Chapter 11 PDF

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1.Quality Company issues 8,000,000 Class A shares for gross proceeds of $220,000,000. Legal, printing and sales commission costs to the underwriters were $8,000,000. This $8,000,000 should be accounted for as Amortized against Income using the effective interest method Capitalized as Contributed Surplus Added to the Intangible asset Organization Costs Two of the above treatments are allowed under GAAP A reduction of the proceeds for the share issue 2. Company XYZ issued shares in 20X4 at $20 per share. In 20X5, Company XYZ repurchased these same shares at $30 per share. In 20X6, Company XYZ resold the shares at $40 per share. Assume the number of shares included in the above transactions is 10. What is the entry that Company XYZ will record when it resells the shares in 20X6 at $40 per share? Dr. Cash $4,000. Cr. Treasury Shares $3,000. Cr. Contributed Surplus $1,000 None of the other alternatives are correct Dr. Cash $4,000. Cr. Retained Earnings $3,000. Cr. Treasury shares $1,000 Dr. Cash $4,000. Cr. Treasury Shares $3,000. Cr. Gain on Treasury shares $1,000 Dr. Cash $400. Cr. Treasury Shares $300. Cr. Contributed Surplus $100 3. Tutu Corp issues an 8% stock dividend to shareholders of record on July 8 at a time when the market price of the stock was $14 and although the shares were no par value, all 11,000,000 shares had been issued at $12. Choices a, b and c are all incorrect statements Tutu would credit Stock Dividends on the date of declaration Tutu would use the $14 and not the $12 as the basis for making its journal entries Tutu would debit Retained Earnings on the date of declaration Choices a, b and c are all correct statements 4. A certain corporation retained almost all of its earnings, only rarely paying a cash dividend. If some of the shareholders objected, the president might make the following true statement(s) in reply: "The share price of your shares is likely to increase since the equity in the firm is larger if dividends are not declared" All of the other specific alternatives are correct "Why do you want cash dividends? You would just have to sell some shares when cash is needed." "Why do you want cash dividends? You would just have to go to the trouble of reinvesting them." None of the other alternatives are correct

5. Donald's Inc. would like to declare dividends. Partial financial information for Donald's Inc. is below. Cash balance………………$52,000 Retained Earnings…………$20,000 Accounts Receivable……...$27,500 Dividends receivable……...$19,200 Shareholder's equity………$109,000 What is the maximum stock dividend that Donald's Inc. can declare and pay given the above financial information? None of the other alternatives are correct $20,000 $52,000 $109,000 $1,200 6. The main goal of corporations in Canada is: Solvency Profitability Two of the previous choices are primary goals Growth Fiscal responsibility 7. Rich Ltd. declares a 3 for 1 stock split on its class A common shares. There are 12,000,000 shares authorized and 6,000,000 shares outstanding. The book value of each share at the time of the declaration is $12 and the quoted market value in the Toronto newspapers is $16. The entry to record the split should: Debit retained earnings None of the above Credit retained earnings Debit a liability account Debit some other shareholders equity account 8. A Canadian Corporation has the following accounts in its ledger: Preferred Shares Common Shares From this we can conclude that Ng is : Incorporated federally Incorporated provincially Two of the above statements are correct Incorporated Incorporated under the CICA act

9. A cumulative dividend preference means that: preferred shareholders are paid their full fixed dividend rate each period as long as the company is in operation. none of the above unpaid cash dividends to preferred shareholders must be replaced with stock dividends during the current period. preferred shareholders are paid dividends before common shareholders are paid dividends for the current year only. unpaid dividends to preferred shareholders accumulate and must be paid before common shareholders receive dividends. 10. Company XYZ issued shares in 20X4 at $20 per share. In 20X5, Company XYZ repurchased these same shares at $30 per share. In 20X6, Company XYZ resold the shares at $40 per share in exchange for a piece of land. Assume the number of shares included in the above transactions is 100. What is the entry that Company XYZ will record when it resells the shares in 20X6 at $40 per share? Dr. Land $4,000. Cr. Treasury Shares $3,000. Cr. Contributed Surplus $1,000 Dr. Cash $4,000. Cr. Retained Earnings $3,000. Cr. Treasury shares $1,000 Dr. Land $4,000. Cr. Treasury Shares $3,000. Cr. Gain on Treasury shares $1,000 Dr. Cash $4,000. Cr. Treasury Shares $3,000. Cr. Contributed Surplus $1,000 None of the other alternatives are correct 11. Company XYZ issued shares in 20X4 at $20 per share. In 20X5, Company XYZ repurchased these same shares at $30 per share. In 20X6, Company XYZ resold the shares at $40 per share in exchange for a piece of land. Assume the number of shares included in the above transactions is 100. What is the entry that Company XYZ will record when it resells the shares in 20X6 at $40 per share? None of the other alternatives are correct Dr. Cash $4,000. Cr. Treasury Shares $3,000. Cr. Contributed Surplus $1,000 Dr. Cash $4,000. Cr. Retained Earnings $3,000. Cr. Treasury shares $1,000 Dr. Land $4,000. Cr. Treasury Shares $3,000. Cr. Contributed Surplus $1,000 Dr. Land $4,000. Cr. Treasury Shares $3,000. Cr. Gain on Treasury shares $1,000 12. At the annual shareholders' meeting, the president of the Sante Corporation makes the following statement: "The net income for the year, after taxes, was $1,096,000. The directors have decided that the corporation can afford to distribute only $500,000 as a cash dividend." These two statements are: None of the other alternatives are correct Compatible Cash available determined the maximum of cash dividends that can be declared Incompatible Net Income determined the maximum of cash dividends that can be paid

