ch11

ch11 Student: ___________________________________________________________________________

1.

Outstanding shares of stock are those shares which a corporation has the ability to issue as documented in its charter in the state where incorporated. True

2.

There would be 100,000 shares of common stock outstanding when the number of shares authorized was 150,000, issued shares totaled 120,000, and 20,000 shares were being held in the treasury. True

3.

False

Stockholders' equity decreases when a company purchases treasury stock. True

9.

False

The issue of $1 par value common stock for $10 per share results in a $9 credit to the capital in excess of par value account for each share issued. True

8.

False

The issue of $5 par value common stock for $10 per share results in a $10 credit to the common stock account for each share issued. True

7.

False

Earnings per share increases when a company purchases treasury stock. True

6.

False

Treasury stock is a corporation's own stock that was issued and then repurchased, and is still held by the corporation. True

5.

False

Earnings per share are calculated by dividing net income by the number of outstanding shares of common stock at year-end. True

4.

False

False

Net income increases when treasury stock is sold for an amount in excess of its cost. True

False

10. Total stockholders' equity increases when treasury stock is sold for an amount less than its cost. True

False

11. Net income decreases when treasury stock is sold for an amount less than its cost. True

False

12. Total stockholders' equity of Grasse Company is not affected when a stockholder sells shares of Grasse Company stock to another stockholder. True

False

13. Total assets remain the same when a company uses cash to purchase treasury stock. True

False

14. Common stockholders have voting rights and can declare cash dividends. True

False

15. Shares of stock held as treasury stock do not have voting rights or the right to receive dividends. True

False

16. Most investors that are retired prefer to receive their return on investment in the form of stock price appreciation rather in dividends. True

False

17. The dividend yield ratio is dividends per share divided by the number of shares outstanding. True

False

18. The dividend yield ratio increases when the market price per share increases. True

False

19. The dividend yield ratio increases when a cash dividend is paid. True

False

20. A company's assets and stockholders' equity decrease when a cash dividend is declared by its board of directors. True

False

21. A company's assets and liabilities decrease when they pay a previously declared cash dividend. True

False

22. The declaration of a common stock dividend by a corporation's board of directors creates a liability on the declaration date. True

False

23. The declaration and distribution of a common stock dividend results in a reduction of the issuing corporation's total stockholders' equity. True

False

24. The declaration and distribution of a 2-for-1 stock split results in a reduction of retained earnings. True

False

25. A stock split results in the reduction of the par or stated value per share and a proportionate increase in the number of shares outstanding. True

False

26. Preferred stock often has a preference in the distribution of assets over common stock in the event of dissolution of the corporation. True

False

27. Preferred stockholders don't have voting rights but do have a preference with respect to dividend payments. True

False

28. When a company reissues treasury stock, it creates a cash inflow from an investing activity because treasury stock is an investment asset on the balance sheet. True

False

29. When a company issues common stock in exchange for cash, a cash inflow from a financing activity is reported. True

False

30. When a company pays its previously declared cash dividend, an investing cash outflow is reported. True

False

31. Which of the following statements is false? A. Stockholders have a residual claim on assets in the event of liquidation. B Shares of stock held in the treasury are deducted from the number of issued shares in the determination . of the number of outstanding shares. C. Common stockholders have voting rights at annual stockholder meetings. D. Corporations are governed by their stockholders. 32. RKJ Company has provided the following: • 100,000 shares of $5 par value common stock are authorized; • 70,000 shares have been issued; • 65,000 shares are outstanding. Which of the following statements is correct? A. B. C. D.

RKJ has 35,000 shares of treasury stock. RKJ has 30,000 shares of treasury stock. RKJ can reissue an additional 35,000 shares of common stock. RKJ can issue an additional 30,000 shares of common stock.

33. RKJ Company has provided the following: • 100,000 shares of $5 par value common stock are authorized; • 70,000 shares were issued for $9 per share; • 65,000 shares are outstanding. Which of the following statements is correct based only on the above facts? A. B. C. D.

Common stock is reported at $630,000 on the balance sheet. Additional-paid in capital is reported at $260,000 on the balance sheet. Common stock is reported at $350,000 on the balance sheet. Treasury stock is reported at $45,000 on the balance sheet.

34. Which of the following represents the maximum number of shares of stock issuable to the public? A. B. C. D.

Authorized shares Issued shares Outstanding shares Treasury shares

35. Which of the following statements regarding earnings per share (EPS) is correct? A. B. C. D.

It equals net income divided by the number of authorized common shares. It equals net income divided by the number of outstanding common shares. It equals net income divided by the number of issued common shares. It equals net income divided by the number of treasury shares.

36. Which of the following statements regarding earnings per share (EPS) is false? A. B. C. D.

It increases when treasury stock is acquired. It increases when net income increases. It decreases when additional shares of common stock are issued. It decreases when the number of shares of common stock authorized increases.

37. Which of the following statements regarding earnings per share (EPS) is correct? A. B. C. D.

EPS can't be used to compare different size companies. Investors expect a higher EPS for companies with higher stock prices. It is calculated by dividing net income by the number of common shares issued. It increases when the number of shares of common stock outstanding increases.

38. Which of the following represents the number of shares currently in the hands of investors? A. B. C. D.

Authorized shares Issued shares Outstanding shares Treasury shares

39. Rye Company has provided the following information: • Number of issued common shares, 225,000; • Net income, $500,000; • Number of authorized common shares, 400,000; • Number of treasury shares, 25,000. What is Rye's earnings per share? A. B. C. D.

$2.50 $1.25 $2.22 $1.33

40. Kirova Company has provided the following information: • Number of issued common shares, 900,000; • Net income, $1,000,000; • Number of authorized common shares, 1,000,000; • Number of outstanding common shares, 800,000 • Number of treasury shares, 100,000. What is Kirova's earnings per share? A. B. C. D.

$1.43 $1.25 $1.11 $1.00

41. Which of the following statements about earnings per share is correct? A. B. C. D.

Increased net income would cause earnings per share to decrease. Issuance of more common shares would cause earnings per share to increase. Purchasing treasury shares would cause earnings per share to decrease. It is calculated using the number of common shares of stock outstanding.

42. 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? A. B. C. D.

Common stock is reported at $700,000 on the balance sheet. Additional-paid in capital is reported at $840,000 on the balance sheet. Stockholders' equity decreased $110,000 when the treasury stock was purchased. There are 10,000 shares of treasury stock.

43. Which of the following journal entries doesn't reflect the initial cash sale of shares of common stock? A. B. C. D.

44. Which of the following journal entries is correct when no-par common stock is initially issued for cash? A. B. C. D.

45. 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? A. B. C. D. 46. 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? A. B. C. D.

$0 $600,000 $100,000 $700,000

47. Which of the following statements about treasury stock transactions is correct? A. B. C. D.

The total number of shares issued increases when treasury stock is purchased. The total number of shares authorized changes when treasury stock is purchased. Gains and losses on treasury stock transactions are reported on the income statement. A stockholders' equity account is debited when treasury stock is purchased.

48. 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? A. B. C. D.

0 5,700,000 5,300,000 400,000

49. 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?

A. B. C. D.

Option A Option B Option C Option D

50. 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?

A. B. C. D.

Option A Option B Option C Option D

51. 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?

A. B. C. D.

Option A Option B Option C Option D

52. A company reported the following asset and liability balances at the end of 2009 and 2010:

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? A. B. C. D.

$400,000 $480,000 $350,000 $300,000

53. 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 A. not prepare a journal entry because the event had no effect on the corporation's financial position until 2010. B. decrease retained earnings $1.6 million and increase expenses $1.6 million. C. decrease retained earnings $1.6 million and increase liabilities by $1.6 million. D. decrease cash $1.6 million and decrease retained earnings $1.6 million. 54. The declaration and payment of a cash dividend A. B. C. D.

reduces retained earnings and increases liabilities by the amount of the dividend. reduces retained earnings and increases contributed capital by the same amount. reduces assets and increases liabilities by the amount of the dividend. reduces both assets and retained earnings by the amount of the dividend.

55. Which of the following correctly describes the affect of declaring and distributing a common stock dividend? A. B. C. D.

Total stockholders' equity decreases. Total stockholders' equity remains the same. The number of shares outstanding increases while the par value of each share decreases. The number of shares outstanding decreases while the par value of each share increases.

56. A stock dividend A. results in a transfer of retained earnings to contributed capital. B. increases the number of shares outstanding and involves a pro rata reduction in the par value per share. C. is accounted for in exactly the same manner as a stock split. Dresults in a transfer of retained earnings to contributed capital and also increases the number of shares . outstanding and involves a pro rata reduction in the par value per share.

57. 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? A. B. C. D.

Retained earnings decreased $20,000. Capital in excess of par increased $10,000. Common stock increased $18,000. Retained earnings decreased $18,000.

58. 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? A. B. C. D.

Par value of $100 per share. Market value per share on the issue date. Half of the previous total amount in the common stock account. Retained earnings aren't transferred to the common stock account.

59. Which of the following statements is false? A. B. C. D.

Stock splits reallocate amounts between retained earnings and contributed capital accounts. Both stock splits and stock dividends increase the common shares issued. Both stock splits and stock dividends increase the common shares outstanding. Both stock splits and stock dividends have the impact of reducing the market price of the stock.

60. 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? A. There will be a transfer of $2.4 million from retained earnings to contributed capital. B. Only the shares outstanding will quadruple to 49.86 million and the par value will be reduced to $.25 per share. C The shares authorized, issued, outstanding, and held in treasury will all quadruple while the par value . will be reduced to $.25 per share. D The company will be unable to declare a 4-for-1 split because they do not have enough authorized shares . to issue the needed 49.86 million shares. 61. A company declares a 40% stock dividend when there were 4 million common shares outstanding with a $1 par value. The current market price is $20 per common share. Which of the following will be the effect of the stock dividend? A. Retained earnings will decrease by $1.6 million and contributed capital will increase by $1.6 million. B. Contributed capital will decrease by $1.6 million and retained earnings will increase by $1.6 million. C. Retained earnings will decrease by $32 million and contributed capital will increase by $32 million. D. Contributed capital will decrease by $32 million and retained earnings will increase by $32 million.

62. Davidson Company has 10,000,000 common shares issued and 500,000 shares of treasury stock. The stock's par value is $2 per share and its current market price is $25 per share. Which of the following is correct when a 15% stock dividend is declared and distributed? A. B. C. D.

