ch11

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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 False

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 False

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

True False

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

True False

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

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.

True False

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 False

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

9. 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

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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

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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. RKJ has 35,000 shares of treasury stock. B. RKJ has 30,000 shares of treasury stock.

C. RKJ can reissue an additional 35,000 shares of common stock. D. RKJ can issue an additional 30,000 shares of common stock.

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• 100,000 shares of $5 par value common stock are authorized; • 70,000 shares were issued for $9 per share;

Which of the following statements is correct based only on the above facts? A. Common stock is reported at $630,000 on the balance sheet.

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

D. 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. Authorized shares

B. Issued shares C. Outstanding shares D. Treasury shares

35. Which of the following statements regarding earnings per share (EPS) is correct? A. It equals net income divided by the number of authorized common shares. B. It equals net income divided by the number of outstanding common shares. C. It equals net income divided by the number of issued common shares. D. 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. It increases when treasury stock is acquired.

B. It increases when net income increases.

C. It decreases when additional shares of common stock are issued.

D. 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. EPS can't be used to compare different size companies.

B. Investors expect a higher EPS for companies with higher stock prices.

C. It is calculated by dividing net income by the number of common shares issued. D. 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. Authorized shares

B. Issued shares C. Outstanding shares D. Treasury shares

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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. $2.50

B. $1.25 C. $2.22 D. $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. $1.43

B. $1.25 C. $1.11 D. $1.00

41. Which of the following statements about earnings per share is correct? A. Increased net income would cause earnings per share to decrease.

B. Issuance of more common shares would cause earnings per share to increase. C. Purchasing treasury shares would cause earnings per share to decrease. D. 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. Common stock is reported at $700,000 on the balance sheet.

B. Additional-paid in capital is reported at $840,000 on the balance sheet.

C. Stockholders' equity decreased $110,000 when the treasury stock was purchased. D. 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.

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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. $0 B. $600,000 C. $100,000 D. $700,000

47. Which of the following statements about treasury stock transactions is correct? A. The total number of shares issued increases when treasury stock is purchased. B. The total number of shares authorized changes when treasury stock is purchased. C. Gains and losses on treasury stock transactions are reported on the income statement. D. 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. 0

B. 5,700,000 C. 5,300,000 D. 400,000

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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. Option A

B. Option B C. Option C D. 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. Option A

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. Option A

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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. $400,000 B. $480,000 C. $350,000 D. $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. reduces retained earnings and increases liabilities by the amount of the dividend. B. reduces retained earnings and increases contributed capital by the same amount. C. reduces assets and increases liabilities by the amount of the dividend.

D. 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. Total stockholders' equity decreases.

B. Total stockholders' equity remains the same.

C. The number of shares outstanding increases while the par value of each share decreases. D. 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.

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.

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

D. 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. Par value of $100 per share.

B. Market value per share on the issue date.

C. Half of the previous total amount in the common stock account. D. Retained earnings aren't transferred to the common stock account. 59. Which of the following statements is false?

A. Stock splits reallocate amounts between retained earnings and contributed capital accounts. B. Both stock splits and stock dividends increase the common shares issued.

C. Both stock splits and stock dividends increase the common shares outstanding.

D. 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.

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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. Retained earnings will decrease $37.5 million. B. Retained earnings will decrease $35.625 million. C. Retained earnings will decrease $3 million. D. Retained earnings will decrease $2.85 million.

63. Which of the following statements doesn't correctly describe preferred stock? A. Preferred shareholders have a preference with respect to dividend payments.

B. Preferred shareholders have a preference with respect to assets in the event of liquidation. C. Preferred shareholders have voting rights on a per share basis.

D. 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. Option A

65. Which of the following doesn't correctly describe preferred stock? A. Preferred stock has a higher priority status relative to common stock. B. Preferred shareholders are guaranteed to receive dividends.

C. Preferred stock usually does not carry voting rights.

D. 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. $12,000 B. $50,000 C. $47,000 D. $38,000

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67. Assume the following capital structure:

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. $12,000 B. $3,000 C. $47,000 D. $38,000

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. $12,000 B. $3,000 C. $47,000 D. $38,000

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. $12,000 B. $3,000 C. $47,000 D. $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.

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. $3,500 B. $7,000 C. $10,500 D. $14,500

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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. $3,500 B. $7,000 C. $10,500 D. $14,500

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. $3,500 B. $7,000 C. $21,500 D. $14,500

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. $3,500 B. $7,000 C. $22,500 D. $14,500

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. D

.

Cumulative 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.