13. Detachable warrants are Debt cupons that are independent from common shares and can be traded separately. None of the other alternatives are correct Stock options that cannot be detached from a debt issue and cannot be traded separately. Stock options that may be detached from a debt issue and traded separately. Debt cupons that may be detached from common shares and can be traded separately. 14. Donald's Inc. would like to declare a cash dividend. Partial financial information for Donald's Inc. is below. Cash balance………………$52,000 Retained Earnings…………$50,000 Accounts Receivable……...$27,500 Dividends receivable……...$19,200 Shareholder's equity………$129,000 What is the maximum cash dividend that Donald's Inc. can declare and pay given the above financial information? $19,200 None of the other alternatives are correct $52,000 $129,000 $50,000 15. Interest on bonds is deductible for tax purposes; dividends on preferred share issues are not. Assume that a company can raise $100 million either by assuming bonds promising 12 percent annual interest or by issuing preferred shares, convertible into common shares promising 12 percent annual dividends. The firm expects to continue to have income (in excess of all interest payments) taxable at the rate of 40 percent per year. The company would prefer to: Issue the preferred shares Issue the bonds at a premium None of the other alternatives are correct Issue the bonds at a discount Cannot be determined without considering the underlying risk 16. Donald's Inc. would like to declare dividends by distributing inventory. Partial financial information for Donald's Inc. is below. Cash balance………………$2,000 Inventory…………………..$20,000 Retained Earnings…………$10,000 Accounts Receivable……...$7,500 Dividends receivable……...$1,200 Shareholder's equity………$129,000 What is the maximum property dividend that Donald's Inc. can declare and pay given the above financial information? None of the other alternatives are correct $129,000 $1,200 $20,000 $2,000

17. Which of the following statements about stock dividends is true? none of the above Stock dividends increase total shareholders' equity Stock dividends are reported on the income statement Stock dividends are reported on the statement of shareholders' equity Stock dividends decrease total shareholders' equity 18. Song Sue is a shareholder of Gene Company and receives a 2% stock dividend. Song: None of the above are correct statements Will debit Cash and credit Dividend Income in her accounting records Will only be legally entitled to such dividend if Generous has positive net income that year Will own a larger percentage of Generous than before Will own the same percentage of Generous as before 19. Dividends in arrears on cumulative preferred shares Are not part of the balance sheet Are reported as current liabilities Are reported as part of retained earnings Are reported as part of deferred earnings Are reported as non current liabilities 20. The shareholder who receives a cash dividend has Has increased his proportionate share ownership of the company Has decreased their proportionate share ownership of the company Had converted a portion of his investment in the company into another form Sold a portion of his investment in the company None of the other alternatives are correct 21. Basic rights of common shareholders include which of the following: None of the other alternatives are correct Preference to receive dividends Multiple votes per one share owned Overseeing the hiring and firing of key management Pre-emptive rights