Retained earnings will decrease $37.5 million. Retained earnings will decrease $35.625 million. Retained earnings will decrease $3 million. Retained earnings will decrease $2.85 million.

63. Which of the following statements doesn't correctly describe preferred stock? A. B. C. D.

Preferred shareholders have a preference with respect to dividend payments. Preferred shareholders have a preference with respect to assets in the event of liquidation. Preferred shareholders have voting rights on a per share basis. Preferred stock typically has a fixed dividend rate.

64. What is the correct entry for the sale of 1,000 shares of $10 par value preferred stock for $50,000 cash?

A. B. C. D.

Option A Option B Option C Option D

65. Which of the following doesn't correctly describe preferred stock? A. B. C. D.

Preferred stock has a higher priority status relative to common stock. Preferred shareholders are guaranteed to receive dividends. Preferred stock usually does not carry voting rights. Preferred stockholders receive dividends in arrears only if the shares are cumulative.

66. Assume the following capital structure: Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009). Common stock, $100 par value, 2,000 shares issued and outstanding. Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paid to the common stockholders assuming the preferred stock is cumulative? A. B. C. D.

$12,000 $50,000 $47,000 $38,000

67. Assume the following capital structure: Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009). Common stock, $100 par value, 2,000 shares issued and outstanding. Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paid to the preferred stockholders assuming the preferred stock is cumulative? A. B. C. D.

$12,000 $3,000 $47,000 $38,000

68. Assume the following capital structure: Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009). Common stock, $100 par value, 2,000 shares issued and outstanding. Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paid to the preferred stockholders assuming the preferred stock is noncumulative? A. B. C. D.

$12,000 $3,000 $47,000 $38,000

69. Assume the following capital structure: Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009). Common stock, $100 par value, 2,000 shares issued and outstanding. Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paid to the common stockholders assuming the preferred stock is noncumulative? A. B. C. D.

$12,000 $3,000 $47,000 $38,000

70. Slickers, Inc. had the following capital structure during 2010: Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009. Common stock, $100 par value, 2,000 shares issued and outstanding. The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the preferred stockholders during 2010 assuming the preferred stock is cumulative? A. B. C. D.

$3,500 $7,000 $10,500 $14,500

71. Slickers, Inc. had the following capital structure during 2010: Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009. Common stock, $100 par value, 2,000 shares issued and outstanding. The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the preferred stockholders during 2010 assuming the preferred stock is noncumulative? A. B. C. D.

$3,500 $7,000 $10,500 $14,500

72. Slickers, Inc. had the following capital structure during 2010: Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009. Common stock, $100 par value, 2,000 shares issued and outstanding. The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the common stockholders during 2010 assuming the preferred stock is noncumulative? A. B. C. D.

$3,500 $7,000 $21,500 $14,500

73. Slickers, Inc. had the following capital structure during 2010: Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009. Common stock, $100 par value, 2,000 shares issued and outstanding. The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the common stockholders during 2010 assuming the preferred stock is cumulative? A. B. C. D.

$3,500 $7,000 $22,500 $14,500

74. Which of the following is a correct statement about cumulative and noncumulative preferred stock? A. They both receive dividends in arrears. BCumulative stock's undeclared dividends accumulate each year until paid, while noncumulative stock's . right to receive dividends is forfeited in any year that dividends are not declared. C. Cumulative preferred stock is guaranteed to receive their dividends. DCumulative preferred stock's right to receive dividends is forfeited in any year that dividends are not . declared. However, noncumulative stock's undeclared dividends accumulate each year until paid.

75. Cornhusker Corporation plans to raise $10 million cash on January 1, 2010, by issuing either bonds payable (8% interest rate) or cumulative preferred stock (8% dividend rate). How would the annual interest amount on the bonds or annual preferred dividend amount (if paid) affect the net income for the year ended December 31, 2010? A. Net income would be reduced by the annual interest on the bonds and by the annual preferred stock dividends. B. Net income would be reduced by the annual interest on the bonds but not by the annual preferred stock dividends. C. Net income would not be reduced by either the annual interest on the bonds or the annual preferred stock dividends. D. Net income would be reduced by the annual preferred dividends but not by the annual interest on the bonds. 76. CBA Company reported total stockholders' equity of $85,000 on its balance sheet dated December 31, 2010. During the year ended December 31, 2011, CBA reported net income of $10,000, declared and paid a cash dividend of $2,000, and issued additional common stock for $20,000. What is total stockholders' equity as of December 31, 2011? A. B. C. D.

$117,000 $113,000 $109,000 $101,000

77. A company reported total stockholders' equity of $170,000 on its balance sheet dated December 31, 2010. During the year ended December 31, 2011, the company reported net income of $20,000, declared and paid a cash dividend of $4,000, declared and distributed a 10% stock dividend with a $5,000 total market value, and issued additional common stock for $40,000. What is total stockholders' equity as of December 31, 2011? A. B. C. D.

$234,000 $226,000 $231,000 $221,000

78. A company reported total stockholders' equity of $340,000 on its balance sheet dated December 31, 2010. During the year ended December 31, 2011, the company reported net income of $40,000, declared and paid a cash dividend of $8,000, declared and distributed a 10% stock dividend with a $10,000 total market value, purchased treasury stock costing $12,000, and issued additional common stock for $60,000. What is total stockholders' equity as of December 31, 2011? A. B. C. D.

$432,000 $410,000 $444,000 $420,000

79. A company reported total stockholders' equity of $540,000 on its balance sheet dated December 31, 2010. During the year ended December 31, 2011, the company reported net income of $60,000, declared and paid a cash dividend of $18,000, declared and distributed a 10% stock dividend with a $15,000 total market value, sold treasury stock costing $12,000 for $15,000, and issued additional common stock for $70,000. What is total stockholders' equity as of December 31, 2011? A. B. C. D.

$650,000 $670,000 $667,000 $655,000

80. Wendell Company provided the following pertaining to its recent year of operation: • Common stock with a $10,000 par value was sold for $50,000 cash. • Cash dividends totaling $20,000 were declared, of which $15,000 were paid. • Net income was $70,000. • A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a $23,000 market value. • Treasury stock costing $9,000 was sold for $7,000. How much did Wendell's total stockholders' equity increase during the recent year of operation? A. B. C. D.

$107,000 $84,000 $80,000 $112,000

81. Wendell Company provided the following pertaining to its recent year of operation: • Common stock with a $10,000 par value was sold for $50,000 cash. • Cash dividends totaling $20,000 were declared, of which $15,000 were paid. • Net income was $70,000. • A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a $23,000 market value. • Treasury stock costing $9,000 was sold for $7,000. How much did Wendell's retained earnings increase during the recent year of operation? A. B. C. D.

$32,000 $45,000 $29,000 $27,000

82. Wendell Company provided the following pertaining to its recent year of operation: • Common stock with a $10,000 par value was sold for $50,000 cash. • Cash dividends totaling $20,000 were declared, of which $15,000 were paid. • Net income was $70,000. • A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a $23,000 market value. • Treasury stock costing $9,000 was sold for $7,000. How much did Wendell's contributed capital increase during the recent year of operation? A. B. C. D.

$15,000 $73,000 $58,000 $75,000

83. Wendell Company provided the following pertaining to its recent year of operation: • Common stock with a $10,000 par value was sold for $50,000 cash. • Cash dividends totaling $20,000 were declared, of which $15,000 were paid. • Net income was $70,000. • A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a $23,000 market value. • Treasury stock costing $9,000 was sold for $7,000. How much did Wendell's capital in excess of par increase during the recent year of operation? A. B. C. D.

$60,000 $58,000 $67,000 $24,000

84. Which of the following statements is not correct? A. B. C. D.

Issuance of common stock creates a financing activities cash inflow. Payment of a common stock cash dividend creates an operating activities cash outflow. Purchase of treasury stock creates a financing activities cash outflow. Issuance of preferred stock creates a financing activities cash inflow.

85. Which of the following statements is not correct? A. Cash flow from financing activities increases when treasury shares are reissued. B. Cash dividends decrease cash flow from financing activities. C. Cash flow from investing activities decreases when treasury shares are purchased. D. Issuance of a seasoned new issuance of stock increases cash flow from financing activities. E. AACSB Tag: Relative Thinking 86. Which of the following transactions doesn't result in an increase in stockholders' equity? A. B. C. D.

Sale of no par common stock for cash. Declaration and distribution of a common stock dividend. Sale of preferred stock for cash at par value. Sale of treasury stock for cash at a price less than its cost.

87. Which of the following statements is false? A. The declaration of a cash dividend creates a liability as of the date of record. B. The date of record is irrelevant with respect to recording of a liability pertaining to a cash dividend. C. The dividend payment date is when the dividend liability is reduced. D. The dividend liability for a cash dividend is created on the declaration date. 88. A company purchased treasury stock for $19,000; the treasury stock was initially issued for $12,000 and had a $5,000 par value. Which of the following statements correctly describes the effects of the treasury stock purchase? A. B. C. D.

Net income increases by $7,000. Net income decreases by $7,000. Stockholders' equity increases $12,000. Stockholders' equity decreases $19,000.

89. A company purchased 1,000 shares of treasury stock for $38,000 cash; the treasury stock was initially issued for $24,000 and had a $9,000 par value. Which of the following statements incorrectly describes the effect of treasury stock purchase? A. B. C. D.

Net income is unchanged. Earnings per share increases. Total assets remain the same. Stockholders' equity decreases.

90. Which of the following statements is correct? A. A 2-for-1 common stock split decreases both earnings per share and total stockholders' equity. B. A 10% common stock dividend decreases both earnings per share and total stockholders' equity. C. A 2-for-1 common stock split increases both the number of common shares outstanding and total stockholders' equity. D.A 30% common stock dividend increases the number of common shares outstanding and does not affect total stockholders' equity. 91. Which of the following statements is correct? A. A treasury stock purchase for less than its original issue cost results in a decrease in total stockholders' equity. B. A treasury stock purchase for less than its original issue cost results in an increase in total stockholders' equity. C. A treasury stock purchase for an amount equal to its original issue cost results in no change to total stockholders' equity. D. A treasury stock purchase for more than its original issue cost results in an increase in total stockholders' equity. 92. Atkins Company had 20,000 shares of $5 par value common stock outstanding prior to a 10% common stock dividend declaration and distribution. The market value of the common stock on the declaration date was $11. Which of the following statements correctly describes the affect of the common stock dividend and declaration? A. B. C. D.

