Deck 12: Corporations: Effects on Retained Earnings and the Income Statement

Question 1

A company releases an additional 15,000 shares of common stock as a dividend. The current number of shares before the dividend is 45,000. This represents:

A) a 100 % stock dividend.
B) a 33 1/3% stock dividend.
C) a small dividend.
D) none of the above.

Answer 1

a 33 1/3% stock dividend.

Question 2

A company issued 40,000 shares of $5 common stock at $8. The company has now issued a 5% stock dividend when the market price of the stock is $10 a share. What is the amount transferred from the Retained earnings account to the Paid-in capital accounts as a result of the stock dividend?

A) $10,000
B) $20,000
C) $16,000
D) $45,000

Answer 2

$20,000

Question 3

A company originally issued 40,000 shares of $5 common stock at $8. The company has now issued a 5% stock dividend when the market price of the stock is $10 a share. What is the amount to be credited to the Common stock account when the shares are distributed?

A) $45,000
B) $16,000
C) $10,000
D) $20,000

Answer 3

$10,000

Question 4

A company originally issued 10,000 shares of $20 common stock at $22. The board of directors declares a 15% stock dividend when the market price of the stock is $25 a share. Which of the following is included in the entry to record the stock dividend?

A) Common stock is credited for $37,500.
B) Retained earnings is debited for $30,000.
C) Retained earnings is debited for $37,500.
D) Paid-in capital in excess of par is credited for $30,000.

Question 5

A company originally issued 50,000 shares of $5 common stock at $9. The board of directors declares a 10% stock dividend when the market price of the stock is $10 a share. Which of the following shows the net effect of the stock dividend?

A) Retained earnings is decreased, common stock is increased and paid-in capital is increased.
B) Retained earnings is decreased, common stock is increased and paid-in capital is decreased.
C) Retained earnings is decreased, common stock is decreased and paid-in capital is increased.
D) Retained earnings is increased, common stock is increased and paid-in capital is increased.

Question 6

A company originally issued 50,000 shares of $5 common stock at $9. The board of directors declares a 10% stock dividend when the market price of the stock is $10 a share. Which of the following shows s the net effect of the stock dividend?

A) Assets are decreased, liabilities are decreased and common stock is increased.
B) Assets are increased, liabilities are decreased and common stock is decreased.
C) Assets are decreased, liabilities are increased and common stock is increased.
D) None of the above happens.

Question 7

A company originally issued 50,000 shares of $5 par common stock at $9. The board of directors declares a 40% stock dividend when the market price of the stock is $10 a share. Which of the following shows the effect of the stock dividend?

A) Retained earnings is decreased, common stock is decreased and paid-in capital is increased.
B) Retained earnings is decreased, common stock is increased and paid-in capital is increased.
C) Retained earnings is increased, common stock is increased and paid-in capital is increased.
D) None of the above happens.

Question 8

Gordon Corporation reported the following equity section on its current balance sheet. The common stock is currently selling for $11.50 per share.
$$\begin{array} { | l | r | } \hline \begin{array} { l } \text { Common stock, \$5 par, } 100,000 \text { shares } \\\text { authorized, } 40,000 \text { shares issued }\end{array} & \$ 200,000 \\\hline \text { Paid in capital in excess of par - common } & 120,000 \\\hline \text { Retained earnings } & \underline { 290,000 } \\\hline \text { Total stockholders' equity } & \$ \underline { 610,000 } \\\hline\end{array}$$ Which of the following would be included in the entry to record a 10% stock dividend?

A) Paid-in capital in excess of par - common is credited for $46,000.
B) Retained earnings would be debited for $46,000.
C) Common stock would be debited for $20,000.
D) Common stock would be credited for $46,000.

Question 9

Gordon Corporation reported the following equity section on its current balance sheet. The common stock is currently selling for $11.50 per share.
$$\begin{array} { | l | r | } \hline \begin{array} { l } \text { Common stock, \$5 par, } 100,000 \text { shares } \\\text { authorized, } 40,000 \text { shares issued }\end{array} & \$ 200,000 \\\hline \text { Paid in capital in excess of par - common } & 120,000 \\\hline \text { Retained earnings } & \underline { 290,000 } \\\hline \text { Total stockholders' equity } & \$ \underline { 610,000 } \\\hline\end{array}$$ What would be the total paid-in capital after a 10% common stock dividend?

