends declared and paid in 2010 were $50,000.How much of the 2010 dividend will be paid to the preferred stockholders assuming the preferred stock is noncumulative?

A)$12,000
B)$3,000
C)$47,000
D)$38,000

Question 69

A company reported total stockholders' equity of $340,000 on its balance sheet dated December 31,2010.During the year ended December 31,2011,the company reported net income of $40,000,declared and paid a cash dividend of $8,000,declared and distributed a 10% stock dividend with a $10,000 total market value,purchased treasury stock costing $12,000,and issued additional common stock for $60,000.What is total stockholders' equity as of December 31,2011?

A)$432,000
B)$410,000
C)$444,000
D)$420,000

Question 70

Wendell Company provided the following pertaining to its recent year of operation:
Common stock with a $10,000 par value was sold for $50,000 cash.
Cash dividends totaling $20,000 were declared,of which $15,000 were paid.
Net income was $70,000.
A 5% stock dividend resulted in a common stock distribution,which had a $5,000 par value and a $23,000 market value.
Treasury stock costing $9,000 was sold for $7,000.
How much did Wendell's total stockholders' equity increase during the recent year of operation?

A)$107,000
B)$84,000
C)$80,000
D)$112,000

Question 71

A company reported total stockholders' equity of $170,000 on its balance sheet dated December 31,2010.During the year ended December 31,2011,the company reported net income of $20,000,declared and paid a cash dividend of $4,000,declared and distributed a 10% stock dividend with a $5,000 total market value,and issued additional common stock for $40,000.What is total stockholders' equity as of December 31,2011?

A)$234,000
B)$226,000
C)$231,000
D)$221,000

Question 72

Cornhusker Corporation plans to raise $10 million cash on January 1,2010,by issuing either bonds payable (8% interest rate)or cumulative preferred stock (8% dividend rate).How would the annual interest amount on the bonds or annual preferred dividend amount (if paid)affect the net income for the year ended December 31,2010?

A)Net income would be reduced by the annual interest on the bonds and by the annual preferred stock dividends.
B)Net income would be reduced by the annual interest on the bonds but not by the annual preferred stock dividends.
C)Net income would not be reduced by either the annual interest on the bonds or the annual preferred stock dividends.
D)Net income would be reduced by the annual preferred dividends but not by the annual interest on the bonds.

Question 73

Which of the following is a correct statement about cumulative and noncumulative preferred stock?

A)They both receive dividends in arrears.
B)Cumulative stock's undeclared dividends accumulate each year until paid, while noncumulative stock's right to receive dividends is forfeited in any year that dividends are not declared.
C)Cumulative preferred stock is guaranteed to receive their dividends.
D)Cumulative preferred stock's right to receive dividends is forfeited in any year that dividends are not declared.However, noncumulative stock's undeclared dividends accumulate each year until paid.

Question 74

Slickers,Inc.had the following capital structure during 2010:
Preferred stock,7%,$50 par value,1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009.
Common stock,$100 par value,2,000 shares issued and outstanding.
The total dividends declared and paid during 2010 totaled $25,000.How much of the dividend is paid to the common stockholders during 2010 assuming the preferred stock is cumulative?

A)$3,500
B)$7,000
C)$22,500
D)$14,500

Question 75

Assume the following capital structure:
Preferred stock,6%,$50 par value,1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009).
Common stock,$100 par value,2,000 shares issued and outstanding.
Total dividends declared and paid in 2010 were $50,000.How much of the 2010 dividend will be paid to the preferred stockholders assuming the preferred stock is cumulative?

A)$12,000
B)$3,000
C)$47,000
D)$38,000

Question 76

Slickers,Inc.had the following capital structure during 2010:
Preferred stock,7%,$50 par value,1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009.
Common stock,$100 par value,2,000 shares issued and outstanding.
The total dividends declared and paid during 2010 totaled $25,000.How much of the dividend is paid to the common stockholders during 2010 assuming the preferred stock is noncumulative?

A)$3,500
B)$7,000
C)$21,500
D)$14,500

Question 77

Slickers,Inc.had the following capital structure during 2010:
Preferred stock,7%,$50 par value,1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009.
Common stock,$100 par value,2,000 shares issued and outstanding.
The total dividends declared and paid during 2010 totaled $25,000.How much of the dividend is paid to the preferred stockholders during 2010 assuming the preferred stock is cumulative?

A)$3,500
B)$7,000
C)$10,500
D)$14,500

Question 78

CBA Company reported total stockholders' equity of $85,000 on its balance sheet dated December 31,2010.During the year ended December 31,2011,CBA reported net income of $10,000,declared and paid a cash dividend of $2,000,and issued additional common stock for $20,000.What is total stockholders' equity as of December 31,2011?

A)$117,000
B)$113,000
C)$109,000
D)$101,000

Question 79

What is the correct entry for the sale of 1,000 shares of $10 par value preferred stock for $50,000 cash? $\begin{array}{lr}\text { A. Cash } & \quad\quad\quad\quad\quad\quad50,000 \\\text { Preferred stock } & &50,000 \\\end{array}$

$\begin{array}{lr}\text { B. Cash } & \quad\quad\quad\quad\quad\quad10,000 \\\text { Preferred stock } & &10,000 \\\end{array}$

$\begin{array}{lr}\text { C. Cash } & 50,000 \\\text { Gain on sale of preferred stock} & &40,000 \\\text { Preferred stock } & &10,000 \\\end{array}$

$\begin{array}{lr}\text { D. Cash } & 50,000 \\\text { Preferred stock } & &10,000 \\\text { Gain on sale of preferred stock} & &40,000 \\\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 80

A company reported total stockholders' equity of $540,000 on its balance sheet dated December 31,2010.During the year ended December 31,2011,the company reported net income of $60,000,declared and paid a cash dividend of $18,000,declared and distributed a 10% stock dividend with a $15,000 total market value,sold treasury stock costing $12,000 for $15,000,and issued additional common stock for $70,000.What is total stockholders' equity as of December 31,2011?

A)$650,000
B)$670,000
C)$667,000
D)$655,000