When common stock is issued at an amount greater than par value

When common stock
1. Which of the following is not a major advantage of a corporation?
a. Separate legal existence.
b. Continuous life.
c. Government regulations.
d. Transferable ownership rights.

c. Government regulations.
2. A major disadvantage of a corporation is:
a. limited liability of stockholders.
b. additional taxes.
c. transferable ownership rights.
d. None of the above.

b. additional taxes.
3. Which of the following statements is not considered a disadvantage of the corporate form of organization?
a. Additional taxes
b. Government regulations
c. Limited liability of stockholders
d. Separation of ownership and management

c. Limited liability of stockholders
4. The ability of a corporation to obtain capital is
a. enhanced because of limited liability and ease of share transferability.
b. less than a partnership.
c. restricted because of the limited life of the corporation.
d. about the same as a partnership.

a. enhanced because of limited liability and ease of share transferability.
5. Costs incurred in the formation of a corporation:
a. do not include legal fees.
b. are expensed as incurred.
c. are recorded as an asset.
d. provide future benefits whose amounts and timing are

b. are expensed as incurred.
6. Which of the following statements is true?
a. Ownership of common stock gives the owner a voting right.
b. The stockholders’ equity section begins with paid-in -capital.
c. The authorization of capital stock does not result in a formal accounting entry.
d. All of the above.

d. All of the above.
7. Preferred stock may have priority over common stock except in:
a. dividends.
b. assets in the event of liquidation.
c. cumulative dividend features.
d. voting.

d. voting.
8. Which stock has the voting rights?
Common
Preferred
Participating
Authorized

Common
9. Which of the following factors does not affect the initial market price of a stock?
a. The company’s anticipated future earnings
b. The par value of the stock
c. The current state of the economy
d. The expected dividend rate per share

b. The par value of the stock
10. The officer who is generally responsible for maintaining the cash position of the corporation, arranging lending with bank, bond and stock financing, is the
a. controller.
b. treasurer.
c. cashier.
d. internal auditor.

b. treasurer.
11. The chief accounting officer in a corporation is the
a. treasurer.
b. president.
c. controller.
d. vice-president of finance.

c. controller.
12. Total stockholders’ equity is composed of the two main categories of:
a. Total Paid-in Capital + Retained earnings.
b. Paid-in capital + Capital stock + Retained earnings.
c. Capital stock + Additional paid-in capital + Retained
earnings.
d.Common stock + Retained earnings.

a. Total Paid-in Capital + Retained earnings.
13. The Paid-in-Capital category of the Stockholders’ Equity section of the balance sheet consists of the two main classifications of:
a. Capital Stock (Common and Preferred) accounts and Additional
Paid- in- Capital accounts
b. common stock and treasury stock accounts
c. preferred stock and treasury stock accounts
d. common stock and preferred stock accounts

a. Capital Stock (Common and Preferred) accounts and Additional
Paid- in- Capital accounts
14. The two main classes of authorized and issued capital stock in the Stockholders’ Equity section of the balance sheet are:
A. additional paid-in capital and common stock.
B. common stock and treasury stock.
C. common stock, preferred stock, and treasury stock.
D. common stock and preferred stock.

D. common stock and preferred stock.
15. In the stockholders’ equity section of the balance sheet, common stock:
a. is listed before preferred stock.
b. is added to total capital stock.
c. is part of paid-in capital.
d. is part of additional paid-in capital.

c. is part of paid-in capital.
16. The Additional Paid-in-Capital part of the Stockholders’ Equity section of the balance sheet consists of:
a. Paid-in capital in excess of par on common
b. Paid-in capital in excess of par on preferred
c. Paid-in capital from treasury stock.
d. Paid-in capital in excess of stated value
e. All of the above.

e. All of the above.
17. Which of the following is not reported under additional
paid-in capital?
a. Paid-in capital in excess of par.
b. Common stock.
c. Paid-in capital in excess of stated value.
d. Paid-in capital from treasury stock.