A) Total paid-in capital would be $656,000.
B) Total paid-in capital would be $320,000.
C) Total paid-in capital would be $610,000.
D) Total paid-in capital would be $366,000.

Question 10

Gordon Corporation reported the following equity section on its current balance sheet. The common stock is currently selling for $11.50 per share.
$$\begin{array} { | l | r | } \hline \begin{array} { l } \text { Common stock, \$5 par, } 100,000 \text { shares } \\\text { authorized, } 40,000 \text { shares issued }\end{array} & \$ 200,000 \\\hline \text { Paid in capital in excess of par - common } & 120,000 \\\hline \text { Retained earnings } & \underline { 290,000 } \\\hline \text { Total stockholders' equity } & \$ \underline { 610,000 } \\\hline\end{array}$$ What would be the amount of the common stock account after the declaration of a 10% stock dividend?

A) The common stock account would be $200,000.
B) The common stock account would be $246,000.
C) The common stock account would be $220,000.
D) The common stock account would be $226,000.

Question 11

A stock split is an increase in the number of outstanding shares of stock couples with a proportionate reduction in the par value of the stock.

Question 12

Most companies record stock dividends with a single entry on the date of distribution.

Question 13

A 4-for-1 stock split increases the stock account by a factor of 4.

Question 14

Which of the following occurs with a stock split?

A) A stock split increases the number of authorized issued and outstanding shares of stock.
B) A stock split decreases the par value per share of stock.
C) Both A and B occur.
D) Neither A nor B occur.

Question 15

Which of the following statements is TRUE?

A) Both a stock dividend and a stock split increase the balance in the common stock account.
B) Both a stock dividend and a stock split reduce retained earnings.
C) Neither a stock dividend nor a stock split will create taxable income for the investor.
D) A stock split increases the par value of the stock.

Question 16

Gordon Corporation reported the following equity section on its current balance sheet. The common stock is currently selling for $11.50 per share.
$$\begin{array} { | l | r | } \hline \begin{array} { l } \text { Common stock, \$5 par, } 100,000 \text { shares } \\\text { authorized, } 40,000 \text { shares issued }\end{array} & \$ 200,000 \\\hline \text { Paid in capital in excess of par - common } & 120,000 \\\hline \text { Retained earnings } & \underline { 290,000 } \\\hline \text { Total stockholders' equity } & \$ \underline { 610,000 } \\\hline\end{array}$$ Which of the following would be included in the entry to record a 2-for-1 stock split?

A) Retained earnings would be debited for $46,000.
B) Common stock would be credited for $46,000.
C) Paid-in capital in excess of par - common is credited for $$46,000.
D) Common stock would not change.

Question 17

Gordon Corporation reported the following equity section on its current balance sheet. The common stock is currently selling for $11.50 per share.
$$\begin{array} { | l | r | } \hline \begin{array} { l } \text { Common stock, \$5 par, } 100,000 \text { shares } \\\text { authorized, } 40,000 \text { shares issued }\end{array} & \$ 200,000 \\\hline \text { Paid in capital in excess of par - common } & 120,000 \\\hline \text { Retained earnings } & \underline { 290,000 } \\\hline \text { Total stockholders' equity } & \$ \underline { 610,000 } \\\hline\end{array}$$ What would be the total paid-in capital after a 2-for-1 stock split?

A) Total paid-in capital would be $610,000.
B) Total paid-in capital would be $656,000.
C) Total paid-in capital would be $366,000.
D) Total paid-in capital would be $320,000.

Question 18

Gordon Corporation reported the following equity section on its current balance sheet. The common stock is currently selling for $11.50 per share.
$$\begin{array} { | l | r | } \hline \begin{array} { l } \text { Common stock, \$5 par, } 100,000 \text { shares } \\\text { authorized, } 40,000 \text { shares issued }\end{array} & \$ 200,000 \\\hline \text { Paid in capital in excess of par - common } & 120,000 \\\hline \text { Retained earnings } & \underline { 290,000 } \\\hline \text { Total stockholders' equity } & \$ \underline { 610,000 } \\\hline\end{array}$$ What would be the total stockholders' equity after a 2-for-1 stock split?

