Chapter 15 - Study Guide PDF

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Study Guide for Chapter 15 – Stockholders’ Equity
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Intermediate Accounting – Part 2 Study Guide for Chapter 15 – Stockholders’ Equity 1. A corporation is incorporated in only one state regardless of the number of states in which it operates. True 2. Common stock is the residual corporate interest that bears the ultimate risks of loss. True 3. Earned capital consists of additional paid-in capital and retained earnings. False 4. True no-par stock should be carried in the accounts at issue price without any additional paid-in capital reported. True 5. Companies should record stock issued for services or noncash property at either the fair value of the stock issued or the fair value of the consideration received, whichever is more clearly determinable. True 6. Treasury stock is a company’s own stock that has been reacquired and retired. False

7.

When a corporation sells treasury stock below its cost, it usually debits the difference between cost and selling price to Paid-in Capital from Treasury Stock. True

8.

Callable preferred stock permits the corporation at its option to redeem the outstanding preferred shares at specified future dates and at stipulated prices. True

9.

The laws of some states require that corporations restrict their legal capital from distribution to stockholders. True

10.

The SEC makes it mandatory for companies to disclose their dividend policy in their annual report.

Page 2 of 7 False 11.

Dividends payable in assets of the corporation other than cash are called property dividends or dividends in kind. True

12.

When a stock dividend is less than 20-25 percent of the common stock outstanding, a company is required to transfer the fair value of the stock issued from retained earnings. True

13.

The residual interest in a corporation belongs to the a. management. b. creditors. c. common stockholders. d. preferred stockholders.

14.

The pre-emptive right of a common stockholder is the right to a. share proportionately in corporate assets upon liquidation. b. share proportionately in any new issues of stock of the same class. c. receive cash dividends before they are distributed to preferred stockholders. d. exclude preferred stockholders from voting rights.

15.

In a corporate form of business organization, legal capital is best defined as a. the amount of capital the state of incorporation allows the company to accumulate over its existence. b. the par value of all capital stock issued. c. the amount of capital the federal government allows a corporation to generate. d. the total capital raised by a corporation within the limits set by the Securities and Exchange Commission.

16.

Total stockholders' equity represents a. a claim to specific assets contributed by the owners. b. the maximum amount that can be borrowed by a company. c. a claim against a portion of the total assets of a company. d. only the amount of earnings that have been retained in the business.

17.

A primary source of stockholders' equity is a. income retained by the corporation. b. appropriated retained earnings. c. contributions by stockholders. d. both income retained by the corporation and contributions by stockholders.

18.

Stockholders' equity is generally classified into two major categories: a. contributed capital and appropriated capital. b. appropriated capital and retained earnings. c. retained earnings and unappropriated capital. d. earned capital and contributed capital.

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19.

When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the a. market value of the services received. b. par value of the shares issued. c. market value of the shares issued. d. Any of these provides an appropriate basis for recording the transaction.

20.

Which of the following represents the total number of shares that a corporation may issue under the terms of its charter? a. Authorized shares b. Issued shares c. Unissued shares d. Outstanding shares

21.

Stock that has a fixed per-share amount printed on each stock certificate is called a. stated value stock. b. fixed value stock. c. uniform value stock. d. par value stock.

22.

Which of the following is not a legal restriction related to profit distributions by a corporation? a. The amount distributed to owners must be in compliance with the state laws governing corporations. b. The amount distributed in any one year can never exceed the net income reported for that year. c. Profit distributions must be formally approved by the board of directors. d. Dividends must be in full agreement with the capital stock contracts as to preferences and participation.

23.

In January 2014, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2014, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares a. decreased total stockholders' equity. b. increased total stockholders' equity. c. did not change total stockholders' equity. d. decreased the number of issued shares.

24.

Treasury shares are shares a. held as an investment by the treasurer of the corporation. b. held as an investment of the corporation. c. issued and outstanding. d. issued but not outstanding.

Page 4 of 7 25.

When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited? a. Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value. b. Paid-in capital in excess of par for the purchase price. c. Treasury stock for the purchase price. d. Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value.

26.

“Gains" on sales of treasury stock (using the cost method) should be credited to a. paid-in capital from treasury stock. b. capital stock. c. retained earnings. d. other income.

27.

How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions? a. As ordinary earnings shown on the income statement. b. As paid-in capital from treasury stock transactions. c. As an increase in the amount shown for common stock. d. As an extraordinary item shown on the income statement.

28.

Which of the following features of preferred stock makes it more like a debt than an equity instrument? a. Participating b. Voting c. Redeemable d. Noncumulative

29.

The cumulative feature of preferred stock a. limits the amount of cumulative dividends to the par value of the preferred stock. b. requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders. c. means that the shareholder can accumulate preferred stock until it is equal to the par value of common stock at which time it can be converted into common stock. d. enables a preferred stockholder to accumulate dividends until they equal the par value of the stock and receive the stock in place of the cash dividends.