b. Common stock.
18. The account Retained Earnings is:
a. a subdivision of paid-in capital.
b. net income retained in the corporation—i.e. accumulated income less dividends paid to stockholders
c. reported as an expense in the income statement.
d. closed to capital stock.

b. net income retained in the corporation—i.e. accumulated income less dividends paid to stockholders
19. If common stock is issued for an amount greater than par value, the excess should be credited to
a. Cash.
b. Retained Earnings.
c. Paid-in Capital in Excess of Par.
d. Legal Capital

c. Paid-in Capital in Excess of Par.
20. If stock is issued for a noncash asset, the asset should be recorded on the books of the corporation at
a. fair value.
b. cost.
c. zero.
d. a nominal amount.

a. fair value.
21. Crain Company issued 2,000 shares of its $5 par value common stock in payment of its attorney’s bill of $40,000. The bill was for services performed in helping the company incorporate. Crain should record this transaction by debiting
a. Legal Expense for $10,000 and crediting Common Stock for $10,000.
b. Organizational Expense for $40,000 and crediting Common Stock for $40,000.
c. Organizational Expense for $10,000 and crediting Common Stock for $10,000.
d. Organization Expense for $40,000, crediting Common Stock for $10,000 and crediting Paid-in-Capital for $30,000.
e. Organization Expense for $40,000, crediting Common Stock for $30,000 and crediting Paid-in-Capital for $10,000.

d. Organization Expense for $40,000, crediting Common Stock for $10,000 and crediting Paid-in-Capital for $30,000.
23. ABC Corporation issues 1,000 shares of $10 par value common stock at $12 per share. In recording the transaction, credits are made to:
a. Common Stock $10,000 and Paid-in Capital in Excess
of Stated Value $2,000.
b. Common Stock $12,000.
c. Common Stock $10,000 and Paid-in Capital in Excess of Par $2,000.
d.Common Stock $10,000 and Retained Earnings $2,000.

c. Common Stock $10,000 and Paid-in Capital in Excess of Par $2,000.

Know the complete journal entry which is:
Cash 12,000 [Amount company received 1,000 shares x $12]
Common Stock 10,000 [Par Value] 1,000 shares x $10 Par]
Paid-in-capital in Excess of par 2,000 [1,000 shares x ($12-$10]
or [$12,000 – $10,000].
24. Ranier Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If Ranier issues 5,000 shares of preferred stock for land with an asking price of $600,000 and a market value of $540,000, which of the following would be the journal entry for Ranier to record?
a. Land 500,000
Preferred Stock 500,000
b. Land 540,000
Preferred Stock 540,000
c. Land 600,000
Preferred Stock 500,000
Paid-in Capital in Excess of Par-Preferred 100,000
d. Land 540,000
Preferred Stock [Par $100 x5,000 sh.] 500,000
Paid-in Capital Excess of Par-Preferred[540,000-500,000] 40,000

d. Land 540,000
Preferred Stock [Par $100 x5,000 sh.] 500,000
Paid-in Capital Excess of Par-Preferred[540,000-500,000] 40,000
22. A-Team Corporation issued 1,000 shares of $5 par value
stock for land. The stock is actively traded at $9 per share.
The land was advertised for sale at $10,500. The land
should be recorded at:
a. $4,000.
b. $5,000.
c. $9,000
d. $10,500.

c. $9,000

(1,000 shares x $9market price = $9,000 market value)
(Note advertised price is not necessarily market price.)
25. Treasury stock may be repurchased:
a. to reissue the shares to officers and employees under bonus and stock compensation plans.
b. to signal to the stock market that management believes the stock is underpriced.
c. to have additional shares available for use in the acquisition of other companies.
d. All of the above.

d. All of the above.
26. Evergreen Manufacturing Corporation purchased 4,000 shares of its own previously issued $10 par common stock for $92,000. As a result of this event,
a. Evergreen’s Common Stock account decreased $40,000.
b. Evergreen’s total stockholders’ equity increased $92,000.
c. Evergreen’s Paid-in Capital in Excess of Par account decreased $52,000.
d. Evergreen debited Treasury Stock for the cost of the shares $92,000.
e. Evergreen debited Treasury Stock for the par value of the shares $40,000.

d. Evergreen debited Treasury Stock for the cost of the shares $92,000.

