D104 Intermediate Accounting II Unit 6 Stockholders’
Equity (189 QUESTIONS AND EXPLAINED ANSWERS
2025) Western Governors University
Describe the corporate form and the issuance of shares of
stock 1. The corporate charter sometimes is known as (a)
a. articles of incorporation.
b. statement of organization.
c. by-laws.
d. registration statement.
Ans a
Accounting Rule: the corporate form of business organization begins with the submitting of
articles of incorporation to the state in which incorporation is desired. Assuming the requirements
are properly fulfilled, the corporation charter is issued and the corporation is recognized as a legal
entity subject to state law. The laws of the state of incorporation that govern owners’ equity
transactions are normally set out in the state’s business corporation act.
2. What must a company submit to establish it as a legal entity that is subject to state law?
a. articles of incorporation.
b. by-laws.
c. registration statement.
d. statement of organization.
Ans a
Accounting Rule: articles of incorporation must be submitted to the secretary of the state the
company wished to incorporate in.
3. A share of stock has a preemptive right. From which event is the stockholder protected?
a. double taxation on dividends
,b. involuntary dilution of ownership interest
c. loss of investment in the event of liquidation
d. requirement to vote in an election of board of
directors Ans b
Accounting Rule: the preemptive right protects current shareholders against dilution of
ownership interest.
4. The preemptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
,Ans b
Accounting Rule: preemptive rights are a contractual clause giving a shareholder the right to
buy additional shares in any future issue of the company's common stock before the shares are
available to the general public. A preemptive right is sometimes called an "anti-dilution
provision." It gives the investor the option of maintaining a certain percentage of ownership of
the company as it grows.
5. Under a preemptive right provision
a. holders of common stock must be given the first option to purchase new shares
b. common shareholders have a pre-emptive right to dividends
c. preferred shareholders have the first option on new common shares
d. dilution of existing positions is
encouraged Ans a
6. An accountant is explaining to a client that each share of common stock comes with rights
and privileges for the owner and that a specific right protects existing stockholders from having
their interest diluted.
Which right is the accountant referencing to this client?
a. right to vote for directors.
b. right to share in losses and profits.
c. right to share in new issues of common stock.
d. right to share assets upon liquidation.
Ans c
7. The preemptive right enables a stockholder to
a. receive the same amount of dividends on a percentage basis as the preferred stockholders.
b. receive cash dividends after other classes of stock with the preemptive right.
c. buy capital stock back to the corporation at the option of the stockholder.
d. receive unequal amounts of dividends on a percentage basis as the preferred
stockholders, Ans a
, 8. A company’s balance sheet displays common stock of $150,000, preferred stock of $50,000,
additional paid-in capital from common stock of $100,000, and retained earnings of $80,000.
Which amount represents stockholders’ equity?
a. $100,000
b. $300,000
c. $330,000
d. $380,000
Ans d
Accounting Rule: stockholders’ equity is comprised of
a. Capital stock – common stock and preferred stock.
b. Additional paid-in capital.
c. Retained earnings.
d. Treasury stock as a contra account.
9. Stockholders' equity is generally classified into two major categories
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.
Ans d
Accounting Rule: capital stock and additional paid-in capital constitute contributed (paid-in)
capital; retained earnings represents the earned capital of the enterprise (reduced by dividends
distributed). Contributed capital (paid-in capital) is the total amount paid in on capital stock.
Earned capital is the capital that develops from profitable operations.
10.When stock traded on an active exchange is issued for a machine
a. no entry is recorded until restrictions are lifted.
b. the asset is recorded for the fair value of the stock.
c. the asset is recorded for the appraised value of the machine.
d. paid-in capital is increased by the appraised value of the machine.
Ans b
Accounting Rule: accounting for the issuance of shares of stock for property or services involves
an issue of valuation. The general rule is companies should record stock issued for services or
property other than cash at either the fair value of the stock issued or the fair value of the
noncash consideration received, whichever is more clearly and readily determinable. When the
stock is actively traded on an organized stock exchange, the market value of the stock is the
best evidence of value.