Retained earnings decreased $22,000. Retained earnings decreased $10,000. Total stockholders' equity decreased $22,000. Total stockholders' equity decreased $10,000.

93. Katie Company had 40,000 shares of $2 par value common stock outstanding prior to a 40% common stock dividend declaration and distribution. The market value of the common stock on the declaration date was $10. Which of the following statements incorrectly describes the affect of the common stock dividend and declaration? A. B. C. D.

Retained earnings decreased $32,000. Capital in excess of par remained the same. Contributed capital increased $128,000. Total stockholders' equity remained the same.

94. Which of the following statements is correct? A. The dividend yield and earnings per share both have the same denominator. B. The dividend yield and earnings per share both have the same numerator. C. Dividends per share are used in calculation of both earnings per share and dividend yield. D. Net income is used in the calculation of earnings per share but not in the calculation of dividend yield. 95. Which of the following statements correctly describes either the dividend yield or earnings per share? A. B. C. D.

The dividend yield decreases when net income increases. Earnings per share are per share of both common and preferred stock. The dividend yield increases when the market price per share decreases. Earnings per share decreases when dividends per share decrease.

96. Which of the following statements incorrectly describes earnings per share? A. Earnings per share are per common share. B. An increase in the market price per common share does not result in a decrease in earnings per share. C. An increase in dividends per share results in an increase in earnings per share. D. The reissue of treasury stock decreases earnings per share. 97. Which of the following is not a primary advantage of a general partnership relative to a corporation? A. B. C. D.

The ease of formation. The limited liability for the owners. There isn't income taxation on the business itself. The complete control of the business given to the partners.

98. Which of the following is true about a proprietorship? A. B. C. D.

The capital account is used to record only the investments of the owner. The drawing account records distribution of assets to the proprietor. A proprietorship is a separate legal entity from the owner. A proprietorship is subject to income tax.

99. Which of the following statements is true about a partnership? A. One capital and drawing account is used for each partnership. B. The capital account is used to record each partner's investment and their designated share of the earnings. C. Partnerships are subject to income taxes. D. The drawings account is closed to retained earnings at the end of the period. 100.Which of the following statements is true about partnership accounting? A. A particular partner's capital account is debited when a withdrawal takes place by that partner. B. The process of closing, through the closing entry process, a positive net income results in an increase in overall partner capital. C. The drawings account balances are deducted to arrive at the net income to allocate to the partners. D. The drawings account is closed to retained earnings at the end of the period.

101.Constance Corporation reported a $750,000 balance in its common stock account at the end of 2010. The company held 50,000 shares of treasury stock and had 700,000 shares outstanding. Calculate the par value per share of the company's common stock.

102.The charter of Delta Corporation specified a maximum of 25,000 shares of common stock. At the current date, 5,000 shares remain unissued, and 2,000 of the issued shares have been repurchased and are still held by Delta. Calculate the number of shares issued, authorized, outstanding, and held in the treasury.

103.DRP, Inc. sold and issued 50,000 shares of its own $50 par value preferred stock for $110 per share, and 200,000 shares of its no par common stock for $40 per share. Prepare the required journal entry.

104.Three dates are described below.

105.At the end of 2010, Washington Corporation reported a $40,000 balance in its common stock account (par value $1 per share). The treasury stock account balance was $720 (cost $6 per share). During 2010, the company declared and paid a cash dividend at $1.50 per share. Calculate the total amount of the 2010 cash dividend.

106.Survivor Company was formed on January 1, 2010 by selling and issuing 20,000 shares of common stock at $15 per share. On December 1, 2010, the company declared a cash dividend of $10,000 which will be paid in cash on January 15, 2011. Requirements: A. Prepare the journal entry to record the sale and issuance of the common stock on January 1, 2010 under each of the following independent assumptions: 1. The common stock has a par value of $10 per share. 2. The common stock was no par with a stated value of $5 per share. 3. The common stock was no par and no stated value. B. Prepare the journal entry to record the dividend declaration on December 1, 2010. C. Prepare the journal entry to record payment of the dividend on January 15, 2011.

107.Contrast the economic effects of a cash dividend (declared and paid) with a stock dividend (declared and issued) on the distributing corporation by completing the following chart by placing "X" where appropriate.

108.The following information is available for Bradford Bikes for the years 2011 and 2010:

Requirements: A. Calculate the dividend yield ratio for both 2011 and 2010. B. Interpret the yield ratio in terms of whether it is high or low, whether it indicates a steady dividend policy, and whether Bradford Bikes appears to be growing or stagnant.

109.The following information is available for Italiano Ices for the years 2011 and 2010:

Requirements: A. Calculate the dividend yield for both 2011 and 2010. B. Does the dividend yield appear to be low, moderate or high and what caused the change in the yield from 2010 to 2011?

110.Tractor Corporation was just formed. The following accounts of Tractor Corporation, with code letters, are needed to record the transactions given below. You are to indicate the appropriate journal entry for each transaction by entering the code letters and the correct amounts. The transactions including the example are independent unless otherwise stated.

111.HighRise Company reported the following amounts of contributed capital in the stockholders' equity accounts as of January 1, 2010:

112.On January 1, 2010, the stockholders' equity section of Gibbons Corporation's balance sheet reported the following:

113.On January 1, 2010, the accounts of Mac Corporation showed the following:

114.On December 31, 2010, Brave Corporation reported the following on its balance sheet:

115.During 2010, Sanders Corporation made the following journal entry to record the declaration and payment of a cash dividend:

The total par values of common and preferred stock outstanding were $70,000 and $40,000, respectively. No dividends were declared or paid during 2009. There are 1,000 shares of common treasury stock. Requirements: A. If the preferred stock is noncumulative, calculate the current dividend rate on the preferred stock. B. If the preferred stock is cumulative, calculate the current dividend rate on the preferred stock.

116.Wedge Corporation has the following capital stock outstanding: $1 par value common stock, 250,000 shares. 8% preferred stock, par $100, 5,000 shares, cumulative, with 2 years in arrears. Cash dividends of $150,000 were declared and paid near the end of the current year. Requirements: A. Calculate the dividends received by the preferred stockholders. B. Calculate the dividends received by the common stockholders.

117.Marlin, Inc., declared a cash dividend of $40,000 in 2009 when the following stocks were outstanding:

118.Identify the effects on cash flow from financing activities of the following activities as increasing (+), decreasing (-) or having no effect on financing cash flows:

119.Determine the effect of the following transactions on the financial statement components identified. Code your answers as follows: A. If the transaction results in an increase in the financial statement component. B. If the transaction results in a decrease in the financial statement component. C. If the transaction does not affect the financial statement component. Answer: Transaction 1: Common stock was sold at a price in excess of par value. Net income ______ Total assets ______ Stockholders' equity ______ Transaction 2: Treasury stock was purchased using cash. Net income ______ Total assets ______ Stockholders' equity ______ Transaction 3: Treasury stock was sold for cash at a price less than the treasury stock's cost. Net income ______ Total assets ______ Stockholders' equity ______ Transaction 4: Treasury stock was sold for cash at a price greater than the treasury stock's cost. Net income ______ Total assets ______ Stockholders' equity ______

120.Determine the effect of the following transactions on the financial statement components identified. Code your answers as follows: A. If the transaction results in an increase in the financial statement component. B. If the transaction results in a decrease in the financial statement component. C. If the transaction does not affect the financial statement component. Answer: Transaction 1: A cash dividend was declared. Net income ______ Total assets ______ Total liabilities _______ Stockholders' equity ______ Transaction 2: A previously declared cash dividend was paid. Net income ______ Total assets ______ Total liabilities _______ Stockholders' equity ______ Transaction 3: A 2-for-1 stock split was declared and distributed. Net income ______ Total assets ______ Total liabilities ______ Stockholders' equity ______ Transaction 4: A common stock dividend was declared and distributed. Net income ______ Total assets ______ Total liabilities ______ Stockholders' equity ______

121.Prepare journal entries for each of the following AJ Partnership transactions: 1. A and J each contribute cash into the partnership in exchange for capital. 2. A makes a cash withdrawal from the partnership. 3. Partnership net income is allocated to the partners' capital accounts. 4. A's drawing account is closed.

ch11 Key 1.

Outstanding shares of stock are those shares which a corporation has the ability to issue as documented in its charter in the state where incorporated. FALSE Authorized shares of stock are those shares which a corporation has the ability to issue as documented in its charter in the state where incorporated. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation. Libby - Chapter 11 #1 Topic Area: Understanding The Business

2.

There would be 100,000 shares of common stock outstanding when the number of shares authorized was 150,000, issued shares totaled 120,000, and 20,000 shares were being held in the treasury. TRUE The number of shares outstanding (100,000) equals the number of shares issued (120,000) minus the number of treasury shares (20,000). AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation. Libby - Chapter 11 #2 Topic Area: Understanding The Business

3.

Earnings per share are calculated by dividing net income by the number of outstanding shares of common stock at year-end. FALSE Earnings per share are calculated by dividing net income by the average number of outstanding shares of common stock during the period. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: Easy Learning Objective: 11-02 Analyze the earnings per share ratio. Libby - Chapter 11 #3 Topic Area: Key Ratio Analysis

4.

Treasury stock is a corporation's own stock that was issued and then repurchased, and is still held by the corporation. TRUE Stock bought back and being held by the issuing company is called treasury stock. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation. Libby - Chapter 11 #4 Topic Area: Understanding The Business

5.

Earnings per share increases when a company purchases treasury stock. TRUE The earnings per share denominator is the average number of common shares outstanding. Purchasing treasury stock reduces the number of outstanding shares and therefore increases earnings per share. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Libby - Chapter 11 #5 Topic Area: Key Ratio Analysis

6.

The issue of $5 par value common stock for $10 per share results in a $10 credit to the common stock account for each share issued. FALSE The common stock account is credited for the par value ($5) of the issued shares. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Easy Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #6 Topic Area: Common Stock Transactions

7.

The issue of $1 par value common stock for $10 per share results in a $9 credit to the capital in excess of par value account for each share issued. TRUE The capital in excess of par value account is credited for $9; the excess of the selling price ($10) over the par value ($1) of the issued shares. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Easy Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #7 Topic Area: Common Stock Transactions

8.