Treasury stock is the company’s own stock that it has bought back. The company records Treasury Stock at its cost.
27. Evergreen Manufacturing Corporation purchased 4,000 shares of its own previously issued $10 par common stock for $92,000. As a result of this event,
a. Evergreen’s Common Stock account decreased $40,000.
b. Evergreen’s total stockholders’ equity decreased $92,000.
c. Evergreen’s Paid-in Capital in Excess of Par account decreased $52,000.
d. All of the above.

b. Evergreen’s total stockholders’ equity decreased $92,000.

Treasury stock is not treated the same as stock which has been purchased by investors. Treasury stock is a contra-equity account which is deducted from Stockholders’ Equity.
28. XYZ, Inc. sells 100 shares of $5 par value treasury stock at $13 per share. If the cost of acquiring the shares was $10 per share, the entry for the sale should include
credits to:
a. Treasury Stock $1,000 and Paid-in Capital from Treasury Stock $300.
b. Treasury Stock $500 and Paid-in Capital from Treasury
Stock $800.
c. Treasury Stock $1,000 and Retained Earnings $300.
d. Treasury Stock $500 and Paid-in Capital in Excess of
Par $800.

a. Treasury Stock $1,000 and Paid-in Capital from Treasury Stock $300.

Know the complete journal entry which is: [Note that you ignore par value
in this entry when dealing with Treasury Stock]

Cash 1,300 [100 sh x $13]
Treasury Stock [100 sh. X $10 cost] 1,000
Paid-in Capital from Treasury Stock 300
[ ($13 – $10) x 100 sh. Or $1,300 – 1,000]
29. In the stockholders’ equity section, the cost of treasury stock is deducted from:
a. total paid-in capital and retained earnings.
b. retained earnings.
c. total stockholders’ equity.
d. common stock in paid-in capital.

a. total paid-in capital and retained earnings.
30. Treasury stock is generally accounted for by the
a. cost method.
b. market value method.
c. par value method.
d. stated value method.

a. cost method.
31. Treasury Stock is a(n)
a. contra asset account.
b. retained earnings account.
c. asset account.
d. contra stockholders’ equity account

d. contra stockholders’ equity account
32. A corporation purchases 30,000 shares of its own $30 par common stock for $45 per share, recording it at cost. What will be the effect on total stockholders’ equity?
a. Increase by $1,350,000
b. Decrease by $900,000
c. Decrease by $1,350,000
d. Increase by $900,000

c. Decrease by $1,350,000 [30,000 shares x $45 Cost]

Treasury stock is the company’s own stock that it has bought back. Treasury stock is not treated the same as stock which has been purchased by investors.Treasury stock is a contra-equity account which is deducted from Stockholders’ Equity.
33. The following data is available for Blaine Corporation at December 31, 2012:
Common stock, par $10 (authorized 25,000 shares) $200,000
Treasury Stock (at cost $15 per share) 900
Based on the data, how many shares of common stock are outstanding?
a. 25,000
b. 20,000
c. 24,940
d. 19,940

d. 19,940

Know the following (needed for this problem and also for possible word questions on test)
“Authorized shares” are number of shares the corporation is authorized to sell as indicated in its charter.
“Issued shares” are the shares the corporation has actually sold to investors.
“Treasury shares” are the shares the corporation has bought back from investors.
“Outstanding shares” are issued shares less treasury shares.

Step 1: Issued shares $200,000 / $10 par = 20,000 shares
Step 2: Treasury Shares $900/$15 = 60
Step 3: Outstanding shares are issued shares less treasury shares.