A) Total paid-in capital would be $366,000.
B) Total paid-in capital would be $610,000.
C) Total paid-in capital would be $320,000.
D) Total paid-in capital would be $656,000.

Question 19

Gordon Corporation reported the following equity section on its current balance sheet. The common stock is currently selling for $11.50 per share.
$$\begin{array} { | l | r | } \hline \begin{array} { l } \text { Common stock, \$5 par, } 100,000 \text { shares } \\\text { authorized, } 40,000 \text { shares issued }\end{array} & \$ 200,000 \\\hline \text { Paid in capital in excess of par - common } & 120,000 \\\hline \text { Retained earnings } & \underline { 290,000 } \\\hline \text { Total stockholders' equity } & \$ \underline { 610,000 } \\\hline\end{array}$$ What would be the amount of the common stock account after the declaration of a 2-for-1 stock split?

A) The common stock account would be $226,000.
B) The common stock account would be $220,000.
C) The common stock account would be $200,000.
D) The common stock account would be $246,000.

Question 20

Gordon Corporation reported the following equity section on its current balance sheet. The common stock is currently selling for $11.50 per share.
$$\begin{array} { | l | r | } \hline \begin{array} { l } \text { Common stock, \$5 par, } 100,000 \text { shares } \\\text { authorized, } 40,000 \text { shares issued }\end{array} & \$ 200,000 \\\hline \text { Paid in capital in excess of par - common } & 120,000 \\\hline \text { Retained earnings } & \underline { 290,000 } \\\hline \text { Total stockholders' equity } & \$ \underline { 610,000 } \\\hline\end{array}$$ What would be the number of issued common shares after the declaration of a 2-for-1 stock split?

A) There will be 40,000 issued common shares.
B) There will be 44,000 issued common shares.
C) There will be 84,000 issued common shares.
D) There will be 80,000 issued common shares.

Question 21

Exchanging 5 shares of stock that a stockholder has for 1 share of stock is called a:

A) forward stock split.
B) reverse stock split.
C) stock dividend.
D) cash dividend.

Question 22

Apira has 7,500 shares of common stock outstanding. A stockholder has 250 shares. If Apira distributes a 20% stock dividend, how many shares of Apira will the stockholder have after the dividend?

A) 250
B) 1125
C) 300
D) 50

Question 23

Dividends given by a corporation are generally:

A) Liquidating dividends
B) Cash dividends
C) Stock dividends
D) Property dividends

Question 24

Stock splits differ from stock dividends in the fact that:

A) the total value of the shares go up in a stock split.
B) the total value of the shares goes up in a stock dividend.
C) par value goes up in a stock dividend.
D) the total value of the shares goes down in a stock dividend.

Question 25

A corporation must recognize a gain on the sale of treasury stock for an amount greater than its purchase price.

Question 26

Which of the following statements is true?

A) Treasury stock causes issued shares to exceed outstanding shares.
B) Treasury stock causes issued shares to exceed authorized shares.
C) Treasury stock causes outstanding shares to exceed authorized shares.
D) Treasury stock causes outstanding shares to exceed issued shares.

Question 27

How is treasury stock reported on the balance sheet?

A) Treasury stock is a contra stockholders' equity account.
B) Treasury stock is a contra asset account.
C) Treasury stock is liability account.
D) Treasury stock is a contra liability account.

Question 28

Ross Corporation reported the following equity section on its current balance sheet.
$$\begin{array} { | l | r | } \hline \begin{array} { l } \text { Common stock, \$5 par, 140,000 shares } \\\text { authorized, 50,000 shares issued }\end{array} & \$ 250,000 \\\hline \text { Paid in capital in excess of par - common } & 200,000 \\\hline \text { Retained earnings } & \underline { 207,000 } \\\hline \text { Total stockholders' equity } & \$ \underline { 657,000 } \\\hline\end{array}$$ The corporation has acquired treasury stock for $10 per share. Which of the following would be included in the entry to record the corporation's reissue of 8,000 shares of its common stock for $13 per share?

