Deck 11: Stockholders Equity: Paid-In Capital

Question 1

The par value of a stock is the minimum amount of capital of the corporation existing for the protection of creditors.

Answer 1

True

Question 2

A corporation is a legal entity separate from its owners; it may sue and be sued, but it may not own property in its own name.

Answer 2

False

Question 3

Only preferred stock of a corporation must have a par value.

Answer 3

False

Question 4

The purchase of treasury stock creates an asset for the corporation and is recorded at the cost of the shares purchased, not par value.

Question 5

When a corporation fails to pay a dividend one year on its common stock, it is said to be "in arrears."

Question 6

The number of shares a corporation may issue is specified in the articles of incorporation and approved by the Securities and Exchange Commission.

Question 7

When a state authorizes the sale of stock to stockholders, the corporation will credit Retained Earnings for the par value of the stock.

Question 8

Contributed capital is equivalent to paid-in capital.

Question 9

It is illegal for the government to double tax corporate earnings.

Question 10

Common stock is considered the legal capital of the corporation.

Question 11

A stockholders' subsidiary ledger will have entries made for each stockholder showing the number of shares held.

Question 12

Treasury stock is stock of a corporation that has been issued and then reacquired and then cancelled.

Question 13

A stock split will normally increase the market price of the stock and decrease the number of shares on the market.

Question 14

Stockholders of a corporation are personally liable for the debts of the corporation if all shares of stock are owned by the officers of the corporation.

Question 15

A corporation continues in existence even if a stockholder dies or withdraws from the organization.

Question 16

Cumulative preferred stock means the stock is entitled to its regular dividend plus an additional share of the total amount of declared dividends.

Question 17

A stock split will decrease the total par value of the stock.

Question 18

Treasury stock is stock that is issued and outstanding but not authorized.

Question 19

When a stockholder sends in a proxy statement to a corporation he or she owns stock in, they relinquish their voting rights to the officers of the corporation.

Question 20

International accounting standards require mandatory redeemable preferred stock to be classified as a liability on the balance sheet and not as equity.

Question 21

Book value per share of common stock is derived by which of the following:

A) Stockholders equity divided by the number of shares authorized.
B) Stockholders equity divided by the number of shares outstanding.
C) Net income divided by the number of shares outstanding.
D) Net income divided by the number of shares authorized.

Question 22

In the event of the liquidation of a corporation, treasury stock ordinarily has preference as to liabilities, while preferred stock has preference as to assets.

Question 23

The ownership of common stock in a corporation usually carries the following rights:

A) To vote for directors.
B) To declare dividends.
C) To share in a distribution of assets if the corporation is to be liquidated.
D) Both declare dividends and share in a distribution of assets if the corporation is to be liquidated.

Question 24

Inside directors of a corporation may be officers of the corporation and therefore are not considered independent.

Question 25

A corporation must always have more than one class of stock.

Question 26

If capital stock is issued by a corporation at a price lower than par value, the difference represents a loss in the period in which the shares of stock are issued.

Question 27

Preferred stockholders are owners of the corporation and have rights upon liquidation and to receive dividends.

Question 28

Paid-in-capital includes donated capital.

Question 29

Preferred stockholders generally do not have the same voting rights as do common stockholders in a corporation.

Question 30

To be consistent with international standards, the FASB has changed reporting requirements for redeemable preferred stock to require it to be reported in the equity section.

Question 31

When par value capital stock is issued, capital stock is credited with the par value of the shares issued, regardless of whether the issuance price is equal to par, more than par, or less than par.

Question 32

Shares that have been sold and are in the hands of stockholders are called:

A) Outstanding.
B) Issued.
C) Treasury.
D) Underwritten.

Question 33

In a "pump-and-dump" scheme, the owners of the company:

A) Falsely claim the business has high growth potential.
B) Artificially raise the price of the stock.
C) Sell the stock at a high price.
D) Falsely claim the business has high growth potential, artificially raise the price of the stock, and sell the stock at a high price.

Question 34

In order to limit the use of a shell company, the SEC has proposed:

A) Greater financial disclosures.
B) Eliminating this type of company.
C) Arresting promoters of shell companies for fraud.
D) That its stock only be sold in foreign countries.

Question 35

The purchase of treasury stock for cash causes no change in total assets.

Question 36

The advantages of corporations going public include all of the following except:

A) Professional management.
B) Transferability of ownership.
C) Limited shareholder liability.
D) Ability to remove assets.

Question 37

By going public a corporation can raise equity capital from many investors.

Question 38

The board of directors' primary functions include all of the following except:

A) Hiring corporate officers.
B) Setting officers' salaries.
C) Declaring dividends.
D) Protecting the interests of the officers.

Question 39

The sale of treasury stock at a price in excess of its cost results in a realized gain which should be presented as a non-operating item in the income statement.

Question 40

When assets are donated to a corporation, a revenue account should be credited for the fair market value of the assets received.