Outstanding Shares = 20,000 issued shares – 60 treasury shares – 19,940.
41. M-Bot Corporation has 10,000 shares of 8% , $100 par value, cumulative preferred stock outstanding at December 31, 2012. No dividends were declared in 2010 or 2011. If
M-Bot wants to pay $375,000 of dividends in 2012, common stockholders will receive:
a. $0.
b. $295,000.
c. $215,000.
d. $135,000.

d. $135,000.

Step 1: Pay Preferred first: 10,000 X 8% x $100par = $80,000 X 3 years (current year
+ two years in arrears) = $240,000
Step 2: Pay Common what is left over.

$375,000 – 240,000 = $135,000
Basically common gets what is left over after preferred are paid for the current year and the two years in arrears. Please note that preferred are paid for the two years in arrears since common has the “cumulative” feature.
34. Entries for cash dividends are required on the:
a. declaration date and the payment date.
b. record date and the payment date.
c. declaration date, record date, and payment date.
d. declaration date and the record date.

a. declaration date and the payment date.
35. The date on which a cash dividend becomes a binding legal obligation is on the
a. declaration date.
b. date of record.
c. payment date.
d. last day of the fiscal year-end.

a. declaration date.
36. Regular cash dividends are declared out of
a. Paid-in Capital in Excess of Par.
b. Treasury Stock.
c. Common Stock.
d. Retained Earnings.

d. Retained Earnings.
37. Which of the following is not a significant date with respect to dividends?
a. The declaration date
b. The incorporation date
c. The record date
d. The payment date

b. The incorporation date
38. The effect of the declaration of a cash dividend by the board of directors is to
Increase Decrease
a. Stockholders’ equity Assets
b. Assets Liabilities
c. Liabilities Stockholders’ equity
d. Liabilities Assets

c. Increase Liabilities Decrease Stockholders’ equity
39. On January 2, 2010, Riley Corporation issued 20,000 shares of 6% cumulative preferred stock at $100 par value. On December 31, 2013, Riley Corporation declared and paid its first dividend. What dividends are the preferred stockholders entitled to receive in 2013 before any distribution is made to common stockholders?

A. $0
B. $120,000
C. $360,000
D. $480,000

D. $480,000

20,000 shares X .06 preferred percentage X $100 par = $120,000 annual dividend requirement for the preferred stockholders. $120,000 X 4 years = $480,000 due to preferred stockholders before any distribution is made to common stockholders.
42. During 2012, Talon Inc. had sales revenue $376,000,
gross prof t $176,000, operating expenses $66,000, cash
dividends $30,000, other expenses and losses $20,000. Its
corporate tax rate is 30% . What was Talon’s income tax
expense for the year?
a. $18,000.
b. $52,800.
c. $112,800.
d. $27,000.

d. $27,000.

($176,000 – $66,000 – $20,000) x 30% = $27,000

This problem illustrates that dividends are not tax deductible for the company. However the investor has to pay taxes on dividend income. This situation has been referred to as “double taxation.”
43. Which of the following statements about small stock divi-
dends is true? a. A debit to Retained Earnings for the par value of the
shares issued should be made.
b. A small stock dividend decreases total stockholders’
equity.
c. Market value per share should be assigned to the divi-
dend shares.
d. A small stock dividend ordinarily will have an effect on
par value per share of stock.

c. Market value per share should be assigned to the divi-
dend shares.
44. If a stockholder receives a dividend that reduces retained earnings by the fair market value of the stock, the stockholder has received a
a. large stock dividend.
b. cash dividend.
c. contingent dividend.
d. small stock dividend.

d. small stock dividend.
45. Raptor Inc. has retained earnings of $500,000 and total
stockholders’ equity of $2,000,000. It has 100,000 shares
of $8 par value common stock outstanding, which is cur-
rently selling for $30 per share. If Raptor declares a 10%
stock dividend on its common stock:

a. net income will decrease by $80,000.
b. retained earnings will decrease by $80,000 and total
stockholders’ equity will increase by $80,000.
c. retained earnings will decrease by $300,000 and total
stockholders’ equity will increase by $300,000.
d. retained earnings will decrease by $300,000 and total
paid-in capital will increase by $300,000.

