Question 1

Which of the following combinations appropriately reflects the type of accounts represented by the Treasury Stock account and Additional Paid-in Capital-Treasury Stock account? ​ $\begin{array}{cc}
 \text {Treasury Stock} & \text { Additional Paid-in Capital-Treasury Stock } \
\hline \text { a.contra stockholders' equity } &\text {stockholders' equity }\
\text { b.contra stockholders' equity  } &\text { contra stockholders' equity}\
\text { c. stockholders' equity} &\text { stockholders' equity}\
\text { d. retained earnings  } &\text { retained earnings  }\
\end{array}$

Accepted Answer

The answer of Which of the following combinations appropriately reflects...

Question 2

Ari's Cafe began operations on March 1, 2016.The corporate charter authorized the issuance of 3,000 shares of $2 par value common stock and 1,000 shares of $3 par value, 8% cumulative preferred stock.The company's fiscal year ends on February 28.Ari's sold 500 shares of common stock at $6 per share on April 1.What impact does the entry to record the April 1 transaction have on total stockholders' equity?

Accepted Answer

The sale of 500 shares of common stock at $6 per share results in an increase in stockholders' equity by $3,000 (500 shares x $6 per share).

Question 3

A company would repurchase its own stock for all of the following reasons except

Accepted Answer

Repurchasing stock as an investment in itself is not a primary reason companies buy back their own shares. The main reasons include using the stock for employee compensation, preventing hostile takeovers, and improving financial ratios by reducing the number of shares outstanding, which can increase earnings per share and return on equity.

Question 4

Portland Sound Cafe began business on January 1, 2016.The corporate charter authorized issuance of 1,000 shares of no-par value common stock, of which 200 shares were issued, and 4,000 shares of $8 par value, 6% cumulative preferred stock, of which none were issued.Portland Sound sold 400 shares of common stock at $8 per share on May 1.The entry to record the issuance of the shares on May 1 will:

Accepted Answer

The entry to record the issuance of 400 shares of no-par value common stock at $8 per share would increase Cash by $3,200 (400 shares x $8) and increase Common Stock by $3,200, as there is no par value or additional paid-in capital involved.

Question 5

If a company issues $5 par value common stock,

Accepted Answer

The par value of $5 per share is presented in the common stock account on the balance sheet, indicating the minimum value assigned to each share. This has no bearing on the selling price or dividends that may be paid to shareholders, nor does it affect liabilities.

Question 6

Perry Corporation issues 20,000 shares of $0.50 par common stock for $6 per share; the Additional Paid-in Capital-Common account will increase by

Accepted Answer

The Additional Paid-in Capital-Common account will increase by the amount received over the par value. The calculation is (20,000 shares * $6) - (20,000 shares * $0.50 par) = $120,000 - $10,000 = $110,000.

Question 7

The stockholders' equity section of Twilight Time's balance sheet on January 1, 2016, appeared as follows: $\begin{array}{lr}
\text { Common stock, \$2 par, } 2,000 \text { shares issued and outstanding } & \$ 4,000 \
\text { Additional paid-in capital-Common } & 1,600 \
\text { Retained earnings } & 5,400 \
\quad \text { Total stockholders' equity } & \$ 11,000
\end{array}$ On March 1, 2016, Twilight reacquired 800 shares of common stock at $10 per share.Twilight sold 400 of the treasury shares on November 15 for $12 per share.The entry to record the sale on November 15 would show:

Accepted Answer

The entry to record the sale of treasury shares would include a decrease in Treasury Stock for the cost of the shares when they were reacquired. Since 800 shares were initially bought back at $10 per share, the total cost was $8,000. Selling 400 of these shares means half of the treasury stock is being sold, but the decrease in Treasury Stock account would be based on the cost of these shares when reacquired, which is 400 shares * $10 = $4,000.

Question 8

Poole Company began business on January 1, 2016.The corporate charter authorized issuance of 5,000 shares of $1 par value common stock, and 4,000 shares of $8 par value, 6% cumulative preferred stock.None of the preferred shares were issued.On July 1, Poole issued 1,000 shares of common stock in exchange for two years rent on a retail location.The cash rental price is $2,400 per month and the rental period begins on July 1.The correct entry to record the July 1 transaction will

Accepted Answer

The transaction represents a non-cash exchange where rent was paid in the form of common stock. As a result, Prepaid Rent is increased by the fair value of the rent, $57,600, and Common Stock is increased by the number of shares issued, 1,000, at par value, $1 per share. The difference between the fair value of the rent and the par value of the common stock, $56,600, represents Additional Paid-in Capital-Common.

Question 9

A company issued 4,000 shares of $5 par common stock for $30 per share.The company purchased 1,200 shares as treasury stock at $32 per share.Later, the company reissued 400 shares of the treasury stock at $34 per share.Which of the following is true?

Accepted Answer

The answer of A company issued 4,000 shares of $5...

Question 10

Museum Corporation acquired a new manufacturing building by issuing 10,000 shares of its $50 par value preferred stock with a $75 per share market price.Similar buildings have recently cost $780,000.What are the effects of this transaction on the accounting equation for Museum?