Equity (189 QUESTIONS AND EXPLAINED ANSWERS
2025) Western Governors University
Describe the corporate form and the issuance of shares of
stock 1. The corporate charter sometimes is known as (a)
a. articles of incorporation.
b. statement of organization.
c. by-laws.
d. registration statement.
Ans a
Accounting Rule: the corporate form of business organization begins with the submitting of
articles of incorporation to the state in which incorporation is desired. Assuming the requirements
are properly fulfilled, the corporation charter is issued and the corporation is recognized as a legal
entity subject to state law. The laws of the state of incorporation that govern owners’ equity
transactions are normally set out in the state’s business corporation act.
2. What must a company submit to establish it as a legal entity that is subject to state law?
a. articles of incorporation.
b. by-laws.
c. registration statement.
d. statement of organization.
Ans a
Accounting Rule: articles of incorporation must be submitted to the secretary of the state the
company wished to incorporate in.
3. A share of stock has a preemptive right. From which event is the stockholder protected?
a. double taxation on dividends
,b. involuntary dilution of ownership interest
c. loss of investment in the event of liquidation
d. requirement to vote in an election of board of
directors Ans b
Accounting Rule: the preemptive right protects current shareholders against dilution of
ownership interest.
4. The preemptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
,Ans b
Accounting Rule: preemptive rights are a contractual clause giving a shareholder the right to
buy additional shares in any future issue of the company's common stock before the shares are
available to the general public. A preemptive right is sometimes called an "anti-dilution
provision." It gives the investor the option of maintaining a certain percentage of ownership of
the company as it grows.
5. Under a preemptive right provision
a. holders of common stock must be given the first option to purchase new shares
b. common shareholders have a pre-emptive right to dividends
c. preferred shareholders have the first option on new common shares
d. dilution of existing positions is
encouraged Ans a
6. An accountant is explaining to a client that each share of common stock comes with rights
and privileges for the owner and that a specific right protects existing stockholders from having
their interest diluted.
Which right is the accountant referencing to this client?
a. right to vote for directors.
b. right to share in losses and profits.
c. right to share in new issues of common stock.
d. right to share assets upon liquidation.
Ans c
7. The preemptive right enables a stockholder to
a. receive the same amount of dividends on a percentage basis as the preferred stockholders.
b. receive cash dividends after other classes of stock with the preemptive right.
c. buy capital stock back to the corporation at the option of the stockholder.
d. receive unequal amounts of dividends on a percentage basis as the preferred
stockholders, Ans a
, 8. A company’s balance sheet displays common stock of $150,000, preferred stock of $50,000,
additional paid-in capital from common stock of $100,000, and retained earnings of $80,000.
Which amount represents stockholders’ equity?
a. $100,000
b. $300,000
c. $330,000
d. $380,000
Ans d
Accounting Rule: stockholders’ equity is comprised of
a. Capital stock – common stock and preferred stock.
b. Additional paid-in capital.
c. Retained earnings.
d. Treasury stock as a contra account.
9. Stockholders' equity is generally classified into two major categories
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.
Ans d
Accounting Rule: capital stock and additional paid-in capital constitute contributed (paid-in)
capital; retained earnings represents the earned capital of the enterprise (reduced by dividends
distributed). Contributed capital (paid-in capital) is the total amount paid in on capital stock.
Earned capital is the capital that develops from profitable operations.
10.When stock traded on an active exchange is issued for a machine
a. no entry is recorded until restrictions are lifted.
b. the asset is recorded for the fair value of the stock.
c. the asset is recorded for the appraised value of the machine.
d. paid-in capital is increased by the appraised value of the machine.
Ans b
Accounting Rule: accounting for the issuance of shares of stock for property or services involves
an issue of valuation. The general rule is companies should record stock issued for services or
property other than cash at either the fair value of the stock issued or the fair value of the
noncash consideration received, whichever is more clearly and readily determinable. When the
stock is actively traded on an organized stock exchange, the market value of the stock is the
best evidence of value.