d. retained earnings will decrease by $300,000 and total
paid-in capital will increase by $300,000.

d (100,000 shares x 10% x $30 market value)
46. On January 1, Sway Corporation had 60,000 shares of $10 par value common stock outstanding. On March 17, the company declared a 18% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The stock was distributed on March 30. The entry to record the transaction of March 17th would include a:
a. credit to Cash for $108,000.
b. credit to Common Stock Dividends Distributable for $106,000.
c. credit to Paid-in Capital in Excess of Par for $32,400.
d. debit to Stock Dividends for $32,400.

c. credit to Paid-in Capital in Excess of Par for $32,400.

The number of shares in the stock dividend is 60,000 x 18% = 10,800

The entire journal entry which you should know is:

Stock Dividends [10,800 x $13 Market Value] 140,400
[Market Value is used because this is a small stock dividend]
Common Stock Dividends Distributable 108,000
[10,800 x par value $10]
Paid-in-Capital in Excess of Par -Common Stock 32,400
[10,800 x ($13 – $10)]
47. Cloud Manufacturing declared a 10% stock dividend when it had 350,000 shares of $3 par value common stock outstanding. The market price per common share was $12 per share when the dividend was declared. The entry to record this dividend declaration includes a credit to
a. Stock Dividends for $105,000.
b. Paid-in Capital in Excess of Par for $315,000.
c. Common Stock for $105,000.
d. Common Stock Dividends Distributable for $420,000.

b. Paid-in Capital in Excess of Par for $315,000.

The number of shares in the dividend is 10% x 350,000 = 35,000
The entire journal entry is:

Stock Dividends [35,000 x $12 Market Value] 420,000
[Market Value is used because this is a small stock dividend]
Common Stock Dividends Distributable 105,000
[35,000 x par value $3]
Paid-in-Capital in Excess of Par -Common Stock 315,000
[35,000 x ($12 – $3) or (420,000 – 105,000.)
48. In the stockholders’ equity section, Common Stock Dividends
Distributable is reported as a(n):
a. deduction from total paid-in capital and retained earnings.
b. addition to additional paid-in capital.
c. deduction from retained earnings.
d. addition to capital stock.

d. addition to capital stock.
49. Which of the following statements about a 3-for-1 stock
split is true?
a. It will triple the market value of the stock.
b. It will triple the amount of total stockholders’ equity.
c. It will have no effect on total stockholders’ equity.
d. It requires the company to distribute cash.

c. It will have no effect on total stockholders’ equity.
50. Abbot Corporation splits its common stock 4 for 1, when the market value is $40 per share. Prior to the split, Abbott had 50,000 shares of $10 par value common stock issued and outstanding. After the split, the par value of the stock

A. remains the same.
B. is reduced to $2 per share.
C. is reduced to $2.50 per share.
D. is reduced to $10 per share.

C. is reduced to $2.50 per share.

The par value will fall to 25% of the original par, 25% of $10 = $2.50.

Note in a 2 for 1 stock split the par value would be reduced in half.
51. Moore, Inc. had 250,000 shares of common stock outstanding before a stock split occurred, and 750,000 shares outstanding after the stock split. The stock split was
a. 2-for-5.
b. 5-for-1.
c. 1-for-5.
d. 3-for-1.

d. 3-for-1.
Understand that if they 500,000 shares outstanding after the stock split it would have been a 2-for 1 stock split.
52. The account Retained Earnings is:
a. a subdivision of paid-in capital.
b. accumulated earnings of the company less dividends
c. reported as an expense in the income statement.
d. closed to capital stock.