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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. $117,000 B. $113,000 C. $109,000 D. $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. $234,000 B. $226,000 C. $231,000 D. $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. $432,000 B. $410,000 C. $444,000 D. $420,000

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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. $650,000 B. $670,000 C. $667,000 D. $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. $107,000

B. $84,000 C. $80,000 D. $112,000

How much did Wendell's retained earnings increase during the recent year of operation? A. $32,000

B. $45,000 C. $29,000 D. $27,000

How much did Wendell's contributed capital increase during the recent year of operation? A. $15,000

B. $73,000 C. $58,000 D. $75,000

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How much did Wendell's capital in excess of par increase during the recent year of operation? A. $60,000

B. $58,000 C. $67,000 D. $24,000

84. Which of the following statements is not correct?

A. Issuance of common stock creates a financing activities cash inflow.

B. Payment of a common stock cash dividend creates an operating activities cash outflow. C. Purchase of treasury stock creates a financing activities cash outflow.

D. 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. Sale of no par common stock for cash.

B. Declaration and distribution of a common stock dividend. C. Sale of preferred stock for cash at par value.

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

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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. Net income is unchanged. B. Earnings per share increases. C. Total assets remain the same. D. 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.

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. Retained earnings decreased $22,000. B. Retained earnings decreased $10,000.

C. Total stockholders' equity decreased $22,000. D. 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. Retained earnings decreased $32,000. B. Capital in excess of par remained the same. C. Contributed capital increased $128,000. D. Total stockholders' equity remained the same.

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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. The dividend yield decreases when net income increases.

B. Earnings per share are per share of both common and preferred stock. C. The dividend yield increases when the market price per share decreases. D. 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. The ease of formation.

B. The limited liability for the owners.

C. There isn't income taxation on the business itself.

D. The complete control of the business given to the partners. 98. Which of the following is true about a proprietorship?

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

D. 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.

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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.

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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.

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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.

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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?

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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.

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

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

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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:

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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.

(27)

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:

(28)

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 ______

Transaction 3: Treasury stock was sold for cash at a price less than the treasury stock's cost. Net income ______

Total assets ______

Transaction 4: Treasury stock was sold for cash at a price greater than the treasury stock's cost. Net income ______

Total assets ______

(29)

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.

(30)

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

(31)

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

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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.

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.

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.

(33)

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.

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

Common stockholders do have voting rights; the board of directors declares dividends.

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.

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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

(35)

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

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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

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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.

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.

(38)

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

• 100,000 shares of $5 par value common stock are authorized; • 70,000 shares have been issued;

Which of the following statements is correct?

A. RKJ has 35,000 shares of treasury stock.

B. RKJ has 30,000 shares of treasury stock.

C. RKJ can reissue an additional 35,000 shares of common stock. D. 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

(39)

• 100,000 shares of $5 par value common stock are authorized; • 70,000 shares were issued for $9 per share;

Which of the following statements is correct based only on the above facts?

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

D. 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. Authorized shares

B. Issued shares

C. Outstanding shares

D. Treasury shares

The maximum number of shares that can be issued equals the number of authorized shares.

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

A. It equals net income divided by the number of authorized common shares. B. It equals net income divided by the number of outstanding common shares.

C. It equals net income divided by the number of issued common shares.

D. 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

(40)

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

A. It increases when treasury stock is acquired.

B. It increases when net income increases.

C. It decreases when additional shares of common stock are issued.

D. 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. EPS can't be used to compare different size companies.

B. Investors expect a higher EPS for companies with higher stock prices.

C. It is calculated by dividing net income by the number of common shares issued.

D. 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.

38. Which of the following represents the number of shares currently in the hands of investors?

A. Authorized shares

B. Issued shares C. Outstanding shares

D. Treasury shares

The outstanding shares of stock represent stock currently held by investors.

(41)

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. $2.50

B. $1.25

C. $2.22

D. $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. $1.43 B. $1.25

C. $1.11

D. $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

(42)

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

A. Increased net income would cause earnings per share to decrease.

B. Issuance of more common shares would cause earnings per share to increase.

C. Purchasing treasury shares would cause earnings per share to decrease. D. It is calculated using the number of common shares of stock outstanding. The earnings per share denominator is the number of common shares 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?

B. Additional-paid in capital is reported at $840,000 on the balance sheet.

C. Stockholders' equity decreased $110,000 when the treasury stock was purchased.

D. There are 10,000 shares of treasury stock.

The amount paid for the treasury stock is not known.

(43)

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).

(44)

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.

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. $0

B. $600,000 C. $100,000

D. $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).