21.The residual interest in a corporation belongs
pre-emptive right of a common stockholder is the right to
a. share proportionately
in corporate assets upon liquidation.
proportionately in any new issues of stock of the same class.
c. receive cash
dividends before they are distributed to preferred stockholders.
d. exclude preferred
stockholders from voting rights.
pre-emptive right enables a stockholder to
proportionately in any new issues of stock of the same class.
b. receive cash
dividends before other classes of stock without the pre-emptive right.
c. sell capital stock
back to the corporation at the option of the stockholder.
d. receive the same
amount of dividends on a percentage basis as the preferred stockholders.
24. In a corporate form of business organization, legal capital is
best defined as
a. the amount of
capital the state of incorporation allows the company to accumulate over its
b. the par value of
all capital stock issued.
c. the amount of
capital the federal government allows a corporation to generate.
d. the total capital
raised by a corporation within the limits set by the Securities and Exchange
25. Stockholders of a business enterprise are
said to be the residual owners. The term residual owner means that shareholders
a. are entitled to a
dividend every year in which the business earns a profit.
b. have the rights to
specific assets of the business.
c. bear the ultimate
risks and uncertainties and receive the benefits of enterprise ownership.
d. can negotiate
individual contracts on behalf of the enterprise.
stockholders’ equity represents
a. a claim to specific
assets contributed by the owners.
b. the maximum amount
that can be borrowed by the enterprise.
c. a claim against a
portion of the total assets of an enterprise.
d. only the amount of
earnings that have been retained in the business.
primary source of stockholders’ equity is
a. income retained by
c. contributions by
d. both income
retained by the corporation and
contributions by stockholders.
equity is generally classified into two major categories:
a. contributed capital
and appropriated capital.
capital and retained earnings.
c. retained earnings
and unappropriated capital.
d. earned capital and
29. The accounting problem in a lump sum
issuance is the allocation of proceeds between the classes of securities. An
acceptable method of allocation is the
a. pro forma method.
c. incremental method.
d. either the
proportional method or the incremental method.
30. When a corporation issues its capital stock
in payment for services, the least
appropriate basis for recording the transaction is the
a. market value of the
b. par value of the
c. market value of the
d. Any of these
provides an appropriate basis for recording the transaction.
31. Direct costs incurred to sell stock such as
underwriting costs should be accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock
3. an intangible asset.
d. 1 or 3
“secret reserve” will be created if
depreciation is charged to income.
b. a capital
expenditure is charged to expense.
c. liabilities are
equity is overstated.
33. Which of the following represents the total
number of shares that a corporation may issue under the terms of its charter?
a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares
34. Stock that has a fixed per-share amount
printed on each stock certificate is called
a. stated value stock.
b. fixed value stock.
c. uniform value
d. par value stock.
35. Which of the following is not a legal
restriction related to profit distributions by a corporation?
a. The amount
distributed to owners must be in compliance with the state laws governing
b. The amount
distributed in any one year can never exceed the net income reported for that
distributions must be formally approved by the board of directors.
d. Dividends must be
in full agreement with the capital stock contracts as to preferences and
36. In January 2010, Finley Corporation, a
newly formed company, issued 10,000 shares of its $10 par common stock for $15
per share. On July 1, 2010, Finley Corporation reacquired 1,000 shares of its
outstanding stock for $12 per share. The acquisition of these treasury shares
a. decreased total
b. increased total
c. did not change
total stockholders’ equity.
d. decreased the
number of issued shares.
37. Treasury shares are
a. shares held as an
investment by the treasurer of the corporation.
b. shares held as an
investment of the corporation.
c. issued and
d. issued but not
38. When treasury stock is purchased for more
than the par value of the stock and the cost method is used to account for
treasury stock, what account(s) should be debited?
a. Treasury stock for
the par value and paid-in capital in excess of par for the excess of the
purchase price over the par value.
b. Paid-in capital in
excess of par for the purchase price.
c. Treasury stock for
the purchase price.
d. Treasury stock for
the par value and retained earnings for the excess of the purchase price over
the par value.
on sales of treasury stock (using the cost method) should be credited to
a. paid-in capital
from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.
Corp. purchased its own par value stock on January 1, 2010 for $20,000 and
debited the treasury stock account for the purchase price. The stock was
subsequently sold for $12,000. The $8,000 difference between the cost and sales
price should be recorded as a deduction from
a. additional paid-in
capital to the extent that previous net “gains” from sales of the
same class of stock are included therein; otherwise, from retained earnings.
b. additional paid-in
capital without regard as to whether or not there have been previous net
“gains” from sales of the same class of stock included therein.
c. retained earnings.
d. net income.
should a “gain” from the sale of treasury stock be reflected when
using the cost method of recording treasury stock transactions?
a. As ordinary
earnings shown on the income statement.
b. As paid-in capital
from treasury stock transactions.
c. As an increase in
the amount shown for common stock.
d. As an extraordinary
item shown on the income statement.
of the following best describes a possible result of treasury stock
transactions by a corporation?
a. May increase but
not decrease retained earnings.
b. May increase net
income if the cost method is used.
c. May decrease but
not increase retained earnings.
d. May decrease but
not increase net income.
of the following features of preferred stock makes the security more like debt
than an equity instrument?
cumulative feature of preferred stock
a. limits the amount
of cumulative dividends to the par value of the preferred stock.
b. requires that
dividends not paid in any year must be made up in a later year before dividends
are distributed to common shareholders.
c. means that the
shareholder can accumulate preferred stock until it is equal to the par value
of common stock at which time it can be converted into common stock.
d. enables a preferred
stockholder to accumulate dividends until they equal the par value of the stock
and receive the stock in place of the cash dividends.