22. Donald's Inc. would like to declare a cash dividend. Partial financial information for Donald's Inc. is below. Cash balance……………..….$52,000 Dividends payable…..….…...$19,200 Retained Earnings……..……$27,500 Common Shares………..…...$50,000 Shareholder's equity……..…$77,500 What is the maximum cash dividend that Donald's Inc. can declare and pay given the above financial information? None of the other alternatives are correct $52,000 $77,500 $58,300 $50,000 23. The journal entries accompanying a cash dividend occur on: The date of authorization and the date of payment The date of authorization and the date of record None of the above The date of declaration and the date of payment The date of record and the date of payment 24. Company XYZ issued shares in 20X4 at $20 per share. In 20X5, Company XYZ repurchased these same shares at $30 per share. In 20X6, Company XYZ resold the shares at $40 per share. Assume the number of shares included in the above transactions is 100. What is the entry that Company XYZ will record when it resells the shares in 20X6 at $40 per share? Dr. Cash $4,000. Cr. Retained Earnings $3,000. Cr. Treasury shares $1,000 Dr. Cash $4,000. Cr. Treasury Shares $3,000. Cr. Contributed Surplus $1,000 Dr. Cash $4,000. Cr. Treasury Shares $3,000. Cr. Gain on Treasury shares $1,000 Dr. Cash $400. Cr. Treasury Shares $300. Cr. Contributed Surplus $100 None of the other alternatives are correct 25. Company XYZ issued shares in 20X4 at $20 per share. In 20X5, Company XYZ repurchased these same shares at $30 per share. In 20X6, Company XYZ resold the shares at $40 per share in exchange for a truck. Assume the number of shares included in the above transactions is 100. What is the entry that Company XYZ will record when it resells the shares in 20X6 at $40 per share? None of the other alternatives are correct Dr. Cash $4,000. Cr. Retained Earnings $3,000. Cr. Treasury shares $1,000 Dr. Cash $4,000. Cr. Treasury Shares $3,000. Cr. Contributed Surplus $1,000 Dr. Truck $4,000. Cr. Treasury Shares $3,000. Cr. Gain on Treasury shares $1,000 Dr. Truck $4,000. Cr. Treasury Shares $3,000. Cr. Contributed Surplus $1,000

26. Doug & Beatie's Inc., a large, private company, declared and distributed a 25% percent stock dividend to its shareholders. If Doug & Beatie's Inc. had instead done a stock split, which of the following stock splits would have had the same effect as the fifty percent stock dividend on the number of Doug & Beatie's Inc. shares outstanding? None of the other alternatives are correct 2 for 1 4 for 3 3 for 2 5 for 4 27. Holders of common shares receive certain benefits, such as a residual claim, which should the company cease operations, is the right to share in any remaining assets after creditors have been paid off. is the right to oversee management of the company None of the above is the continuing right to receive a share of profits as dividends. is the right of shareholders to be paid back their investment before anyone else if the company ceases operation 28. Donald's Inc. would like to declare dividends by distributing accounts receivable rights. Partial financial information for Donald's Inc. is below. Cash balance………………$2,000 Inventory…………………..$20,000 Accounts Receivable……...$7,500 Dividends receivable……...$1,200 Common shares……………$100,000 Shareholder's equity………$100,000 What is the maximum property dividend that Donald's Inc. can declare and pay given the above financial information? $1,200 None of the other alternatives are correct $20,000 $7,500 $2,000 29. Ho Ltd. is federally incorporated under the Canada Business Corporations Act and issues one share for $10 and a second share for $100 and a third share for $1,000. The credit to the common shares account will be for $1,110 The weighted average number of shares outstanding during the year cannot be computed without knowing the dates of issue Ho would assign the par value to the Share Capital account and the remainder to Contributed Surplus Federally incorporated companies cannot issue shares at different prices None of the above are correct statements

30. A company issues 100 shares and received $2,000. With the proceeds pays $200 in legal fees, accounting fees, underwriting commissions and mailing, registration and advertising costs. Which is the journal entry that better reflects the transaction: Dr. Cash $2,000 Dr. Organization Costs $200 Cr. Common Shares $2,200 Dr. Cash $2,000 Dr. Organization Costs $200 Cr. Common Shares $2,000 Cr. Accounts Payable $200 Dr. Cash $2,000 and Cr. Common Shares $2,000 None of the other alternatives are correct Dr. Cash $1,800 Dr. Organization Costs $200 Cr. Common Shares $2,000

If a company issues a 20% stock dividend when you are holding 2,000 shares of the company's stock: You can expect to receive an additional 200 shares in the mail The additional shares gives you a larger voting interest (more control) of the company You can expect to receive an additional 2,000 shares in the mail The aggregate market value of your holdings will change on receipt of the additional shares None of the above statements are correct 31. Donald's Inc. would like to declare dividends. Partial financial information for Donald's Inc. is below. Cash balance………………$52,000 Accounts Receivable……...$27,500 Dividends receivable……...$19,200 Common shares……………$109,000 Shareholder's equity………$109,000 What is the maximum stock dividend that Donald's Inc. can declare and pay given the above financial information? $19,200 $27,500 $109,000 $52,000 None of the other alternatives are correct