Question 41

In a corporation's organization chart, which is the highest position?

A) Stockholders.
B) Board of directors.
C) CEO.
D) President.

Question 42

A deficit appears in a corporation's financial statements:

A) Among the operating expenses.
B) Among the liabilities.
C) As a deduction from assets.
D) As a deduction from total paid-in capital.

Question 43

Which of the following best describes the relationship between revenue and retained earnings?

A) Revenue increases net income, which in turn increases retained earnings.
B) Revenue represents a cash receipt; retained earnings is an element of stockholders' equity.
C) Revenue represents the price of goods sold or services rendered; retained earnings represents cash available for paying dividends.
D) Retained earnings is equal to assets minus expenses.

Question 44

Which of the following is not a right of stockholders?

A) To vote for directors and on key issues.
B) To participate in dividends declared.
C) To share in the distribution of assets if the corporation is liquidated.
D) To select the Chief Executive Officer.

Question 45

Which of the following is not an addition to total paid-in-capital?

A) Retained earnings.
B) Treasury stock.
C) Neither retained earnings nor treasury stock.
D) Both retained earnings and treasury stock.

Question 46

The rights of a common stockholder do not include the right:

A) To vote for directors.
B) To withdraw a share of corporate net assets proportionate to the person's stockholdings.
C) To receive a proportionate share of corporate assets upon liquidation, after creditors have been paid.
D) To share in profits when the board of directors declares a dividend.

Question 47

Which of the following best describes retained earnings?

A) Cash available for dividends.
B) The amount initially invested in the business by stockholders.
C) Cash available for expansion and growth.
D) Income that has been reinvested in the business rather than distributed as dividends to stockholders.

Question 48

The market price of a preferred stock will be affected by:

A) The dividend rate.
B) The chance that the company will not operate profitably.
C) The level of interest rates.
D) The dividend rate, the chance that the company will not operate profitably, and the level of interest rates.

Question 49

A primary disadvantage of the corporate form of organization is:

A) Unlimited personal liability for business debts.
B) Ownership is difficult to transfer.
C) Corporate earnings are subject to double taxation.
D) Management is separated from ownership.

Question 50

Public corporations are required by law or regulation to perform all of the following except:

A) Submit much of their financial information to the SEC for review.
B) Make regularly scheduled dividend payments to all stockholders.
C) Have their annual financial statements audited by an independent CPA.
D) Disclose their financial information to the public.

Question 51

Which of the following is not a characteristic of the corporate form of organization?

A) The owners of a corporation cannot lose more than the amount of their investment.
B) Shares of stock in a corporation are more readily transferable than is an interest in a partnership.
C) Stockholders have authority to decide by majority vote the amount of dividends to be paid.
D) The corporation is a very efficient vehicle for obtaining large amounts of capital required for large-scale production.

Question 52

The term paid-in capital means:

A) All assets other than retained earnings.
B) Legal capital plus retained earnings.
C) Total stockholders' equity minus retained earnings.
D) Legal capital minus retained earnings.

Question 53

Topper Corporation has 60,000 shares of $1 par value common stock and 16,000 shares of cumulative 7%, $100 par preferred stock outstanding. Topper has not paid a dividend for the prior year. If Topper declares a $1.95 per share dividend this year, what will be the total amount they must pay their shareholders?

A) $117,000.
B) $341,000.
C) $327,000.
D) $177,000.

Question 54

Most preferred stocks have the following characteristics, except:

A) To receive dividends on a preferred basis.
B) Cumulative dividends.
C) Voting rights.
D) Callable at the option of the corporation.

Question 55

Which of the following individuals has the most power to influence corporate policy on a long-term basis?

A) A shareholder owning 60% of the outstanding common stock.
B) A shareholder owning 80% of the outstanding preferred stock.
C) The treasurer of the corporation.
D) The controller of the corporation.

Question 56

If a corporation has issued a single class of stock, it must be:

A) Common Stock.
B) Preferred Stock.
C) Stock issued at Par-value.
D) Cumulative preferred Stock.

Question 57

The net assets of a corporation are equal to:

A) Total assets-total liabilities.
B) Total assets-retained earnings.
C) Total assets + total liabilities.
D) Total assets + retained earnings.

Question 58

The directors of a corporation:

A) Are hired by the officers to run the business on a day-to-day basis.
B) May not own stock in the same corporation or be officers of the same corporation.
C) Are responsible for formulating corporate policy and for hiring corporate officers.
D) Are elected by the shareholders to run day-to-day operations.

Question 59

Which of the following would usually be the greatest amount?

A) The number of shares authorized.
B) The number of shares issued.
C) The number of shares outstanding.
D) They must all be the same amount.

Question 60

When shares of stock are sold from one investor to another, they will trade at:

A) Par value.
B) Book value.
C) Market value.
D) Stated Value.

Question 61

Which of the following does not appear in a corporate income statement?