A) Paid-in capital from treasury stock transactions would be credited for $24,000.
B) Common stock would be credited for $104,000
C) Treasury stock would be debited for $104,000.
D) Retained earnings would be debited for $104,000.

Question 29

Ross Corporation reported the following equity section on its current balance sheet.
$$\begin{array} { | l | r | } \hline \begin{array} { l } \text { Common stock, \$5 par, 140,000 shares } \\\text { authorized, 50,000 shares issued }\end{array} & \$ 250,000 \\\hline \text { Paid in capital in excess of par - common } & 200,000 \\\hline \text { Retained earnings } & \underline { 207,000 } \\\hline \text { Total stockholders' equity } & \$ \underline { 657,000 } \\\hline\end{array}$$ The corporation has acquired treasury stock for $9.50 per share. No treasury stock has been reissued by the corporation. Which of the following would be included in the entry to record the reissue of 8,000 shares of the treasury stock for $8 per share?

A) Treasury stock would be debited for $76,000.
B) Retained earnings would be debited for $12,000.
C) Common stock would be credited for $40,000
D) Paid-in capital from treasury stock transactions would be credited for $64,000.

Question 30

A corporation has 40,000 shares of $5 par common stock outstanding. The corporation has acquired treasury stock for $8.00 per share. Which of the following would be included in the entry to record the reissue of 8,000 shares of the treasury stock for $10 per share?

A) Retained earnings would be debited for $16,000.
B) Common stock would be credited for $80,000
C) Paid-in capital from treasury stock transactions would be credited for $16,000.
D) Treasury stock would be debited for $80,000.

Question 31

The treasury stock account is:

A) credited upon repurchase of the company's stock.
B) debited upon repurchase of the company's stock.
C) treated like a common stock account.
D) none of the above.

Question 32

Which of the following occurs as the result of a retirement of common stock?

A) The number of shares of common stock outstanding decreases.
B) The balance in the common stock account increases.
C) The number of shares of common stock issued decreases.
D) Both A and C occur.

Question 33

The retirement of stock is recorded as a debit to Common stock account and a credit to Cash.

Question 34

Which of the following would be included in the entry to record appropriated retained earnings for plant expansion?

A) Retained earnings appropriated for plant expansion would be debited.
B) Retained earnings would be credited.
C) Retained earnings would be debited.
D) Cash would be credited.

Question 35

Which of the following is TRUE of a restriction or appropriation of retained earnings?

A) A restriction or appropriation of retained earnings decreases total retained earnings.
B) A restriction or appropriation of retained earnings decreases total assets.
C) A restriction or appropriation of retained earnings increases total retained earnings.
D) A restriction or appropriation of retained earnings does not affect total retained earnings.

Question 36

A corporation has $250,000 in retained earnings. The board of directors appropriates $50,000 for the purchase of a new building. Which of the following would be included in the entry to record this appropriation?

A) Appropriated retained earnings would be debited for $20,000.
B) Retained earnings would be debited for $50,000.
C) Cash would be credited for $20,000.
D) No formal entry would be made.

Question 37

Debits to Retained earnings do not result from:

A) net losses.
B) purchases of treasury stock.
C) net income.
D) any of the above.

Question 38

Retained earnings represent:

A) excess cash.
B) net losses as a credit.
C) net incomes retained by the business.
D) none of the above.

Question 39

Prior-period adjustments are corrections to:

A) corrections to retained earnings for errors made before the year's beginning.
B) corrections to net income for errors made before the year's beginning.
C) corrections to retained earnings for errors made after the year's beginning.
D) none of the above.

Question 40

Capital resulting from net income should be placed in what account?

A) Retained earnings
B) Net income from the business
C) Capital stock
D) Appropriated retained earnings

Question 41

Retained earnings appropriation are a restriction voted on by the:

A) board of directors.
B) stockholders'.
C) chief financial officer.
D) senior management.

Question 42

Which of the following is TRUE of appropriations of retained earnings?