b. accumulated earnings of the company less dividends
53. All but one of the following is reported in a retained earn-
ings statement. The exception is:
a. cash and stock dividends.
b. net income and net loss.
c. sales revenue.
d. prior period adjustments.

c. sales revenue.
54. The following selected amounts are available for Clark Company.
Retained earnings (beginning) $800
Net loss 150
Cash dividends declared 100
Stock dividends declared 100
What is its ending retained earnings balance?
a. $650
b. $750
c. $450
d. $600

C. $450

800 – 150 – 100 – 100 = 450.
55. The following selected amounts are available for Clark Company.
Retained earnings (beginning) $800
Net Income 150
Cash dividends declared 100
Stock dividends declared 100
What is its ending retained earnings balance?
a. $650
b. $750
c. $450
d. $600

b. $750

800 + 150 – 100 – 100 = 750.
56. The following selected amounts are available for Clark Company.
Retained earnings (beginning) $800
Net Income 150
Cash dividends declared X
Stock dividends declared 75
Ending Retained Earnings 750
What is the amount of cash dividends paid by the company?
a. $125
b. $75
c. $150
d. $200
e. $100

a. $125
X = 750 -800-150+75 = 125
57. Which of the following can cause a restriction in retained earnings?
a. State laws regarding treasury stock.
b. Long-term debt contract terms.
c. Authorizations by the board of directors in light of
planned expansion of corporate facilities.
d. All of the above.

d. All of the above.
58. A prior period adjustment is:
a. reported in the income statement as a nontypical item.
b. a correction of an error that is recorded directly to
retained earnings.
c. reported directly in the stockholders’ equity section.
d. reported in the retained earnings statement as an
adjustment of the ending balance of retained earnings.

b. a correction of an error that is recorded directly to
retained earnings.
59. A prior period adjustment that corrects income of a prior period requires that an entry be made to
a. an income statement account.
b. a current year revenue or expense account.
c. the retained earnings account.
d. an asset account.

c. the retained earnings account.
60. If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant expansion, the effect of this action is to
a. decrease total assets and total stockholders’ equity.
b. increase stockholders’ equity and decrease total liabilities.
c. decrease total retained earnings and increase total liabilities.
d. reduce the amount of retained earnings available for dividend declarations.

d. reduce the amount of retained earnings available for dividend declarations.
61. The income statement for Nadeen, Inc. shows income before income taxes $700,000, income tax expense $210,000, and net income $490,000. If Nadeen has 100,000 shares of common stock outstanding throughout the year, earnings per share is:
a. $7.00.
b. $4.90.
c. $2.10.
d. No correct answer is given.

b. $4.90.

Earnings per Share = Net Income / Common Shares Outstanding
$490,000/100,000
62. If everything else is held constant, earnings per share is increased by:
a. the payment of a cash dividend to common shareholders.
b. the payment of a cash dividend to preferred shareholders.
c. the issuance of new shares of common stock.
d. the purchase of treasury stock.

d. the purchase of treasury stock.

EPS = Net Income / No. of common shares outstanding

Outstanding Shares = Issued Shares – Treasury Shares

When EPS denominator decreases, EPS increases.
63. The return on common stockholders’ equity is defined as:
a. net income divided by total assets.
b. cash dividends divided by average common stock-
holders’ equity.
c. income available to common stockholders divided by
average common stockholders’ equity.
d. None of these is correct.

c. income available to common stockholders divided by
average common stockholders’ equity.
64. Under IFRS, a purchase by a company of its own shares is recorded by:
(a) an increase in Treasury Stock.
(b) a decrease in contributed capital.
(c) a decrease in share capital.
(d) All of these are acceptable treatments.

(d) All of these are acceptable treatments.
65. The basic accounting for cash dividends and stock dividends:
a. is different under IFRS versus GAAP.
b. is the same under IFRS and GAAP.
c. differs only for the accounting for cash dividends between GAAP and IFRS.
d. differs only for the accounting for stock dividends between GAAP and IFRS. is issued at an amount greater than par value, the difference between the par value

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