30.

According to the FASB, redeemable preferred stock should be a. included with common stock. b. included as a liability. c. excluded from the stockholders’ equity heading. d. included as a contra item in stockholders' equity.

31.

Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as a. an increase in current liabilities. b. an increase in stockholders' equity. c. a footnote. d. an increase in current liabilities for the current portion and long-term liabilities for the longterm portion.

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32.

Cash dividends are paid on the basis of the number of shares a. authorized. b. issued. c. outstanding. d. outstanding less the number of treasury shares.

33.

A feature common to both stock splits and stock dividends is a. a transfer to earned capital of a corporation. b. that there is no effect on total stockholders' equity. c. an increase in total liabilities of a corporation. d. a reduction in the contributed capital of a corporation.

34.

What effect does the issuance of a 2-for-1 stock split have on each of the following? a. b. c. d.

Par Value per Share No effect Increase Decrease Decrease

Retained Earnings No effect No effect No effect Decrease

35.

The rate of return on common stock equity is calculated by dividing a. net income less preferred dividends by average common stockholders’ equity. b. net income by average common stockholders’ equity. c. net income less preferred dividends by ending common stockholders’ equity. d. net income by ending common stockholders’ equity.

36.

Manning Company issued 10,000 shares of its $5 par value common stock having a fair value of $25 per share and 15,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $530,000. How much of the proceeds would be allocated to the common stock? a. $250,000 b. $240,909 c. $289,091 d. $281,563 (10,000  $25) + (15,000  $20) = $550,000 ($250,000 ÷ $550,000)  $530,000 = $240,909.

Page 6 of 7 37.

Norton Company issues 4,000 shares of its $5 par value common stock having a fair value of $25 per share and 6,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $210,000. What amount of the proceeds should be allocated to the preferred stock? a. $171,818 b. $131,250 c. $114,545 d. $95,454 4,000  $25) + (6,000  $20) = $220,000 ($120,000 ÷ $220,000)  $210,000 = $114,545.

38.

Berry Corporation has 50,000 shares of $10 par common stock authorized. The following transactions took place during 2014, the first year of the corporation’s existence: Sold 10,000 shares of common stock for $13.50 per share. Issued 10,000 shares of common stock in exchange for a patent valued at $150,000. At the end of the Berry’s first year, total paid-in capital amounted to a. $60,000. b. $135,000. c. $150,000. d. $285,000. (10,000  $13.50) + $150,000 = $285,000.

39.

Glavine Company issues 6,000 shares of its $5 par value common stock having a fair value of $25 per share and 9,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $297,000. The proceeds allocated to the common stock is a. $118,800 b. $135,000 c. $150,000 d. $162,000

[(6,000  $25) ÷ [(6,000  $25) + (9,000  $20)]]  $297,000 = $135,000. 40.

Wheeler Company issued 5,000 shares of its $5 par value common stock having a fair value of $25 per share and 7,500 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $264,000. The proceeds allocated to the preferred stock is a. $158,400 b. $150,000 c. $144,000 d. $120,000

[(7,500  $20) ÷ [(5,000  $25) + (7,500  $20)]]  $264,000 = $144,000.

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Pember Corporation started business in 2009 by issuing 200,000 shares of $20 par common stock for $36 each. In 2014, 25,000 of these shares were purchased for $52 per share by Pember Corporation and held as treasury stock. On June 15, 2015, these 25,000 shares were exchanged for a piece of property that had an assessed value of $1,010,000. Pember’s stock is actively traded and had a market price of $60 on June 15, 2015. The cost method is used to account for treasury stock. The amount of paid-in capital from treasury stock transactions resulting from the above events would be a. $ 2,000,000 b. $ 600,000. c. $ 190,000. d. $ 200,000.

($60 – $52)  25,000 = $200,000. 42.

On September 1, 2014, Valdez Company reacquired 20,000 shares of its $10 par value common stock for $15 per share. Valdez uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit a. Treasury Stock for $200,000. b. Common Stock for $200,000. c. Common Stock for $200,000 and Paid-in Capital in Excess of Par for $75,000. d. Treasury Stock for $300,000. 20,000  $15 = $300,000.

43.

Gannon Company acquired 10,000 shares of its own common stock at $20 per share on February 5, 2014, and sold 5,000 of these shares at $27 per share on August 9, 2015. The fair value of Gannon's common stock was $24 per share at December 31, 2014, and $25 per share at December 31, 2015. The cost method is used to record treasury stock transactions. What account(s) should Gannon credit in 2015 to record the sale of 5,000 shares? a. Treasury Stock for $135,000. b. Treasury Stock for $100,000 and Paid-in Capital from Treasury Stock for $35,000. c. Treasury Stock for $100,000 and Retained Earnings for $35,000. d. Treasury Stock for $120,000 and Retained Earnings for $15,000. 5,000  $20 = $100,000; 5,000  $7 = $35,000....