A) Gains and losses from treasury stock transactions.
B) Income tax expense.
C) The income or loss from a segment of the business that has been discontinued during the current year.
D) Gains and losses not expected to recur in the foreseeable future.

Question 62

When a corporation issues capital stock at a price higher than the par value:

A) The amount received over par value increases retained earnings.
B) The entire issue price is credited to the Capital Stock account.
C) The amount received in excess of par value constitutes profit to the issuing corporation.
D) The amount received in excess of par value becomes part of paid-in capital.

Question 63

The par value of the common stock of a large listed corporation:

A) Tends to establish a ceiling for the market price of the stock.
B) Tends to establish a floor for the market price of the stock.
C) Represents legal capital and is not related to the market price of the stock.
D) Is increased by net income and decreased by dividends.

Question 64

Treasury stock should most often be recorded:

A) At cost.
B) Par value.
C) Fair market value at year end.
D) Face value.

Question 65

If the preferred stock of a corporation is cumulative:

A) Dividends on preferred stock are guaranteed.
B) Dividends cannot be declared in an amount less than that stated on the stock certificate.
C) Preferred stockholders participate in dividends paid in excess of a stated amount on the common shares.
D) Dividends in arrears must be paid on preferred stock before any dividend can be paid on common stock.

Question 66

The purchase of treasury stock for cash will have which effect upon the following items?

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

Question 67

If preferred stock is convertible, it is so at the option of the:

A) Board of directors.
B) CEO.
C) CFO.
D) Stockholders.

Question 68

The entry to record the issuance of common stock at a price above its par value includes:

A) A credit to Cash.
B) A credit to a liability account for the difference between the price paid by the stockholders and the par value of the stock.
C) A credit to Additional Paid-in Capital: Common Stock.
D) A debit to Common Stock.

Question 69

A 2-for-1 stock split will:

A) Increase the total par value of the stock and increase the number of shares outstanding.
B) Decrease the total par value of the stock and increase the number of shares outstanding.
C) Not change the total par value of the stock and increase the number of shares outstanding.
D) Increase total stockholders' equity.

Question 70

When no-par stock is issued:

A) The entire amount received is credited to the Additional Paid-in Capital account.
B) The issue price is credited to the Capital Stock account.
C) There is no legal capital created because there is no par or stated value.
D) The transaction usually involves only an exchange for non-cash assets or services, since the stock has no value on the stock exchanges.

Question 71

Which of the following is not a characteristic of most preferred stock?

A) Dividends that vary as income changes.
B) Preference as to dividends.
C) Preference as to assets in the event of liquidation of the company.
D) No voting power.

Question 72

Stock that had been issued by a corporation, and later reacquired, is classified as:

A) Treasury stock.
B) Non-participating preferred stock.
C) Restricted stock.
D) Issued shares.

Question 73

Which of the following best describes the book value of a share of stock?

A) Net assets divided by the number of shares outstanding.
B) The amount at which the stock would sell on the market if sold by a willing and informed seller to a willing and informed buyer.
C) Total assets of the company, as reported in the accounting records, divided by the number of shares of stock outstanding.
D) Total stockholders' equity divided by the number of shares authorized.

Question 74

The purchase of treasury stock for cash will:

A) Increase stockholders' equity.
B) Not increase nor decrease stockholders' equity.
C) Decrease stockholders' equity.
D) Not change total assets.

Question 75

Treasury stock represents:

A) Shares of ownership in the United States Treasury Department.
B) A current asset.
C) Authorized shares that have never been issued.
D) Previously outstanding shares that have been repurchased by the issuing company.

Question 76

The financial statements of a corporation that failed during the current year to pay any dividends on its cumulative preferred stock should:

A) Include the amount of the omitted dividends among its current liabilities.
B) Include a footnote disclosing the amount of the dividends in arrears.
C) Show the amount of the omitted dividends as a deduction from retained earnings.
D) List the omitted dividends as a long-term liability.

Question 77

Treasury stock:

A) Is an asset.
B) Increases total stockholders' equity.
C) Decreases total stockholders' equity.
D) Does not change total stockholders' equity.

Question 78

A 2-for-1 stock split:

A) Is accounted for in the same way as a 100% stock dividend.
B) Increases the number of outstanding shares of common stock, but par value per share remains the same as before the split.
C) Is recorded by transferring the par value of additional shares from retained earnings to the common stock account.
D) Should logically cause the market price per share to drop by approximately 50%.

Question 79

If a corporation has only common stock outstanding, which of the following constitutes legal capital at a particular date?

A) The amount in the Common Stock account.
B) The sum of the Common Stock account and any additional paid-in capital.
C) The total amount of stockholders' equity.
D) The sum of the Common Stock account and retained earnings.

Question 80

Which statement is true about a stock split?

A) Total shareholders' equity increases.
B) Total shareholders' equity decreases.
C) Total shareholders' equity remains the same.
D) A change in total stockholders' equity depends upon whether it is a 2-for-1 split or a 1-for-2 split.