Stockholders' equity decreases when a company purchases treasury stock. TRUE Treasury stock is reported on the balance sheet as a contra-equity account. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #8 Topic Area: Common Stock Transactions

9.

Net income increases when treasury stock is sold for an amount in excess of its cost. FALSE Treasury stock transactions do not affect net income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #9 Topic Area: Common Stock Transactions

10.

Total stockholders' equity increases when treasury stock is sold for an amount less than its cost. TRUE Total stockholders' equity increases by the treasury stock selling price. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #10 Topic Area: Common Stock Transactions

11.

Net income decreases when treasury stock is sold for an amount less than its cost. FALSE Treasury stock transactions do not affect net income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #11 Topic Area: Common Stock Transactions

12.

Total stockholders' equity of Grasse Company is not affected when a stockholder sells shares of Grasse Company stock to another stockholder. TRUE A stock transaction between investors doesn't affect the stockholders' equity of Grasse Company. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #12 Topic Area: Common Stock Transactions

13.

Total assets remain the same when a company uses cash to purchase treasury stock. FALSE Total assets decrease by the amount of the cash payment; treasury stock is reported on the balance sheet as a contra-equity account. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #13 Topic Area: Common Stock Transactions

14.

Common stockholders have voting rights and can declare cash dividends. FALSE Common stockholders do have voting rights; the board of directors declares dividends. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #14 Topic Area: Common Stock Transactions

15.

Shares of stock held as treasury stock do not have voting rights or the right to receive dividends. TRUE Treasury stock doesn't have stockholder rights. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #15 Topic Area: Common Stock Transactions

16.

Most investors that are retired prefer to receive their return on investment in the form of stock price appreciation rather in dividends. FALSE Most retired people tend to prefer their return on investment to be in the form of dividends. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #16 Topic Area: Common Stock Transactions

17.

The dividend yield ratio is dividends per share divided by the number of shares outstanding. FALSE The dividend yield ratio is dividends per share divided by the market price per share. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: Easy Learning Objective: 11-05 Analyze the dividend yield ratio. Libby - Chapter 11 #17 Topic Area: Key Ratio Analysis

18.

The dividend yield ratio increases when the market price per share increases. FALSE The dividend yield ratio is dividends per share divided by the market price per share. Therefore, the ratio decreases when the market price per share increases. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: Medium Learning Objective: 11-05 Analyze the dividend yield ratio. Libby - Chapter 11 #18 Topic Area: Key Ratio Analysis

19.

The dividend yield ratio increases when a cash dividend is paid. FALSE The dividend yield ratio is dividends per share divided by the market price per share. The ratio increases when a cash dividend is declared. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: Medium Learning Objective: 11-05 Analyze the dividend yield ratio. Libby - Chapter 11 #19 Topic Area: Key Ratio Analysis

20.

A company's assets and stockholders' equity decrease when a cash dividend is declared by its board of directors. FALSE Liabilities increase and stockholders' equity decreases when a cash dividend is declared. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #20 Topic Area: Common Stock Transactions

21.

A company's assets and liabilities decrease when they pay a previously declared cash dividend. TRUE Assets (cash) decrease and liabilities (dividends payable) decrease when a previously declared cash dividend is paid. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #21 Topic Area: Common Stock Transactions

22.

The declaration of a common stock dividend by a corporation's board of directors creates a liability on the declaration date. FALSE The declaration of a common stock dividend doesn't create a liability. The declaration affects stockholder equity accounts only. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #22 Topic Area: Common Stock Transactions

23.

The declaration and distribution of a common stock dividend results in a reduction of the issuing corporation's total stockholders' equity. FALSE Retained earnings decrease and common stock related accounts increase by equal amounts; therefore, total stockholders' equity doesn't change. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #23 Topic Area: Common Stock Transactions

24.

The declaration and distribution of a 2-for-1 stock split results in a reduction of retained earnings. FALSE Stock splits do not affect retained earnings. Stock splits reduce the par value per share of the stock and increase the number of shares outstanding. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Easy Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #24 Topic Area: Common Stock Transactions

25.

A stock split results in the reduction of the par or stated value per share and a proportionate increase in the number of shares outstanding. TRUE Stock splits reduce the par value per share of the stock and increase the number of shares outstanding. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Easy Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #25 Topic Area: Common Stock Transactions

26.

Preferred stock often has a preference in the distribution of assets over common stock in the event of dissolution of the corporation. TRUE Preferred stockholders have a preference with respect to payment when a company is being dissolved. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Easy Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #26 Topic Area: Preferred Stock

27.

Preferred stockholders don't have voting rights but do have a preference with respect to dividend payments. TRUE Preferred stockholders have a preference with respect to dividend payments, but don't have voting rights. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #27 Topic Area: Preferred Stock

28.

When a company reissues treasury stock, it creates a cash inflow from an investing activity because treasury stock is an investment asset on the balance sheet. FALSE Treasury stock is reported on the balance sheet as a contra-equity account. Reissuing treasury stock creates a cash flow from financing activities. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows. Libby - Chapter 11 #28 Topic Area: Focus On Cash Flows

29.

When a company issues common stock in exchange for cash, a cash inflow from a financing activity is reported. TRUE Issuing common or preferred stock in exchange for cash results in a cash inflow from financing activities. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows. Libby - Chapter 11 #29 Topic Area: Focus On Cash Flows

30.

When a company pays its previously declared cash dividend, an investing cash outflow is reported. FALSE Cash payments of dividends results in a cash outflow from financing activities. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Easy Learning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows. Libby - Chapter 11 #30 Topic Area: Focus On Cash Flows

31.

Which of the following statements is false? A. Stockholders have a residual claim on assets in the event of liquidation. B.Shares of stock held in the treasury are deducted from the number of issued shares in the determination of the number of outstanding shares. C. Common stockholders have voting rights at annual stockholder meetings. D. Corporations are governed by their stockholders. Corporations are governed by their board of directors. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation. Libby - Chapter 11 #31 Topic Area: Understanding The Business

32.

RKJ Company has provided the following: • 100,000 shares of $5 par value common stock are authorized; • 70,000 shares have been issued; • 65,000 shares are outstanding. Which of the following statements is correct? A. B. C. D.

RKJ has 35,000 shares of treasury stock. RKJ has 30,000 shares of treasury stock. RKJ can reissue an additional 35,000 shares of common stock. RKJ can issue an additional 30,000 shares of common stock.

RKJ can issue an additional 30,000 shares of common stock (100,000 shares authorized minus 70,000 shares already issued). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation. Libby - Chapter 11 #32 Topic Area: Understanding The Business

33.

RKJ Company has provided the following: • 100,000 shares of $5 par value common stock are authorized; • 70,000 shares were issued for $9 per share; • 65,000 shares are outstanding. Which of the following statements is correct based only on the above facts? A. B. C. D.

Common stock is reported at $630,000 on the balance sheet. Additional-paid in capital is reported at $260,000 on the balance sheet. Common stock is reported at $350,000 on the balance sheet. Treasury stock is reported at $45,000 on the balance sheet.

Common stock ($350,000) = Issued shares (70,000) × Par value ($5) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #33 Topic Area: Common Stock Transactions

34.

Which of the following represents the maximum number of shares of stock issuable to the public? A. B. C. D.

Authorized shares Issued shares Outstanding shares Treasury shares

The maximum number of shares that can be issued equals the number of authorized shares. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation. Libby - Chapter 11 #34 Topic Area: Understanding The Business

35.

Which of the following statements regarding earnings per share (EPS) is correct? A. B. C. D.

It equals net income divided by the number of authorized common shares. It equals net income divided by the number of outstanding common shares. It equals net income divided by the number of issued common shares. It equals net income divided by the number of treasury shares.

EPS is calculated by dividing net income by the number of outstanding shares of common stock. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Remember Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Libby - Chapter 11 #35 Topic Area: Understanding The Business

36.

Which of the following statements regarding earnings per share (EPS) is false? A. B. C. D.

It increases when treasury stock is acquired. It increases when net income increases. It decreases when additional shares of common stock are issued. It decreases when the number of shares of common stock authorized increases.

The EPS denominator is the number of outstanding shares, not the number of authorized shares. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Libby - Chapter 11 #36 Topic Area: Understanding The Business

37.

Which of the following statements regarding earnings per share (EPS) is correct? A. B. C. D.

EPS can't be used to compare different size companies. Investors expect a higher EPS for companies with higher stock prices. It is calculated by dividing net income by the number of common shares issued. It increases when the number of shares of common stock outstanding increases.

Generally speaking, a higher EPS is expected when the market price of a stock is relatively higher. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Libby - Chapter 11 #37 Topic Area: Understanding The Business

38.

Which of the following represents the number of shares currently in the hands of investors? A. B. C. D.

Authorized shares Issued shares Outstanding shares Treasury shares

The outstanding shares of stock represent stock currently held by investors. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure of a corporation. Libby - Chapter 11 #38 Topic Area: Understanding The Business

39.

Rye Company has provided the following information: • Number of issued common shares, 225,000; • Net income, $500,000; • Number of authorized common shares, 400,000; • Number of treasury shares, 25,000. What is Rye's earnings per share? A. B. C. D.

$2.50 $1.25 $2.22 $1.33

Earnings per share ($2.50) = Net income ($500,000) ÷ Outstanding shares (225,000 - 25,000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Libby - Chapter 11 #39 Topic Area: Understanding The Business

40.

Kirova Company has provided the following information: • Number of issued common shares, 900,000; • Net income, $1,000,000; • Number of authorized common shares, 1,000,000; • Number of outstanding common shares, 800,000 • Number of treasury shares, 100,000. What is Kirova's earnings per share? A. B. C. D.

$1.43 $1.25 $1.11 $1.00

Earnings per share ($1.25) = Net income ($1,000,000) ÷ Outstanding shares (800,000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Libby - Chapter 11 #40 Topic Area: Understanding The Business

41.

Which of the following statements about earnings per share is correct? A. B. C. D.

Increased net income would cause earnings per share to decrease. Issuance of more common shares would cause earnings per share to increase. Purchasing treasury shares would cause earnings per share to decrease. It is calculated using the number of common shares of stock outstanding.