A) Appropriations of retained earnings must be accompanied by a credit to the cash account.
B) Appropriations of retained earnings are recorded by memorandum entries.
C) Appropriations of retained earnings are recorded by formal journal entries.
D) Appropriations of retained earnings are common.

Question 43

A restriction of retained earnings for a specific purpose is called a(n):

Question 44

Do Total retained earnings increase, decrease or remain the same when an appropriation to retained earnings is made?

Question 45

Gains and losses from the disposal of old plant and equipment are reported as other gains or losses as part of net income from continuing operations.

Question 46

Earnings per share is the most widely used of all business statistics.

Question 47

Comprehensive income is net income from continued operations adjusted for gains or losses from discontinued operations and gains or losses from extraordinary items.

Question 48

Which of the following is the correct order of the sections of a multiple step income statement?

A) The correct order of the steps is income from discontinued operations, extraordinary items, income from continuing operations, and net income.
B) The correct order of the steps is income from discontinued operations, income from continuing operations, extraordinary items, and net income.
C) The correct order of the steps is income from continuing operations, extraordinary items, income from discontinued operations, and net income.
D) The correct order of the steps is income from continuing operations, income from discontinued operations, extraordinary items, and net income.

Question 49

How would a gain on the sale of machinery be reported on an income statement?

A) A gain on the sale of machinery would be reported as an extraordinary gain.
B) A gain on the sale of machinery would be reported as a component of net sales.
C) A gain on the sale of machinery would be reported as a component of income from discontinued operations.
D) A gain on the sale of machinery would be reported as a component of income from continuing operations.

Question 50

How are the components of income from continuing operations reported on an income statement?

A) Some components are reported net of tax effect and some components are reported before their tax effect.
B) Each component is reported before its tax effect.
C) Each component is reported net of its tax effect.
D) None of the items above are correct.

Question 51

How would the expenses of an employee strike be reported on an income statement?

A) The expenses of an employee strike would be reported as a normal business event and as a part of net income from continuing operations.
B) The expenses of an employee strike would be reported as an extraordinary item.
C) The expenses of an employee strike would be reported as a discontinued operation.
D) The expenses of an employee strike would be reported as part of cost of goods sold.

Question 52

Which of the following would not go on a statement of retained earnings?

A) Stock dividends distributed
B) Extraordinary gains
C) Appropriations
D) Cash dividends paid

Question 53

Which of the following would go on a statement of retained earnings?

A) Earnings per share
B) Disposal of a business segment
C) Extraordinary losses
D) None of the above

Question 54

Of the following, which does not go on a statement of retained earnings?

A) An appropriation for new equipment
B) Declaration of a cash dividend
C) Purchase of treasury stock
D) Declaration of a stock dividend

Question 55

How would a loss from a tornado be treated on an income statement?

A) A loss from a tornado would be treated as an extraordinary loss if the company is located in an area where tornados are rare.
B) A loss from a tornado would be treated as a discontinued operation if the company is located in an area where tornados are rare.
C) A loss from a tornado would be treated as another loss in net income from continuing operations if the company is located in an area where tornados are rare.
D) A loss from a tornado would be treated as an operating expense in net income from continuing operations if the company is located in an area where tornados are rare.

Question 56

A corporation suffers a loss from a discontinued operation of $60,000. The company is subject to a tax rate of 40%. Which of the following describes the tax effect of the loss?

A) The loss results in a tax liability of $36,000.
B) The loss results in a tax liability of $24,000.
C) The loss results in a tax savings of $36,000.
D) The loss results in a tax savings of $24,000.

Question 57

Which of the following items would be treated as an extraordinary loss?

A) A loss from the sale of plant assets would be treated as an extraordinary loss.
B) A loss due to a lawsuit would be treated as an extraordinary loss.
C) A loss due to an employee labor strike would be treated as an extraordinary loss.
D) A loss due to a hurricane would be treated as an extraordinary loss if the company is located in an area where hurricanes are rare.

Question 58

Which of the following earnings per share amounts is NOT reported on a corporation's income statement?

A) Earnings per share from extraordinary gains and/or losses
B) Earnings per share from net income
C) Earnings per share from continuing operations
D) All of these earnings per share amounts are reported on a corporations' income statement.