32. Donald's Inc. would like to declare dividends. Partial financial information for Donald's Inc. is below. Cash balance………………$2,000 Retained Earnings…………$20,000 Accounts Receivable……...$27,500 Dividends receivable……...$19,200 Shareholder's equity………$109,000 What is the maximum stock dividend that Donald's Inc. can declare and pay given the above financial information? $109,000 None of the other alternatives are correct $20,000 $2,000 $1,200 33. Declared, accumulated, but unpaid, dividends to preferred shareholders (which must be paid before dividends can be declared on common shares) are: Liabilities None of the other alternatives are correct Assets Owners' equity Expenses 34. Jet Corporation's Retained Earnings decreased by $800,000 during the year. Also during the year, dividends were paid to shareholders. The opening balance of Retained Earnings for the period was $1,900,000. Top Corporation's net income for the year was: Exactly equal to the amount of dividends Not determinable from the information provided A negative amount (a loss) A positive amount Smaller than the amount of the dividends paid 35. A company issues 100 shares at $10 each. The company received $1,000 and paid $50 in legal fees, accounting fees, underwriting commissions and mailing, registration and advertising costs. Which is the journal entry that better reflects the transaction: Dr. Cash $1,000 and Cr. Common Shares $1,000 None of the other alternatives are correct Dr. Cash $950 Dr. Organization Costs $50 Cr. Common Shares $1,000 Dr. Cash $1,000 Dr. Organization Costs $50 Cr. Common Shares $1,000 Cr. Accounts Payable $50 Dr. Cash $1,000 Dr. Organization Costs $50 Cr. Common Shares $1,050

36. Twilight Corporation issued 250 shares of $15 par value stock for $17 per share. The journal entry to record this transaction would include a: Credit to Paid in Capital in Excess of Par Value of $500 None of the above Debit to Common Stock of $3,750 Credit to Cash of $4,250 Debit to Cash of $3,750 37. If a dividend is declared and paid by a corporation. Which statement below is false? The Retained Earnings account will by definition still have a credit balance A reduction in Retained Earnings will occur A reduction in Owner's Equity will occur A reduction in Net Assets will occur Liabilities will stay the same 38. Basic rights of common shareholders include which of the following: Preference to receive dividends Direct appointment of Board of Directors members None of the other alternatives are correct Overseeing the hiring and firing of key management One vote per one share owned 39. The Retained Earnings account for a profitable, growing company that has been in business for several decades are valuable to predicting future dividend declarations? None of the other alternatives are correct Yes because Retained Earnings is money available to be distributed to shareholders. Dividends declaration depends on cash available only. Retained Earnings and Dividends declarations are totally unrelated. No because Retained Earnings is not money available to be distributed to shareholders. 40. Donald's Inc. would like to declare a cash dividend. Partial financial information for Donald's Inc. is below. Cash balance………………$50,000 Retained Earnings…………$52,000 Accounts Receivable……...$27,500 Dividends receivable……...$19,200 Shareholder's equity………$109,800 What is the maximum cash dividend that Donald's Inc. can declare and pay given the above financial information? None of the other alternatives are correct $50,000 $52,000 $109,800 $148,200

41. A company declares a 3 for 1 stock split at a time when you are holding 300 shares of the company. Which of the following statements is correct? The market value of the company's stock will stay the same Your voting interest (control) of the company changes The company needs not make a journal entry for this event The company felt the stock price was trading at too low a level as probable justification for the split There are no correct statements above 42. Dividends in arrears means that They were issued with a group of preferred shares They were omitted in past years They are 'already at the rear' implying that they will be considered last when dividends are declared None of the other alternatives are correct They are related with a set of preferred shares 43. A private company is a closely held company. This means that: The founders will always be the owners. The company's capital does not have common shares. Its shares cannot be sold to those that are not current owners None of the other alternatives are correct Its shares are owned by a small number of people and that they are not marketed to the general public or sold on public stock exchanges 44. Company XYZ issued shares in 20X4 at $20 per share. In 20X5, Company XYZ repurchased these same shares at $30 per share. In 20X6, Company XYZ resold the shares at $40 per share. Assume the number of shares included in the above transactions is 1,000. What is the entry that Company XYZ will record when it resells the shares in 20X6 at $40 per share? Dr. Cash...