The earnings per share denominator is the number of common shares outstanding. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Libby - Chapter 11 #41 Topic Area: Understanding The Business

42.

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? A. B. C. D.

Common stock is reported at $700,000 on the balance sheet. Additional-paid in capital is reported at $840,000 on the balance sheet. Stockholders' equity decreased $110,000 when the treasury stock was purchased. There are 10,000 shares of treasury stock.

The amount paid for the treasury stock is not known. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #42 Topic Area: Common Stock Transactions

43.

Which of the following journal entries doesn't reflect the initial cash sale of shares of common stock? A. B. C. D.

Gains and losses on the issue of stock are not recognized. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #43 Topic Area: Common Stock Transactions

44.

Which of the following journal entries is correct when no-par common stock is initially issued for cash? A. B. C. D.

Common stock is credited for the cash selling price when the stock doesn't have a par value (no-par). AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #44 Topic Area: Common Stock Transactions

45.

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? A. B. C. D.

Common stock is credited for stated value and capital in excess of par is credited for the excess of the selling price above stated value. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #45 Topic Area: Common Stock Transactions

46.

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? A. B. C. D.

$0 $600,000 $100,000 $700,000

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). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #46 Topic Area: Common Stock Transactions

47.

Which of the following statements about treasury stock transactions is correct? A. B. C. D.

The total number of shares issued increases when treasury stock is purchased. The total number of shares authorized changes when treasury stock is purchased. Gains and losses on treasury stock transactions are reported on the income statement. A stockholders' equity account is debited when treasury stock is purchased.

Treasury stock is a contra-equity account with a debit balance. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #47 Topic Area: Common Stock Transactions

48.

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? A. B. C. D.

0 5,700,000 5,300,000 400,000

Outstanding shares (4,300,000) = Issued shares (4,700,000) - Treasury shares (400,000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #48 Topic Area: Common Stock Transactions

49.

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?

A. B. C. D.

Option A Option B Option C Option D

Treasury stock is a contra-equity account, which therefore reduces stockholders' equity. Purchasing treasury stock reduces the number of shares outstanding, which increases earnings per share given that the number of outstanding shares is the earnings per share denominator. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #49 Topic Area: Common Stock Transactions

50.

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?

A. B. C. D.

Option A Option B Option C Option D

Treasury stock is credited for its original cost ($47,000) and capital in excess of par value is credited for $3,000, the difference between the selling price ($50,000) and the original cost ($47,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #50 Topic Area: Common Stock Transactions

51.

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?

A. B. C. D.

Option A Option B Option C Option D

Treasury stock is credited for its original cost ($44,000) and capital in excess of par value is debited for $4,000, the difference between the selling price ($40,000) and the original cost ($44,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #51 Topic Area: Common Stock Transactions

52.

A company reported the following asset and liability balances at the end of 2009 and 2010:

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? A. B. C. D.

$400,000 $480,000 $350,000 $300,000

(1) 2009 stockholders' equity ($3,600,000) = Assets ($6,800,000) - Liabilities ($3,200,000). (2) 2010 stockholders' equity ($4,000,000) = Assets ($7,600,000) - Liabilities ($3,600,000). (3) The change in stockholders' equity during 2010 ($400,000) = 2010 equity ($4,000,000) - 2009 equity ($3,600,000). (4) The change in stockholders' equity during 2010 ($400,000) = The change in contributed capital ($100,000) + The change in retained earnings ($300,000) (5) The change in retained earnings ($300,000) = Net income ($350,000) - Dividends ($50,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Hard Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #52 Topic Area: Common Stock Transactions

53.

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 A. not prepare a journal entry because the event had no effect on the corporation's financial position until 2010. B. decrease retained earnings $1.6 million and increase expenses $1.6 million. C. decrease retained earnings $1.6 million and increase liabilities by $1.6 million. D. decrease cash $1.6 million and decrease retained earnings $1.6 million. Retained earnings is debited (decreased) and dividends payable, a liability, is credited (increased) for $1.6 million (2,000,000 shares × $.80). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #53 Topic Area: Common Stock Transactions

54.

The declaration and payment of a cash dividend A. B. C. D.

reduces retained earnings and increases liabilities by the amount of the dividend. reduces retained earnings and increases contributed capital by the same amount. reduces assets and increases liabilities by the amount of the dividend. reduces both assets and retained earnings by the amount of the dividend.

Dividends are distributions of retained earnings and therefore decrease retained earnings. The cash payment reduces assets. AACSB: Understand AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #54 Topic Area: Common Stock Transactions

55.

Which of the following correctly describes the affect of declaring and distributing a common stock dividend? A. B. C. D.

Total stockholders' equity decreases. Total stockholders' equity remains the same. The number of shares outstanding increases while the par value of each share decreases. The number of shares outstanding decreases while the par value of each share increases.

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. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #55 Topic Area: Financial Analysis

56.

A stock dividend A. results in a transfer of retained earnings to contributed capital. B. increases the number of shares outstanding and involves a pro rata reduction in the par value per share. C. is accounted for in exactly the same manner as a stock split. D results in a transfer of retained earnings to contributed capital and also increases the number of shares . outstanding and involves a pro rata reduction in the par value per share. 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. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #56 Topic Area: Financial Analysis

57.

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? A. B. C. D.

Retained earnings decreased $20,000. Capital in excess of par increased $10,000. Common stock increased $18,000. Retained earnings decreased $18,000.

The retained earnings decrease ($18,000) equals the number of shares issued (20,000 × 10%) multiplied by the market price per share ($9) on the declaration date. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Apply Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #57 Topic Area: Financial Analysis

58.

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? A. B. C. D.

Par value of $100 per share. Market value per share on the issue date. Half of the previous total amount in the common stock account. Retained earnings aren't transferred to the common stock account.

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. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #58 Topic Area: Financial Analysis

59.

Which of the following statements is false? A. B. C. D.

Stock splits reallocate amounts between retained earnings and contributed capital accounts. Both stock splits and stock dividends increase the common shares issued. Both stock splits and stock dividends increase the common shares outstanding. Both stock splits and stock dividends have the impact of reducing the market price of the stock.

Retained earnings is unaffected by stock splits. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #59 Topic Area: Financial Analysis

60.

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? A. There will be a transfer of $2.4 million from retained earnings to contributed capital. B. Only the shares outstanding will quadruple to 49.86 million and the par value will be reduced to $.25 per share. C The shares authorized, issued, outstanding, and held in treasury will all quadruple while the par value . will be reduced to $.25 per share. D The company will be unable to declare a 4-for-1 split because they do not have enough authorized . shares to issue the needed 49.86 million shares. Four shares of $.25 par value common stock will be issued for every share of $1 par value common stock. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #60 Topic Area: Financial Analysis

61.

A company declares a 40% stock dividend when there were 4 million common shares outstanding with a $1 par value. The current market price is $20 per common share. Which of the following will be the effect of the stock dividend? A. B. C. D.

Retained earnings will decrease by $1.6 million and contributed capital will increase by $1.6 million. Contributed capital will decrease by $1.6 million and retained earnings will increase by $1.6 million. Retained earnings will decrease by $32 million and contributed capital will increase by $32 million. Contributed capital will decrease by $32 million and retained earnings will increase by $32 million.

For a large stock dividend, the retained earnings decrease ($1.6 million) and contributed capital increase ($1.6 million) equals the number of shares issued (4 million × 40%) multiplied by the par value per share ($1) on the declaration date. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #61 Topic Area: Financial Analysis

62.

Davidson Company has 10,000,000 common shares issued and 500,000 shares of treasury stock. The stock's par value is $2 per share and its current market price is $25 per share. Which of the following is correct when a 15% stock dividend is declared and distributed? A. B. C. D.

Retained earnings will decrease $37.5 million. Retained earnings will decrease $35.625 million. Retained earnings will decrease $3 million. Retained earnings will decrease $2.85 million.

The retained earnings decrease ($35.625 million) equals the number of shares issued {(10,000,000 500,000) × 15%} multiplied by the market price per share ($25). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #62 Topic Area: Financial Analysis

63.

Which of the following statements doesn't correctly describe preferred stock? A. B. C. D.

Preferred shareholders have a preference with respect to dividend payments. Preferred shareholders have a preference with respect to assets in the event of liquidation. Preferred shareholders have voting rights on a per share basis. Preferred stock typically has a fixed dividend rate.

Preferred stock doesn't provide voting rights. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Understand Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #63 Topic Area: Financial Analysis

64.

What is the correct entry for the sale of 1,000 shares of $10 par value preferred stock for $50,000 cash?

A. B. C. D.

Option A Option B Option C Option D

The preferred stock credit is for par value (1,000 × $10) and the capital in excess of par credit is for the excess of the selling price over par value {($50 - $10) × 1,000}. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #64 Topic Area: Financial Analysis

65.

Which of the following doesn't correctly describe preferred stock? A. B. C. D.

Preferred stock has a higher priority status relative to common stock. Preferred shareholders are guaranteed to receive dividends. Preferred stock usually does not carry voting rights. Preferred stockholders receive dividends in arrears only if the shares are cumulative.

Preferred shareholders only are entitled to dividends when they are declared. There is no guarantee they will receive dividends. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #65 Topic Area: Financial Analysis

66.

Assume the following capital structure: Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009). Common stock, $100 par value, 2,000 shares issued and outstanding. Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paid to the common stockholders assuming the preferred stock is cumulative? A. B. C. D.

$12,000 $50,000 $47,000 $38,000

The preferred stock annual dividend ($3,000) = Preferred stock par value (1,000 × $50) multiplied times 6%. The 2010 dividend payment to the preferred stockholders ($12,000) equals the annual dividend ($3,000) multiplied by four years (2007 - 2010). The 2010 dividend payment to the common stockholders ($38,000) equals the 2010 dividend declaration ($50,000) minus the dividend payment to the preferred stockholders ($12,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #66 Topic Area: Financial Analysis

67.

Assume the following capital structure: Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009). Common stock, $100 par value, 2,000 shares issued and outstanding. Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paid to the preferred stockholders assuming the preferred stock is cumulative? A. B. C. D.

$12,000 $3,000 $47,000 $38,000

The preferred stock annual dividend ($3,000) = Preferred stock par value (1,000 × $50) multiplied times 6%. The 2010 dividend payment to the preferred stockholders ($12,000) equals the annual dividend ($3,000) multiplied by four years (2007 - 2010). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #67 Topic Area: Financial Analysis

68.

