Plack Co. purchased 10,000 shares (2% ownership) of Ty Corp. on February 14, Year 1. Plack received a stock
dividend of 2,000 shares on April 30, Year 1, when the market value per share was $35. Ty paid a cash dividend
of $2 per share on December 15, Year 1. In its Year 1 income statement, what amount should Plack report as
dividend income?
a. $90,000
b
$20,000
.
c. $24,000
d. $94,000
Explanation
Choice "c" is correct.
Dividend Income = No. of shares × dividend per
share
= 12,000 × $2
= $24,000
On January 15, Year 1, Rico Co. declared its annual cash dividend on common stock for the year ended January
31, Year 1. The dividend was paid on February 9, Year 1, to stockholders of record as of January 28, Year 1. On
what date should Rico decrease retained earnings by the amount of the dividend?
a. January 15, Year 1
b
January 28, Year 1
.
c. February 9, Year 1
d. January 31, Year 1
,Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31, Year 1, Cyan's
retained earnings were $300,000. In March, Year 2, Cyan reacquired 5,000 shares of its common stock at $20
per share. In June, Year 2, Cyan sold 1,000 of these shares to its corporate officers for $25 per share. Cyan uses
the cost method to record treasury stock. Net income for the year ended December 31, Year 2, was $60,000. At
December 31, Year 2, what amount should Cyan report as retained earnings?
a. $380,000
b
$375,000
.
c. $360,000
d. $365,000
Explanation
Choice "c" is correct. $360,000 retained earnings at 12/31/Year 2 ($300 + $60). Because all treasury stock
transactions were recorded under the "cost method," and the resale of treasury stock was at a price that exceeded
its acquisition price, none of the treasury stock transactions affected retained earnings.
Selected information from the accounts of Row Co. at December 31, Year 5, follows:
Total income since incorporation $420,000
Total cash dividends paid 130,000
Total value of property dividends distributed 30,000
Excess of proceeds over cost of treasury stock sold, 110,000
accounted for using the cost method
In its December 31, Year 5, financial statements, what amount should Row report as retained earnings?
a. $260,000
, b
$400,000
.
c. $370,000
d. $290,000
Explanation
Choice "a" is correct. Look at each item given and decide how it affects retained earnings: income since
incorporation equals unadjusted ending retained earnings (RE), that is, current year income is included; cash
dividends is a direct deduction from RE on the date of declaration; property dividends are deducted from RE at
market value on the date of declaration; the excess proceeds from the sale of treasury stock is considered
additional paid-in capital. Thus, ending RE = unadj. RE - cash dividends - property dividends = $420,000 -
$130,000 - $30,000 = $260,000.
A company issued rights to its existing shareholders without consideration. The rights allowed the recipients to
purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the
following accounts will be increased?
Additiona
l
Commo paid-in
n stock capital
a. No Yes
b
No No
.
c. Yes Yes
d. Yes No
Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock at December 31,
Year 1. During Year 2, transactions involving Nest's common stock were as follows:
, May 3 1,000 shares of treasury stock were sold.
August 6 10,000 shares of previously unissued stock
were sold.
November 18 A 2-for-1 stock split took effect.
Laws in Nest's state of incorporation protect treasury stock from dilution. At December 31, Year 2, how many
shares of Nest's common stock were issued and outstanding?
Shares
Outstandin
Issued g
a. 220,000 216,000
b
222,000 214,000
.
c. 222,000 218,000
d. 220,000 212,000
Explanation
Choice "d" is correct. 220,000 shares issued, and 212,000 shares outstanding.
Shares In Shares
issued treasury Outstanding
Dec. 31, Year 1 status 100,000 (5,000) 95,000
May 3, 1,000 shares of −− 1,000 1,000
treasury stock sold
Sub total 100,000 (4,000) 96,000
dividend of 2,000 shares on April 30, Year 1, when the market value per share was $35. Ty paid a cash dividend
of $2 per share on December 15, Year 1. In its Year 1 income statement, what amount should Plack report as
dividend income?
a. $90,000
b
$20,000
.
c. $24,000
d. $94,000
Explanation
Choice "c" is correct.
Dividend Income = No. of shares × dividend per
share
= 12,000 × $2
= $24,000
On January 15, Year 1, Rico Co. declared its annual cash dividend on common stock for the year ended January
31, Year 1. The dividend was paid on February 9, Year 1, to stockholders of record as of January 28, Year 1. On
what date should Rico decrease retained earnings by the amount of the dividend?
a. January 15, Year 1
b
January 28, Year 1
.
c. February 9, Year 1
d. January 31, Year 1
,Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31, Year 1, Cyan's
retained earnings were $300,000. In March, Year 2, Cyan reacquired 5,000 shares of its common stock at $20
per share. In June, Year 2, Cyan sold 1,000 of these shares to its corporate officers for $25 per share. Cyan uses
the cost method to record treasury stock. Net income for the year ended December 31, Year 2, was $60,000. At
December 31, Year 2, what amount should Cyan report as retained earnings?
a. $380,000
b
$375,000
.
c. $360,000
d. $365,000
Explanation
Choice "c" is correct. $360,000 retained earnings at 12/31/Year 2 ($300 + $60). Because all treasury stock
transactions were recorded under the "cost method," and the resale of treasury stock was at a price that exceeded
its acquisition price, none of the treasury stock transactions affected retained earnings.
Selected information from the accounts of Row Co. at December 31, Year 5, follows:
Total income since incorporation $420,000
Total cash dividends paid 130,000
Total value of property dividends distributed 30,000
Excess of proceeds over cost of treasury stock sold, 110,000
accounted for using the cost method
In its December 31, Year 5, financial statements, what amount should Row report as retained earnings?
a. $260,000
, b
$400,000
.
c. $370,000
d. $290,000
Explanation
Choice "a" is correct. Look at each item given and decide how it affects retained earnings: income since
incorporation equals unadjusted ending retained earnings (RE), that is, current year income is included; cash
dividends is a direct deduction from RE on the date of declaration; property dividends are deducted from RE at
market value on the date of declaration; the excess proceeds from the sale of treasury stock is considered
additional paid-in capital. Thus, ending RE = unadj. RE - cash dividends - property dividends = $420,000 -
$130,000 - $30,000 = $260,000.
A company issued rights to its existing shareholders without consideration. The rights allowed the recipients to
purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the
following accounts will be increased?
Additiona
l
Commo paid-in
n stock capital
a. No Yes
b
No No
.
c. Yes Yes
d. Yes No
Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock at December 31,
Year 1. During Year 2, transactions involving Nest's common stock were as follows:
, May 3 1,000 shares of treasury stock were sold.
August 6 10,000 shares of previously unissued stock
were sold.
November 18 A 2-for-1 stock split took effect.
Laws in Nest's state of incorporation protect treasury stock from dilution. At December 31, Year 2, how many
shares of Nest's common stock were issued and outstanding?
Shares
Outstandin
Issued g
a. 220,000 216,000
b
222,000 214,000
.
c. 222,000 218,000
d. 220,000 212,000
Explanation
Choice "d" is correct. 220,000 shares issued, and 212,000 shares outstanding.
Shares In Shares
issued treasury Outstanding
Dec. 31, Year 1 status 100,000 (5,000) 95,000
May 3, 1,000 shares of −− 1,000 1,000
treasury stock sold
Sub total 100,000 (4,000) 96,000