Accepted Answer

The total value of the preferred stock issued is 10,000 shares x $75 per share = $750,000. Therefore, the building is acquired for $750,000 which is less than the comparable cost of $780,000. 
This leads to the following effects on the accounting equation:
Assets (+) Building: $750,000 
Liabilities (+) Preferred Stock: $500,000 
Equity (+) Additional Paid-in Capital-Preferred: $250,000

Question 11

Valor Company issued 5,000 shares of $1 par common stock for $30 per share, providing the company with $150,000 in cash.What effect, in addition to the increase in cash, does this transaction have on the accounting equation for Valor?

Accepted Answer

When a company issues common stock, the common stock account increases by the par value of the stock issued, which in this case is $5,000 ($1 par value x 5,000 shares). The remaining amount of $145,000 is recorded in the additional paid-in capital account. Therefore, the accounting equation is increased as follows:

Assets: Cash +$150,000 
Liabilities: None 
Equity: Common Stock +$5,000; Additional Paid-in Capital-Common +$145,000

Question 12

A company purchased machinery by issuing 2,000 shares of $3 par value common stock.Since the company is new, there is no established market price for its stock.How would the company record the transaction?

Accepted Answer

The company would record the transaction at the fair market value of the machine because when the market price of the stock is not available, the value of the asset received (in this case, machinery) provides the best basis for recording the transaction.

Question 13

Vegan Company reported the following: Common stock, $5 par, 200,000 shares authorized, 50,000 shares issued and outstanding
What is the effect of issuing 2,000 shares of common stock in exchange for land with valued by a realtor at $36,000 if the common stock sells for $12 per share and is regularly traded?

Accepted Answer

The answer of Vegan Company reported the following: Common stock,...

Question 14

Fairchild Company acquired a building valued at $210,000 for property tax purposes in exchange for 6,000 shares of its $10 par common stock.The stock is widely traded and selling for $31 per share.At what amount should the building be recorded by Fairchild Company?

Accepted Answer

The building should be recorded at fair value, which in this case is the value of the stock given up. The fair value of the 6,000 shares of common stock is 6,000 x $31 = $186,000. Therefore, the building should be recorded at $186,000.

Question 15

How is treasury stock shown on the balance sheet?

Accepted Answer

Treasury stock represents shares of a company's own stock that have been repurchased from shareholders. As a result, it reduces the number of outstanding shares, which reduces the overall value of stockholders' equity. Therefore, treasury stock is shown as a decrease in the stockholders' equity portion of the balance sheet.

Question 16

All of the following are reasons for a company to repurchase its previously issued stock, except:

Accepted Answer

Repurchasing stock will decrease the number of shares outstanding, not increase them. A company may repurchase its stock to support its market price, resell to employees, or distribute bonuses to employees.

Question 17

Abilene Western Shop began business on January 1, 2016.The corporate charter authorized issuance of 10,000 shares of $2 par value common stock and 4,000 shares of $8 par value, 6% cumulative preferred stock.Abilene issued 2,400 shares of common stock for cash at $20 per share on January 2, 2016.What effect does the entry to record the issuance of stock have on total stockholders' equity?

Accepted Answer

The issuance of 2,400 shares of common stock at $20 per share results in cash proceeds of $48,000 ((2,400 shares x $20 per share) = $48,000). Since the par value of the common stock is $2 per share, the total par value of the common stock issued is $4,800 (2,400 shares x $2 par value per share = $4,800). The remaining $43,200 ($48,000 cash proceeds - $4,800 par value) is recorded in the common stock account as additional paid-in capital. Therefore, the total stockholders' equity increases by $48,000 ($4,800 par value + $43,200 additional paid-in capital).

Question 18

A new company issues 2,000 shares of $5 par common stock in exchange for the services of a lawyer during its first month of business.The lawyer's normal fee is $15,000 for similar work.Which of the following would be recorded if the stock is not currently trading?

Accepted Answer

The company should record the transaction at the fair value of the services received, which is $15,000. The par value of the stock is $10,000 (2,000 shares x $5 par value), so the excess $5,000 is credited to Additional Paid-In Capital-Common Stock.

Question 19

Vegas Finance Company reported the following: Common stock, $10 par, 100,000 shares authorized, 80,000 shares issued and outstanding
What is the effect of issuing 1,000 shares of common stock at $15 per share?

Accepted Answer

When a company issues shares above par value, the excess amount over par is recorded in Additional Paid-in Capital. Here, the shares are issued at $15 each, with a par value of $10. The excess ($5 per share) for 1,000 shares equals $5,000, which increases Additional Paid-in Capital.

Question 20

Montana City Company began business on January 1, 2016.The corporate charter authorized issuance of 500 shares of $1 par value common stock and 400 shares of $4 par value, 3% cumulative preferred stock.What is the maximum amount that can be reported on the balance sheet for Common Stock and Preferred Stock, respectively, if all of the stock is issued? ​ $\begin{array}{cc}
 \text { Common Stock } & \text { Preferred Stock } \
\hline \text { a. } \$ 500 & \$ 1,600 \
\text { b. } \$ 5,000 & \$ 120 \
\text { c. } \$ 500 & \$ 120\
\text { d. Not enough information provided.}\
\end{array}$

Accepted Answer

The answer of Montana City Company began business on January...

Quiz 11: Stockholders Equity