Deck 12: Contributed Capital

Question 1

Compensation expense related to employee stock options is recorded on a corporation's books only when the option price exceeds the current market price at the date the options are granted.

Answer 1

False

Question 2

The liability of a stockholder is usually limited to the stockholder's investment in the corporation.

Answer 2

True

Question 3

The board of directors carries out the day-to-day operations of the business.

Answer 3

False

Question 4

Stock options often are granted by a corporation to management personnel as a means of additional compensation and motivation of these employees.

Question 5

The sale of shares in a corporation by one stockholder to another affects the total capital of the corporation.

Question 6

Financing a business with common stock is less risky than financing it with bonds.

Question 7

The dividends yield is measured in terms of "times."

Question 8

The price/earnings (P/E) ratio is a measure of investors' confidence in a company's future.

Question 9

Return on equity equals average stockholders' equity divided by net income.

Question 10

A corporation often uses an underwriter for an initial public offering (IPO).

Question 11

One disadvantage of a corporation is the lack of mutual agency.

Question 12

The par value of stock refers to its value on the open market.

Question 13

Corporations are subject to less government control and regulation than are other forms of business.

Question 14

The par value of stock constitutes the legal capital of a corporation.

Question 15

The limited liability of a stockholder can be viewed as both an advantage and a disadvantage.

Question 16

The death of a stockholder results in the dissolution of the corporation.

Question 17

Stockholders elect the board of directors who appoints the officers of a corporation.

Question 18

An advantage of the corporate form is the ability of the board to hire professional managers to attend to the corporation's affairs.

Question 19

A corporation is a separate entity for legal purposes.

Question 20

Corporate earnings are subject to double taxation.

Question 21

A liquidating dividend is usually paid when a company is going out of business or reducing its operations.

Question 22

Retained earnings consist of a pool of funds to be distributed to stockholders.

Question 23

Stockholders who own preferred stock usually have voting rights, whereas stockholders who own common stock usually do not have voting rights.

Question 24

No entry is required on the date of record for a cash dividend.

Question 25

Underwriters typically charge 5 percent of the selling price to guarantee the sale of initial public offerings of stock.

Question 26

The word preferred in the phrase preferred stock means that an owner of preferred stock has some advantages over a bondholder.

Question 27

To form a corporation, most states require persons called incorporators to sign and file it with proper state official. This application contains the articles of incorporation. .

Question 28

A dividend that represents a return to the stockholders of a part of their paid-in capital rather than a distribution out of retained earnings is called a liquidating dividend.

Question 29

Treasury shares are shares that are issued but not outstanding.

Question 30

Start-up and organization costs should be amortized over ten years or more.

Question 31

The number of authorized shares should always equal or exceed the number of outstanding shares.

Question 32

The entry required to record start-up and organization costs will cause a decrease in net income for the period.

Question 33

No rights or privileges are associated with unissued stock.

Question 34

Retained earnings are a component of contributed capital.

Question 35

Cash dividends become a liability of a corporation when the stock goes ex-dividend.

Question 36

Dividends Payable is closed by transferring it to Retained Earnings at the end of the period.

Question 37

If a corporation grants a stock option to an employee on July 1, 2010 , that allows the employee to purchase stock at a price substantially below the stock's fair value at July 1, 2010 , an element of compensation expense should be recorded on the corporation's books.

Question 38

The declaration of a cash dividend causes an increase in a corporation's liabilities at the date of record.

Question 39

Preferred stock is considered the residual equity of a corporation.

Question 40

The stockholders' equity in a corporation consists of capital contributed by stockholders and retained earnings.

Question 41

The balance in the Additional Paid-in Capital account must be added to the balance of the Common Stock account to compute the amount of legal capital for a corporation with a par value common stock.

Question 42

The entry to record the purchase of treasury stock will cause total stockholders' equity to decrease by the amount of the cost of the treasury shares.

Question 43

Callable preferred stock is preferred stock that may be redeemed or retired at the option of the stockholder.

Question 44

The concept of legal capital exists to protect the corporation's assets for the stockholders of the corporation.

Question 45

When treasury stock is sold at a price below its cost, the entry to record the sale has the effect of reducing total stockholders' equity.

Question 46

The sale of treasury stock at an amount greater than cost results in a gain to be reported on the income statement.

Question 47

The entry to record the retirement of treasury stock will include a debit to Common Stock for the amount of the cost to retire the shares.

Question 48

Dividends in arrears are forfeited when a corporation calls in its preferred stock.

Question 49

When common stock with a par value is sold for a price that exceeds par value, the Common Stock account is credited only for the par value of the shares sold.

Question 50

When no-par common stock has a stated value, the stated value of the shares issued normally is considered the legal capital of the corporation.

Question 51

Dividends on cumulative preferred stock do not become a liability of the corporation until they are declared by the board of directors.

Question 52

Treasury stock may be either common or preferred stock.

Question 53

When no-par common stock without a stated value is issued for cash, the Common Stock account is credited for an amount equal to the cash proceeds.

Question 54

The cost of treasury stock is deducted from total Contributed Capital and Retained Earnings in determining total stockholders' equity.