Assume the following capital structure: Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009). Common stock, $100 par value, 2,000 shares issued and outstanding. Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paid to the preferred stockholders assuming the preferred stock is noncumulative? A. B. C. D.

$12,000 $3,000 $47,000 $38,000

The preferred stock annual dividend ($3,000) = Preferred stock par value (1,000 × $50) multiplied times 6%. The preferred stockholders do not receive the dividends in arrears because the preferred stock is noncumulative. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #68 Topic Area: Financial Analysis

69.

Assume the following capital structure: Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for three prior years (2007 - 2009). Common stock, $100 par value, 2,000 shares issued and outstanding. Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will be paid to the common stockholders assuming the preferred stock is noncumulative? A. B. C. D.

$12,000 $3,000 $47,000 $38,000

The preferred stock annual dividend ($3,000) = Preferred stock par value (1,000 × $50) multiplied times 6%. The preferred stockholders do not receive the dividends in arrears because the preferred stock is noncumulative. The 2010 dividend payment to the common stockholders ($47,000) equals the 2010 dividend declaration ($50,000) minus the dividend payment to the preferred stockholders ($3,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #69 Topic Area: Financial Analysis

70.

Slickers, Inc. had the following capital structure during 2010: Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009. Common stock, $100 par value, 2,000 shares issued and outstanding. The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the preferred stockholders during 2010 assuming the preferred stock is cumulative? A. B. C. D.

$3,500 $7,000 $10,500 $14,500

The preferred stock annual dividend ($3,500) = Preferred stock par value (1,000 × $50) multiplied times 7%. The 2010 dividend payment to the preferred stockholders ($10,500) equals the annual dividend ($3,500) multiplied by three years (2008 - 2010). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #70 Topic Area: Financial Analysis

71.

Slickers, Inc. had the following capital structure during 2010: Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009. Common stock, $100 par value, 2,000 shares issued and outstanding. The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the preferred stockholders during 2010 assuming the preferred stock is noncumulative? A. B. C. D.

$3,500 $7,000 $10,500 $14,500

The preferred stock annual dividend ($3,500) = Preferred stock par value (1,000 × $50) multiplied times 7%. The preferred stockholders do not receive the dividends in arrears because the preferred stock is noncumulative. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #71 Topic Area: Financial Analysis

72.

Slickers, Inc. had the following capital structure during 2010: Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009. Common stock, $100 par value, 2,000 shares issued and outstanding. The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the common stockholders during 2010 assuming the preferred stock is noncumulative? A. B. C. D.

$3,500 $7,000 $21,500 $14,500

The preferred stock annual dividend ($3,500) = Preferred stock par value (1,000 × $50) multiplied times 7%. The preferred stockholders do not receive the dividends in arrears because the preferred stock is noncumulative. The 2010 dividend payment to the common stockholders ($21,500) equals the 2010 dividend declaration ($25,000) minus the dividend payment to the preferred stockholders ($3,500). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #72 Topic Area: Financial Analysis

73.

Slickers, Inc. had the following capital structure during 2010: Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009. Common stock, $100 par value, 2,000 shares issued and outstanding. The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the common stockholders during 2010 assuming the preferred stock is cumulative? A. B. C. D.

$3,500 $7,000 $22,500 $14,500

The preferred stock annual dividend ($3,500) = Preferred stock par value (1,000 × $50) multiplied times 7%. The 2010 dividend payment to the preferred stockholders ($10,500) equals the annual dividend ($3,500) multiplied by three years (2008 - 2010). The 2010 dividend payment to the common stockholders ($14,500) equals the 2010 dividend declaration ($25,000) minus the dividend payment to the preferred stockholders ($10,500). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #73 Topic Area: Financial Analysis

74.

Which of the following is a correct statement about cumulative and noncumulative preferred stock? A. They both receive dividends in arrears. B Cumulative stock's undeclared dividends accumulate each year until paid, while noncumulative . stock's right to receive dividends is forfeited in any year that dividends are not declared. C. Cumulative preferred stock is guaranteed to receive their dividends. DCumulative preferred stock's right to receive dividends is forfeited in any year that dividends are not . declared. However, noncumulative stock's undeclared dividends accumulate each year until paid. Cumulative preferred stockholders have the right to receive dividends in arrears when dividends are subsequently declared. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Understand Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #74 Topic Area: Financial Analysis

75.

Cornhusker Corporation plans to raise $10 million cash on January 1, 2010, by issuing either bonds payable (8% interest rate) or cumulative preferred stock (8% dividend rate). How would the annual interest amount on the bonds or annual preferred dividend amount (if paid) affect the net income for the year ended December 31, 2010? A. Net income would be reduced by the annual interest on the bonds and by the annual preferred stock dividends. B. Net income would be reduced by the annual interest on the bonds but not by the annual preferred stock dividends. C. Net income would not be reduced by either the annual interest on the bonds or the annual preferred stock dividends. D. Net income would be reduced by the annual preferred dividends but not by the annual interest on the bonds. Annual interest on bonds is reported as interest expense on the income statement and would reduce net income. Preferred stock dividends are not reported on the income statement. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #75 Topic Area: Financial Analysis

76.

CBA Company reported total stockholders' equity of $85,000 on its balance sheet dated December 31, 2010. During the year ended December 31, 2011, CBA reported net income of $10,000, declared and paid a cash dividend of $2,000, and issued additional common stock for $20,000. What is total stockholders' equity as of December 31, 2011? A. B. C. D.

$117,000 $113,000 $109,000 $101,000

December 31, 2011 stockholders' equity ($113,000) = December 31, 2010 stockholders' equity ($85,000) + 2011 net income ($10,000) - 2011 dividend declarations ($2,000) + 2011 common stock issued ($20,000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #76 Topic Area: Common Stock Transactions

77.

A company reported total stockholders' equity of $170,000 on its balance sheet dated December 31, 2010. During the year ended December 31, 2011, the company reported net income of $20,000, declared and paid a cash dividend of $4,000, declared and distributed a 10% stock dividend with a $5,000 total market value, and issued additional common stock for $40,000. What is total stockholders' equity as of December 31, 2011? A. B. C. D.

$234,000 $226,000 $231,000 $221,000

December 31, 2011 stockholders' equity ($226,000) = December 31, 2010 stockholders' equity ($170,000) + 2011 net income ($20,000) - 2011 cash dividend declarations ($4,000) + 2011 common stock issued ($40,000). Stock dividends do not affect total stockholders' equity. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #77 Topic Area: Common Stock Transactions

78.

A company reported total stockholders' equity of $340,000 on its balance sheet dated December 31, 2010. During the year ended December 31, 2011, the company reported net income of $40,000, declared and paid a cash dividend of $8,000, declared and distributed a 10% stock dividend with a $10,000 total market value, purchased treasury stock costing $12,000, and issued additional common stock for $60,000. What is total stockholders' equity as of December 31, 2011? A. B. C. D.

$432,000 $410,000 $444,000 $420,000

December 31, 2011 stockholders' equity ($420,000) = December 31, 2010 stockholders' equity ($340,000) + 2011 net income ($40,000) - 2011 cash dividend declarations ($8,000) - treasury stock purchase ($12,000) + 2011 common stock issue ($60,000). Stock dividends do not affect total stockholders' equity. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #78 Topic Area: Common Stock Transactions

79.

A company reported total stockholders' equity of $540,000 on its balance sheet dated December 31, 2010. During the year ended December 31, 2011, the company reported net income of $60,000, declared and paid a cash dividend of $18,000, declared and distributed a 10% stock dividend with a $15,000 total market value, sold treasury stock costing $12,000 for $15,000, and issued additional common stock for $70,000. What is total stockholders' equity as of December 31, 2011? A. B. C. D.

$650,000 $670,000 $667,000 $655,000

December 31, 2011 stockholders' equity ($667,000) = December 31, 2010 stockholders' equity ($540,000) + 2011 net income ($60,000) - 2011 cash dividend declarations ($18,000) + treasury stock sale ($15,000) + 2011 common stock issue ($70,000). Stock dividends do not affect total stockholders' equity. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #79 Topic Area: Common Stock Transactions

80.

Wendell Company provided the following pertaining to its recent year of operation: • Common stock with a $10,000 par value was sold for $50,000 cash. • Cash dividends totaling $20,000 were declared, of which $15,000 were paid. • Net income was $70,000. • A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a $23,000 market value. • Treasury stock costing $9,000 was sold for $7,000. How much did Wendell's total stockholders' equity increase during the recent year of operation? A. B. C. D.

$107,000 $84,000 $80,000 $112,000

Stockholders' equity increase ($107,000) = Common stock issue ($50,000) - Cash dividends declared ($20,000) + Net income ($70,000) + Treasury stock sale ($7,000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Hard Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #80 Topic Area: Common Stock Transactions

81.

Wendell Company provided the following pertaining to its recent year of operation: • Common stock with a $10,000 par value was sold for $50,000 cash. • Cash dividends totaling $20,000 were declared, of which $15,000 were paid. • Net income was $70,000. • A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a $23,000 market value. • Treasury stock costing $9,000 was sold for $7,000. How much did Wendell's retained earnings increase during the recent year of operation? A. B. C. D.

$32,000 $45,000 $29,000 $27,000

Retained earnings increase ($27,000) = Net income ($70,000) - Cash dividends declared ($20,000) Market value of stock dividend ($23,000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Hard Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #81 Topic Area: Common Stock Transactions

82.

Wendell Company provided the following pertaining to its recent year of operation: • Common stock with a $10,000 par value was sold for $50,000 cash. • Cash dividends totaling $20,000 were declared, of which $15,000 were paid. • Net income was $70,000. • A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a $23,000 market value. • Treasury stock costing $9,000 was sold for $7,000. How much did Wendell's contributed capital increase during the recent year of operation? A. B. C. D.

$15,000 $73,000 $58,000 $75,000

Contributed capital increase ($73,000) = Common stock cash issue ($50,000) + Common stock dividend ($23,000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Hard Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #82 Topic Area: Common Stock Transactions

83.

Wendell Company provided the following pertaining to its recent year of operation: • Common stock with a $10,000 par value was sold for $50,000 cash. • Cash dividends totaling $20,000 were declared, of which $15,000 were paid. • Net income was $70,000. • A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value and a $23,000 market value. • Treasury stock costing $9,000 was sold for $7,000. How much did Wendell's capital in excess of par increase during the recent year of operation? A. B. C. D.