45. According to the FASB, redeemable preferred
stock should be
a. included with
b. included as a
c. excluded from the
stockholdersâ€™ equity heading.
d. included as a
contra item in stockholders’ equity.
46. Cumulative preferred dividends in arrears
should be shown in a corporation’s balance sheet as
a. an increase in
b. an increase in
c. a footnote.
d. an increase in
current liabilities for the current portion and long-term liabilities for the
the date of the financial statements, common stock shares issued would exceed
common stock shares outstanding as a result of the
a. declaration of a
b. declaration of a
c. purchase of
d. payment in full of
48. An entry is not made on the
a. date of
b. date of record.
c. date of payment.
d. An entry is made on
all of these dates.
49. Cash dividends are paid on the basis of the
number of shares
d. outstanding less
the number of treasury shares.
50. Which of the following statements about
property dividends is not true?
a. A property dividend
is usually in the form of securities of other companies.
b. A property dividend
is also called a dividend in kind.
c. The accounting for
a property dividend should be based on the carrying value (book value) of the
nonmonetary assets transferred.
d. All of these
statements are true.
Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31,
2010, Houser distributed these shares of stock as a dividend to its
stockholders. This is an example of a
a. property dividend.
b. stock dividend.
d. cash dividend.
52. A dividend which is a return to
stockholders of a portion of their original investments is a
b. property dividend.
c. liability dividend.
53. A mining company declared a liquidating
dividend. The journal entry to record the declaration must include a debit to
a. Retained Earnings.
b. a paid-in capital
54. If management wishes to
“capitalize” part of the earnings, it may issue a
a. cash dividend.
b. stock dividend.
c. property dividend.
55. Which dividends do not reduce stockholders’ equity?
a. Cash dividends
b. Stock dividends
c. Property dividends
declaration and issuance of a stock dividend larger than 25% of the shares
a. increases common
stock outstanding and increases total stockholders’ equity.
b. decreases retained earnings
but does not change total stockholders’ equity.
c. may increase or
decrease paid-in capital in excess of par but does not change total
d. increases retained
earnings and increases total stockholders’ equity.
Corporation issued a 100% stock dividend of its common stock which had a par
value of $10 before and after the dividend. At what amount should retained
earnings be capitalized for the additional shares issued?
a. There should be no
capitalization of retained earnings.
b. Par value
c. Market value on the
d. Market value on the
issuer of a 5% common stock dividend to common stockholders preferably should
transfer from retained earnings to contributed capital an amount equal to the
a. market value of the
b. book value of the
c. minimum legal
d. par or stated value
of the shares issued.
the date of declaration of a small common stock dividend, the entry should not include
a. a credit to Common
Stock Dividend Payable.
b. a credit to Paid-in
Capital in Excess of Par.
c. a debit to Retained
d. All of these are
60. The balance in Common Stock Dividend
Distributable should be reported as a(n)
a. deduction from
common stock issued.
b. addition to capital
c. current liability.
d. contra current
61. A feature common to both stock splits and
stock dividends is
a. a transfer to
earned capital of a corporation.
b. that there is no
effect on total stockholders’ equity.
c. an increase in
total liabilities of a corporation.
d. a reduction in the
contributed capital of a corporation.
62. What effect does the issuance of a 2-for-1
stock split have on each of the following?
Value per Share Retained
a. No effect No effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease
one of the following disclosures should be made in the equity section of the
balance sheet, rather than in the notes to the financial statements?
c. Call prices
d. Conversion or
rate of return on common stock equity is calculated by dividing
a. net income less
preferred dividends by average common stockholdersâ€™ equity.
b. net income by
average common stockholdersâ€™ equity.
c. net income less
preferred dividends by ending common stockholdersâ€™ equity.
d. net income by
ending common stockholdersâ€™ equity.
65. The payout ratio can be calculated by dividing
a. dividends per share
by earnings per share.
b. cash dividends by
net income less preferred dividends.
c. cash dividends by
market price per share.
d. dividends per share
by earnings per share and dividing cash dividends by net income less preferred
Company has outstanding both common stock and nonparticipating, non-cumulative
preferred stock. The liquidation value of the preferred is equal to its par
value. The book value per share of the common stock is unaffected by
a. the declaration of
a stock dividend on preferred payable in preferred stock when the market price
of the preferred is equal to its par value.
b. the declaration of
a stock dividend on common stock payable in common stock when the market price
of the common is equal to its par value.
c. the payment of a
previously declared cash dividend on the common stock.
d. a 2-for-1 split of
the common stock.
67. Assume common stock is the only class of
stock outstanding in the Manley Corporation. Total stockholders’ equity divided
by the number of common stock shares outstanding is called
a. book value per
b. par value per
c. stated value per
d. market value per
68. Dividends are not paid on
c. treasury common
d. Dividends are paid
on all of these.
69. Noncumulative preferred dividends in
a. are not paid or
b. must be paid before
any other cash dividends can be distributed.
c. are disclosed as a
liability until paid.
d. are paid to
preferred stockholders if sufficient funds remain after payment of the current
should cumulative preferred dividends in arrears be shown in a corporation’s
statement of financial position?
a. Note disclosure
b. Increase in
c. Increase in current
d. Increase in current
liabilities for the amount expected to be declared within the year or operating
cycle, and increase in long-term liabilities for the balance