Question 55

For accounting purposes, stated value is treated the same way as par value.

Question 56

Dividends in arrears are disclosed as liabilities of a corporation.

Question 57

Once an owner of convertible preferred stock has converted to common, he or she cannot convert back to preferred.

Question 58

Treasury stock is reported as an asset on the balance sheet because treasury shares may be sold later.

Question 59

Dividends in arrears pertain to noncumulative preferred stock.

Question 60

Treasury stock usually is recorded at par value when purchased.

Question 61

A disadvantage of the corporate form of business is

A) centralized authority and responsibility.
B) its status as a separate legal entity.
C) government regulation.
D) continuous existence.

Question 62

An advantage of the corporate form of business is

A) possible lack of control by owners.
B) tax treatment.
C) lack of mutual agency.
D) government regulation.

Question 63

The board of directors of Berweck Corporation declared a cash dividend on January 18, 2010 , to be paid on February 18, 2010 , to shareholders holding the stock on February 2, 2010 . Given these facts, the date February 2, 2010 , is referred to as the

A) date of declaration.
B) date of payment.
C) ex-dividend date.
D) date of record.

Question 64

Which of the following phrases is not descriptive of the corporate form of business?

A) Professional management
B) Continuous existence
C) Double taxation
D) Unlimited liability

Question 65

Which of the following is a correct statement relating to the concept of mutual agency and the corporate form of business?

A) There is no mutual agency with the corporate form of business.
B) Mutual agency may or may not exist in a corporation, depending on the individual state law.
C) Mutual agency always exists in the corporate form of business.
D) Mutual agency may or may not exist in a corporation, depending on a vote by the shareholders.

Question 66

The board of directors of Irondale Corporation declared a cash dividend of $2.50 per share on 57,000 shares of common stock on June 14, 2010. The dividend is to be paid on July 15, 2010, to shareholders of record on July 1, 2010. The effects of the entry to record the declaration of the dividend on June 14, 2010 , are to

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

Question 67

Par value

A) is established for a share of stock after it is issued.
B) is the legal capital established for a share of stock.
C) represents what a share of stock is worth.
D) represents the original selling price for a share of stock.

Question 68

The board of directors of Irondale Corporation declared a cash dividend of $2.50 per share on 57,000 shares of common stock on June 14, 2010. The dividend is to be paid on July 15, 2010, to shareholders of record on July 1, 2010. The proper entry to be recorded on June 14, 2010 is,

A) Dividends 142,500
Dividends Payable 142,500
B) Dividends payable 142,500
Cash 142,500
C) Dividends 142,500
Retained Earnings 142,500
D) Dividends payable 142,500
Dividends 142,500

Question 69

Which of the following statements is true of stock option plans?

A) Compensation expense is recorded only if the option price is less than the stock's fair value on the grant date.
B) Compensation is measured on the date the stock is issued.
C) The issued stock is recorded at the market price, not the option price.
D) They all serve to compensate employees.

Question 70

Which of the following statements is not descriptive of common stock?

A) Stockholders are considered owners, not creditors, of a corporation.
B) The payment of dividends is never required.
C) Dividends paid are an expense for the issuing corporation.
D) Issuing stock is less risky than issuing bonds.

Question 71

Which of the following could be described as both an advantage and a disadvantage of incorporation?

A) Continuous existence
B) Limited liability
C) Double taxation
D) Lack of mutual agency

Question 72

A corporation has

A) government regulations.
B) a limited existence.
C) unlimited liability.
D) no tax liability.

Question 73

Which of the following is the appropriate entry to record the declaration of cash dividends?

A) Dividends Payable - Debit
Cash - Credit
B) Additional Paid-in Capital - Debit
Dividends Payable - Credit
C) Dividends - Debit
Dividends Payable - Credit
D) Retained Earnings - Debit
Cash - Credit

Question 74

Compensation expense related to employee stock option plans is to be measured by the excess of the

A) option price over the fair value of the stock at the date the options are granted.
B) fair value of the stock over the option price at the date the options are exercised.
C) option price over the fair value of the stock at the date the options are exercised.
D) fair value of the stock over the option price at the date the options are granted.

Question 75

Dividends yield equals

A) market price per share divided by dividends per share.
B) net income divided by dividends per share.
C) dividends per share divided by net income.
D) dividends per share divided by market price per share.

Question 76

Return on equity is measured in terms of

A) days.
B) times.
C) a percentage.
D) dollars.

Question 77

The price/earnings (P/E) ratio is measured in terms of

A) dollars.
B) a percentage.
C) times.
D) days.

Question 78

The board of directors of Irondale Corporation declared a cash dividend of $2.50 per share on 57,000 shares of common stock on June 14, 2010. The dividend is to be paid on July 15, 2010, to shareholders of record on July 1, 2010. The effects of the entry to record the payment of the dividend on July 15, 2010, are to

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

Question 79

A good measure of confidence in a corporation's future is

A) par value.
B) price/earnings ratio.
C) dividends yield.
D) return on equity.

Question 80

A disadvantage of the corporate form of business is

A) lack of mutual agency.
B) professional management.
C) ease of transfer of ownership.
D) tax treatment.