$60,000 $58,000 $67,000 $24,000

Capital in excess of par increase ($60,000) = Common stock cash issue ($50,000 - $10,000) + Common stock dividend ($23,000 - $5,000) + Treasury stock sale ($9,000 - $7,000) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Hard Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #83 Topic Area: Common Stock Transactions

84.

Which of the following statements is not correct? A. B. C. D.

Issuance of common stock creates a financing activities cash inflow. Payment of a common stock cash dividend creates an operating activities cash outflow. Purchase of treasury stock creates a financing activities cash outflow. Issuance of preferred stock creates a financing activities cash inflow.

Cash dividends are financing activities cash outflows. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows. Libby - Chapter 11 #84 Topic Area: Focus On Cash Flows

85.

Which of the following statements is not correct? A. B. C. D. E.

Cash flow from financing activities increases when treasury shares are reissued. Cash dividends decrease cash flow from financing activities. Cash flow from investing activities decreases when treasury shares are purchased. Issuance of a seasoned new issuance of stock increases cash flow from financing activities. AACSB Tag: Relative Thinking

Treasury stock transactions are financing activities cash flows. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows. Libby - Chapter 11 #85 Topic Area: Focus On Cash Flows

86.

Which of the following transactions doesn't result in an increase in stockholders' equity? A. B. C. D.

Sale of no par common stock for cash. Declaration and distribution of a common stock dividend. Sale of preferred stock for cash at par value. Sale of treasury stock for cash at a price less than its cost.

The declaration and distribution of a common stock dividend decreases retained earnings and increases contributed capital by equal amounts. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #86 Topic Area: Common Stock Transactions

87.

Which of the following statements is false? A. B. C. D.

The declaration of a cash dividend creates a liability as of the date of record. The date of record is irrelevant with respect to recording of a liability pertaining to a cash dividend. The dividend payment date is when the dividend liability is reduced. The dividend liability for a cash dividend is created on the declaration date.

The declaration date is when the liability is created. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #87 Topic Area: Common Stock Transactions

88.

A company purchased treasury stock for $19,000; the treasury stock was initially issued for $12,000 and had a $5,000 par value. Which of the following statements correctly describes the effects of the treasury stock purchase? A. B. C. D.

Net income increases by $7,000. Net income decreases by $7,000. Stockholders' equity increases $12,000. Stockholders' equity decreases $19,000.

Stockholders' equity is reduced by the $19,000 cost of the treasury stock. Treasury stock is reported on the balance sheet as a contra-equity account. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #88 Topic Area: Common Stock Transactions

89.

A company purchased 1,000 shares of treasury stock for $38,000 cash; the treasury stock was initially issued for $24,000 and had a $9,000 par value. Which of the following statements incorrectly describes the effect of treasury stock purchase? A. B. C. D.

Net income is unchanged. Earnings per share increases. Total assets remain the same. Stockholders' equity decreases.

Treasury stock is reported on the balance sheet as a contra-equity account. Assets decrease because of the use of cash to acquire the treasury stock. AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #89 Topic Area: Common Stock Transactions

90.

Which of the following statements is correct? A. A 2-for-1 common stock split decreases both earnings per share and total stockholders' equity. B. A 10% common stock dividend decreases both earnings per share and total stockholders' equity. C. A 2-for-1 common stock split increases both the number of common shares outstanding and total stockholders' equity. D. A 30% common stock dividend increases the number of common shares outstanding and does not affect total stockholders' equity. Stock dividends increase the number of shares outstanding and don't affect total stockholders' equity because the retained earnings reduction is transferred to contributed capital. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #90 Topic Area: Financial Analysis

91.

Which of the following statements is correct? A. A treasury stock purchase for less than its original issue cost results in a decrease in total stockholders' equity. B. A treasury stock purchase for less than its original issue cost results in an increase in total stockholders' equity. C. A treasury stock purchase for an amount equal to its original issue cost results in no change to total stockholders' equity. D. A treasury stock purchase for more than its original issue cost results in an increase in total stockholders' equity. All treasury stock purchases result in a decrease in total stockholders' equity. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #91 Topic Area: Common Stock Transactions

92.

Atkins Company had 20,000 shares of $5 par value common stock outstanding prior to a 10% common stock dividend declaration and distribution. The market value of the common stock on the declaration date was $11. Which of the following statements correctly describes the affect of the common stock dividend and declaration? A. B. C. D.

Retained earnings decreased $22,000. Retained earnings decreased $10,000. Total stockholders' equity decreased $22,000. Total stockholders' equity decreased $10,000.

The decrease in retained earnings ($22,000) equals the market value of the common shares issued (20,000 × 10%) × $11, the increase in retained earnings. So there is no effect on stockholders' equity. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #92 Topic Area: Financial Analysis

93.

Katie Company had 40,000 shares of $2 par value common stock outstanding prior to a 40% common stock dividend declaration and distribution. The market value of the common stock on the declaration date was $10. Which of the following statements incorrectly describes the affect of the common stock dividend and declaration? A. B. C. D.

Retained earnings decreased $32,000. Capital in excess of par remained the same. Contributed capital increased $128,000. Total stockholders' equity remained the same.

Large stock dividends are recorded at par value. Therefore, contributed capital would increase by $32,000 (40,000 × .40 × $2). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #93 Topic Area: Financial Analysis

94.

Which of the following statements is correct? A. The dividend yield and earnings per share both have the same denominator. B. The dividend yield and earnings per share both have the same numerator. C. Dividends per share are used in calculation of both earnings per share and dividend yield. D. Net income is used in the calculation of earnings per share but not in the calculation of dividend yield. Earnings per share equal net income divided by the average number of common shares outstanding. Dividend yield equals dividends per share divided by market price per share. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Learning Objective: 11-05 Analyze the dividend yield ratio. Libby - Chapter 11 #94 Topic Area: Key Ratio Analysis

95.

Which of the following statements correctly describes either the dividend yield or earnings per share? A. B. C. D.

The dividend yield decreases when net income increases. Earnings per share are per share of both common and preferred stock. The dividend yield increases when the market price per share decreases. Earnings per share decreases when dividends per share decrease.

Dividend yield equals dividends per share divided by market price per share. Therefore, the dividend yield increases when the market price per share decreases. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Learning Objective: 11-05 Analyze the dividend yield ratio. Libby - Chapter 11 #95 Topic Area: Key Ratio Analysis

96.

Which of the following statements incorrectly describes earnings per share? A. B. C. D.

Earnings per share are per common share. An increase in the market price per common share does not result in a decrease in earnings per share. An increase in dividends per share results in an increase in earnings per share. The reissue of treasury stock decreases earnings per share.

Earnings per share are calculated by dividing net income by the average number of common shares outstanding. Therefore, dividends per share do not affect earnings per share. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-02 Analyze the earnings per share ratio. Learning Objective: 11-05 Analyze the dividend yield ratio. Libby - Chapter 11 #96 Topic Area: Key Ratio Analysis

97.

Which of the following is not a primary advantage of a general partnership relative to a corporation? A. B. C. D.

The ease of formation. The limited liability for the owners. There isn't income taxation on the business itself. The complete control of the business given to the partners.

Limited liability is a corporation characteristic, not a characteristic of a partnership. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Understand Difficulty: Medium Learning Objective: Chapter Supplement A Libby - Chapter 11 #97 Topic Area: Accounting For Sole Proprietorships And Partnerships

98.

Which of the following is true about a proprietorship? A. B. C. D.

The capital account is used to record only the investments of the owner. The drawing account records distribution of assets to the proprietor. A proprietorship is a separate legal entity from the owner. A proprietorship is subject to income tax.

The drawing account is used to record proprietor asset withdrawals. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Understand Difficulty: Medium Learning Objective: Chapter Supplement A Libby - Chapter 11 #98 Topic Area: Accounting For Sole Proprietorships And Partnerships

99.

Which of the following statements is true about a partnership? A. One capital and drawing account is used for each partnership. B. The capital account is used to record each partner's investment and their designated share of the earnings. C. Partnerships are subject to income taxes. D. The drawings account is closed to retained earnings at the end of the period. The capital account in a partnership keeps track of each partner's capital balance and is affected by partner investments and withdrawals as well as net income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Understand Difficulty: Medium Learning Objective: Chapter Supplement A Libby - Chapter 11 #99 Topic Area: Accounting For Sole Proprietorships And Partnerships

100.

Which of the following statements is true about partnership accounting? A. A particular partner's capital account is debited when a withdrawal takes place by that partner. B. The process of closing, through the closing entry process, a positive net income results in an increase in overall partner capital. C. The drawings account balances are deducted to arrive at the net income to allocate to the partners. D. The drawings account is closed to retained earnings at the end of the period. The capital account in a partnership keeps track of each partner's capital balance and is affected by partner investments and withdrawals as well as net income. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Risk Analysis Blooms: Understand Difficulty: Medium Learning Objective: Chapter Supplement A Libby - Chapter 11 #100 Topic Area: Accounting For Sole Proprietorships And Partnerships

101.

Constance Corporation reported a $750,000 balance in its common stock account at the end of 2010. The company held 50,000 shares of treasury stock and had 700,000 shares outstanding. Calculate the par value per share of the company's common stock. Answers will vary Feedback: Common stock ($750,000) = Number of common shares issued (50,000 + 700,000) × Par value per share ($1) AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #101 Topic Area: Common Stock Transactions

102.

The charter of Delta Corporation specified a maximum of 25,000 shares of common stock. At the current date, 5,000 shares remain unissued, and 2,000 of the issued shares have been repurchased and are still held by Delta. Calculate the number of shares issued, authorized, outstanding, and held in the treasury. Answers will vary Feedback: Authorized shares (25,000) - Unissued shares (5,000) = Issued shares (20,000). Outstanding shares (18,000) = Issued shares (20,000) - Treasury shares (2,000). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #102 Topic Area: Common Stock Transactions

103.

DRP, Inc. sold and issued 50,000 shares of its own $50 par value preferred stock for $110 per share, and 200,000 shares of its no par common stock for $40 per share. Prepare the required journal entry. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #103 Topic Area: Common Stock Transactions

104.

Three dates are described below.

Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Remember Difficulty: Medium Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #104 Topic Area: Common Stock Transactions

105.

At the end of 2010, Washington Corporation reported a $40,000 balance in its common stock account (par value $1 per share). The treasury stock account balance was $720 (cost $6 per share). During 2010, the company declared and paid a cash dividend at $1.50 per share. Calculate the total amount of the 2010 cash dividend. Answers will vary Feedback: The number of issued shares (40,000) = Common stock account balance ($40,000) ÷ $1 per share par value. The number of treasury shares (120) = Treasury stock account balance ($720) ÷ Cost per share ($6). 2010 cash dividend ($59,820) = Number of outstanding shares (40,000 - 120) × Dividend per share ($1.50). AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #105 Topic Area: Common Stock Transactions

106.

Survivor Company was formed on January 1, 2010 by selling and issuing 20,000 shares of common stock at $15 per share. On December 1, 2010, the company declared a cash dividend of $10,000 which will be paid in cash on January 15, 2011. Requirements: A. Prepare the journal entry to record the sale and issuance of the common stock on January 1, 2010 under each of the following independent assumptions: 1. The common stock has a par value of $10 per share. 2. The common stock was no par with a stated value of $5 per share. 3. The common stock was no par and no stated value. B. Prepare the journal entry to record the dividend declaration on December 1, 2010. C. Prepare the journal entry to record payment of the dividend on January 15, 2011. Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #106 Topic Area: Common Stock Transactions

107.

Contrast the economic effects of a cash dividend (declared and paid) with a stock dividend (declared and issued) on the distributing corporation by completing the following chart by placing "X" where appropriate.

Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-04 Discuss dividends and analyze transactions. Libby - Chapter 11 #107 Topic Area: Common Stock Transactions

108.

The following information is available for Bradford Bikes for the years 2011 and 2010:

Requirements: A. Calculate the dividend yield ratio for both 2011 and 2010. B. Interpret the yield ratio in terms of whether it is high or low, whether it indicates a steady dividend policy, and whether Bradford Bikes appears to be growing or stagnant. Answers will vary Feedback: A. Dividend yield in 2011 is 1.6% ($.85/$53.00) and 2010 is 1.5% ($.63/$41.50) B. The dividend yield paid as an immediate return to Bradford Bikes' stockholders is low in comparison to the market price investors are willing to pay for their shares of stock. However, they are paying out about 30% of their current earnings (EPS) as dividends to their investors. AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-05 Analyze the dividend yield ratio. Libby - Chapter 11 #108 Topic Area: Key Ratio Analysis

109.

The following information is available for Italiano Ices for the years 2011 and 2010:

Requirements: A. Calculate the dividend yield for both 2011 and 2010. B. Does the dividend yield appear to be low, moderate or high and what caused the change in the yield from 2010 to 2011? Answers will vary Feedback: A. The 2011 dividend yield was 2.6% ($1 ÷ $38.30) and the 2010 yield was 2.0% ($.88 ÷ $44.00). B. The yield appears to be on the low side, which means the company is reinvesting in growth of operations and earnings to improve the price performance. The ratio increased primarily because the market price of the stock dropped almost $5 per share in 2011 even though the dividends went up $.12 per share. AACSB: Apply AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analytic Difficulty: Medium Learning Objective: 11-05 Analyze the dividend yield ratio. Libby - Chapter 11 #109 Topic Area: Key Ratio Analysis

110.

Tractor Corporation was just formed. The following accounts of Tractor Corporation, with code letters, are needed to record the transactions given below. You are to indicate the appropriate journal entry for each transaction by entering the code letters and the correct amounts. The transactions including the example are independent unless otherwise stated.

Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #110 Topic Area: Common Stock Transactions, Financial Analysis

111.

HighRise Company reported the following amounts of contributed capital in the stockholders' equity accounts as of January 1, 2010:

Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply

112.

On January 1, 2010, the stockholders' equity section of Gibbons Corporation's balance sheet reported the following:

Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #112 Topic Area: Common Stock Transactions, Financial Analysis

113.

On January 1, 2010, the accounts of Mac Corporation showed the following:

Answers will vary Feedback: (1) ($60,000/$2) = 30,000 shares x 2 (100% stock dividend) = 60,000 shares (2) 60,000 shares x $1 = $60,000 (3) $60,000 (4) $60,000 + $60,000 = $120,000 (5) $140,000 - (stock dividend, 30,000 shares x $1) - (cash dividend, $15,000) + net income, $25,000 = $120,000 (6) Treasury stock, shares, 1,000 (7) $8,000 (cost) (8) $120,000 + $120,000 - $8,000 = $232,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #113 Topic Area: Financial Analysis

114.

On December 31, 2010, Brave Corporation reported the following on its balance sheet:

Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #114 Topic Area: Common Stock Transactions

115.

During 2010, Sanders Corporation made the following journal entry to record the declaration and payment of a cash dividend:

The total par values of common and preferred stock outstanding were $70,000 and $40,000, respectively. No dividends were declared or paid during 2009. There are 1,000 shares of common treasury stock. Requirements: A. If the preferred stock is noncumulative, calculate the current dividend rate on the preferred stock. B. If the preferred stock is cumulative, calculate the current dividend rate on the preferred stock. Answers will vary Feedback: A. $40,000 x Rate = $3,600; Rate = 9% B. 2 x ($40,000 x Rate) = $3,600 ($40,000 x Rate) = $1,800 Rate = 4.5% or 9% (from part A.) ÷ 2 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #115 Topic Area: Financial Analysis

116.

Wedge Corporation has the following capital stock outstanding: $1 par value common stock, 250,000 shares. 8% preferred stock, par $100, 5,000 shares, cumulative, with 2 years in arrears. Cash dividends of $150,000 were declared and paid near the end of the current year. Requirements: A. Calculate the dividends received by the preferred stockholders. B. Calculate the dividends received by the common stockholders. Answers will vary Feedback: A. Preferred: (5,000 shares x $100 x 8%) x 3 years = $120,000 B. Common: $150,000 - $120,000 = $30,000 AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #116 Topic Area: Financial Analysis

117.

Marlin, Inc., declared a cash dividend of $40,000 in 2009 when the following stocks were outstanding:

Answers will vary

Feedback: AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Apply Difficulty: Medium Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock. Libby - Chapter 11 #117 Topic Area: Financial Analysis

118.

Identify the effects on cash flow from financing activities of the following activities as increasing (+), decreasing (-) or having no effect on financing cash flows:

Answers will vary

Feedback: AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows. Libby - Chapter 11 #118 Topic Area: Focus On Cash Flows

119.

Determine the effect of the following transactions on the financial statement components identified. Code your answers as follows: A. If the transaction results in an increase in the financial statement component. B. If the transaction results in a decrease in the financial statement component. C. If the transaction does not affect the financial statement component. Answer: Transaction 1: Common stock was sold at a price in excess of par value. Net income ______ Total assets ______ Stockholders' equity ______ Transaction 2: Treasury stock was purchased using cash. Net income ______ Total assets ______ Stockholders' equity ______ Transaction 3: Treasury stock was sold for cash at a price less than the treasury stock's cost. Net income ______ Total assets ______ Stockholders' equity ______ Transaction 4: Treasury stock was sold for cash at a price greater than the treasury stock's cost. Net income ______ Total assets ______ Stockholders' equity ______ AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock. Libby - Chapter 11 #119 Topic Area: Common Stock Transactions

120.

Determine the effect of the following transactions on the financial statement components identified. Code your answers as follows: A. If the transaction results in an increase in the financial statement component. B. If the transaction results in a decrease in the financial statement component. C. If the transaction does not affect the financial statement component. Answer: Transaction 1: A cash dividend was declared. Net income ______ Total assets ______ Total liabilities _______ Stockholders' equity ______ Transaction 2: A previously declared cash dividend was paid. Net income ______ Total assets ______ Total liabilities _______ Stockholders' equity ______ Transaction 3: A 2-for-1 stock split was declared and distributed. Net income ______ Total assets ______ Total liabilities ______ Stockholders' equity ______ Transaction 4: A common stock dividend was declared and distributed. Net income ______ Total assets ______ Total liabilities ______ Stockholders' equity ______ AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement Blooms: Understand Difficulty: Medium Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. Libby - Chapter 11 #120 Topic Area: Financial Analysis

121.

Prepare journal entries for each of the following AJ Partnership transactions: 1. A and J each contribute cash into the partnership in exchange for capital. 2. A makes a cash withdrawal from the partnership. 3. Partnership net income is allocated to the partners' capital accounts. 4. A's drawing account is closed. Answers will vary Feedback: 1. Cash A, Capital J, Capital 2. J, Drawings Cash 3. Net income (revenue and expense accounts) A, Capital J, Capital 4. A, Capital A, Drawings AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Blooms: Understand Difficulty: Medium Learning Objective: Chapter Supplement A Libby - Chapter 11 #121 Topic Area: Accounting For Sole Proprietorships And Partnerships

ch11 Summary Category # of Questions AACSB: Analytic 49 AACSB: Apply 1 AACSB: Reflective Thinking 70 AACSB: Understand 1 AICPA BB: Critical Thinking 121 AICPA FN: Measurement 22 AICPA FN: Reporting 43 AICPA FN: Reporting, Measurement 49 AICPA FN: Risk Analysis 7 Blooms: Analytic 1 Blooms: Apply 51 Blooms: Remember 27 Blooms: Understand 42 Difficulty: Easy 17 Difficulty: Hard 5 Difficulty: Medium 99 Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in 7 the capital structure of a corporation. Learning Objective: 11-02 Analyze the earnings per share ratio. 11 Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common 40 stock. Learning Objective: 11-04 Discuss dividends and analyze transactions. 12 Learning Objective: 11-05 Analyze the dividend yield ratio. 8 Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions. 21 Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred 17 stock. Learning Objective: 11-08 Discuss the impact of captial stock transactions on cash flows. 6 Learning Objective: Chapter Supplement A 5 Libby - Chapter 11 121 Topic Area: Accounting For Sole Proprietorships And Partnerships 5 Topic Area: Common Stock Transactions 53 Topic Area: Common Stock Transactions, Financial Analysis 3 Topic Area: Financial Analysis 29 Topic Area: Focus On Cash Flows 6 Topic Area: Key Ratio Analysis 10 Topic Area: Preferred Stock 2 Topic Area: Understanding The Business 13