Question 59

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

A) Corporations typically report earnings per share for both common stock and preferred stock.
B) The payment of preferred dividends increases earnings per share.
C) The payment of dividends on common stock decreases earnings per share.
D) Earnings per share is an important measure of success used by investors.

Question 60

Which of the following is the denominator of the earnings per share formula?

A) The denominator is the number of common shares outstanding at the end of the year.
B) The denominator is the average number of common shares outstanding for the year.
C) The denominator is the sum of the average number of common shares and the average number of preferred shares for the entire year.
D) The denominator is the sum of the number of common shares and the number of preferred shares outstanding at the end of the year.

Question 61

Which of the following is the numerator of the earnings per share formula?

A) The numerator is the sum of net income and preferred dividends.
B) The numerator is net income minus preferred dividends.
C) The numerator is the average number of common shares outstanding for the year.
D) The numerator is net income minus common dividends.

Question 62

A corporation has net income of $200,000 for the current year. The corporation has 5,000 shares of cumulative, 5%, $100 preferred stock and 20,000 shares of $20 par common stock outstanding for all of the year. What is the numerator to be used in the earnings per share calculation?

A) The numerator is $225,000.
B) The numerator is $200,000.
C) The numerator is $195,000.
D) The numerator is $175,000.

Question 63

A corporation has net income of $200,000 for the current year. The corporation has 5,000 shares of cumulative, 5%, $100 preferred stock and 20,000 shares of $20 par common stock outstanding for all of the year. What is the denominator to be used in the earnings per share calculation?

A) The denominator is 25,000 shares.
B) The denominator is 5,000 shares.
C) The denominator is 10,000 shares.
D) The denominator is 20,000 shares.

Question 64

A corporation reports net income of $100,000 for the current year. The corporation has 10,000 shares of cumulative, 10%, $50 preferred stock and 55,000 shares of $10 par common stock outstanding all of the year. What is earnings per share?

A) Earnings per share is $1.00.
B) Earnings per share is $.50.
C) Earnings per share is $1.81.
D) Earnings per share is $.91.

Question 65

Which of the following statements concerning the statement of retained earnings is NOT correct?

A) The statement of retained earnings contains information concerning new shares of stock issued during the period.
B) The statement of retained earnings reports how the company moved from its beginning balance to its ending balance during the period.
C) Companies often report income and retained earnings on a single statement.
D) Net income is reported as an increase in retained earnings.

Question 66

Which of the following items in NOT found on a statement of retained earnings?

A) Cash dividends
B) Loss on Treasury stock sales
C) Net income
D) Earnings per share

Question 67

A corporation has $40,000 of retained earnings at the beginning of the period. The company has net income of $5,000 and pays dividends of $30,000 during the period. What is the balance in retained earnings at the end of the period?

A) $35,000
B) $15,000
C) $25,000
D) $ 5,000

Question 68

Which of the following items are included in comprehensive income?

A) Changes in total stockholders' equity from all sources other than from the income statement are included in comprehensive income.
B) Changes in total stockholders' equity from all sources other than the owners are included in comprehensive income.
C) Comprehensive income includes net income from the income statement.
D) Both B and C are correct.

Question 69

Which of the following items is NOT found on a statement of comprehensive income?

A) Net income
B) Foreign-currency translation adjustments
C) Unrealized gains or losses on certain investments
D) All of these items are found on a statement of comprehensive income.

Question 70

A corporation reports net income of $150,000 for 2010. The corporation had 10,000 shares of cumulative, 10% $50 preferred stock and 75,000 shares of $10 par common stock for all of 2010. What is earnings per share?

A) Earnings per share is $13.33.
B) Earnings per share is $2.00.
C) Earnings per share is $1.33.
D) Earnings per share is $1.20.

Question 71

Which component of an income statement is listed last?

A) Earnings per share of common stock data
B) Extraordinary items net of income tax
C) Income from operations
D) Discontinued operations

Question 72

Which of the following represents earnings per share?

A) Average number of common shares outstanding/net income
B) Net income/average number of common shares outstanding
C) (Net income - preferred dividends) / number of shares of preferred stock
D) None of the above