Question 1

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

Accepted Answer

A gain on sale of stock is not recorded in the initial issuance of common stock; instead, any excess over par or stated value is recorded as additional paid-in capital.

Question 2

Which of the following statements is false?

Accepted Answer

Retained earnings is unaffected by stock splits.

Question 3

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?

Accepted Answer

Retained earnings and common stock are unaffected by stock splits. Stock splits reduce the par value per share and increase the number of common shares authorized, issued and outstanding.

Question 4

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

Accepted Answer

When no-par common stock is issued for cash, the entire amount received is credited to the common stock account, as there is no par value to allocate between common stock and additional paid-in capital.

Question 5

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}$

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

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

Accepted Answer

When treasury stock is reissued, the entry should reflect the cash received, the cost of the treasury stock, and any excess over the cost as capital in excess of par value. Option A correctly records these amounts.

Question 6

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

Accepted Answer

Retained earnings is debited (decreased) and dividends payable, a liability, is credited (increased) for $1.6 million (2,000,000 shares F1F1F1S1F1F1F10 $.80).

Question 7

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? $$\begin{array} { l l l } 
& \text { Stockholders' Equity } & \text { Earnings Per Share } \
\text { A. } & \text { Decrease } & \text { No effect } \
\text { B. } & \text { Increase } & \text { No effect } \
\text { C. } & \text { Decrease } & \text { Decrease } \
\text { D. } & \text { Decrease } & \text { Increase }
\end{array}$$

Accepted Answer

Repurchasing shares decreases stockholders' equity because it reduces the number of outstanding shares, but it increases earnings per share as the earnings are distributed over fewer shares.

Question 8

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?

Accepted Answer

Four shares of $.25 par value common stock will be issued for every share of $1 par value common stock.

Question 9

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?

Accepted Answer

Outstanding shares (4,300,000) = Issued shares (4,700,000) - Treasury shares (400,000)

Question 10

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

Accepted Answer

The declaration and distribution affects stockholder equity accounts only; retained earnings decreases, common stock and capital in excess of par increases in total by an amount equal to the retained earnings decrease.

Question 11

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?

Accepted Answer

The amount paid for the treasury stock is not known.

Question 12

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?

Accepted Answer

The answer of A company reported the following asset and...

Question 13

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? $\begin{array}{lr}
\text { A. Cash } & 40,000 \
\text { Capital in excess of par value  } & 4,000 \
\text { Treasury Stock } && 44,000
\end{array}$

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

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

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

Accepted Answer

When treasury stock is reissued, the difference between the repurchase price and the reissue price is recorded as a gain or loss on the sale of treasury stock. In this case, the company repurchased the shares at $44 per share and reissued them at $40 per share, resulting in a loss of $4 per share. The total loss on the sale of treasury stock is $4,000 (1,000 shares x $4 per share). The correct journal entry is:Cash 40,000Loss on sale of treasury stock 4,000Treasury Stock 44,000

Question 14

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

Accepted Answer

The earnings per share denominator is the number of common shares outstanding.

Question 15

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

Accepted Answer

Treasury stock is a contra-equity account with a debit balance.

Question 16

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?

Accepted Answer

Common stock is credited for stated value ($100,000) and capital in excess of par is credited for the excess of the selling price above stated value ($600,000).

Question 17

A stock dividend

Accepted Answer

The declaration and distribution of a stock dividend affects stockholder equity accounts only; retained earnings decreases, common stock and capital in excess of par (the sum of these two accounts is contributed capital) increases in total by an amount equal to the retained earnings decrease.

Question 18

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?

Accepted Answer

The retained earnings decrease ($18,000) equals the number of shares issued (20,000 F1F1F1S1F1F1F10 10%) multiplied by the market price per share ($9) on the declaration date.

Question 19

The declaration and payment of a cash dividend

Accepted Answer

Dividends are distributions of retained earnings and therefore decrease retained earnings. The cash payment reduces assets.

Question 20

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?

Accepted Answer

When common stock is issued for cash at a price above its stated value, the excess amount is credited to "Capital in excess of par" (or "Additional Paid-In Capital").

Quiz 11: Reporting and Interpreting Owners Equity