Accounting Chapter 15 test bank

Accounting Chapter 15 test bank 1. legal capital is best defined as a. the amount of capital the state of incorporation allows the company to accumulate a corporate form of business organization, legal capital is best defined as over its existence. b. the par value of all capital stock issued. c. the amount of capital the federal government allows a corporation to generate. d. the total capital raised by a corporation within the limits set by the Securities and Exchange Commission. - [Ans = b. the par value of all capital stock issued. 2. Total stockholders' equity represents a. a claim to specific assets contributed by the owners. b. the maximum amount that can be borrowed by the enterprise. c. a claim against a portion of the total assets of an enterprise. d. only the amount of earnings that have been retained in the business. - [Ans = c. a claim against a portion of the total assets of an enterprise. 3. When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the a. market value of the services received. b. par value of the shares issued. c. market value of the shares issued. d. Any of these provides an appropriate basis for recording the transaction. - [Ans = b. par value of the shares issued. 4. Direct costs incurred to sell stock such as underwriting costs should be accounted for as 1. a reduction of additional paid-in capital. 2. an expense of the period in which the stock is issued. 3. an intangible asset. - [Ans = 1 5. A "secret reserve" will be created if a. inadequate depreciation is charged to income. b. a capital expenditure is charged to expense. c. liabilities are understated. d. stockholders' equity is overstated. - [Ans = b. a capital expenditure is charged to expense. Stock that has a fixed per-share amount printed on each stock certificate is called a. stated value stock. b. fixed value stock. c. uniform value stock. d. par value stock. - [Ans = d. par value stock. 6. Which of the following is not a legal restriction related to profit distributions by a corporation? a. The amount distributed to owners must be in compliance with the state laws governing corporations. b. The amount distributed in any one year can never exceed the net income reported for that year. c. Profit distributions must be formally approved by the board of directors. d. Dividends must be in full agreement with the capital stock contracts as to preferences and participation. - [Ans = b. The amount distributed in any one year can never exceed the net income reported for that year. 7. In January 2012, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2012, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares a. decreased total stockholders' equity. b. increased total stockholders' equity. c. did not change total stockholders' equity. d. decreased the number of issued shares. - [Ans = a. decreased total stockholders' equity. 8. When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited? a. Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value. b. Paid-in capital in excess of par for the purchase price. c. Treasury stock for the purchase price. d. Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value. - [Ans = c. Treasury stock for the purchase price. 9. Gains" on sales of treasury stock (using the cost method) should be credited to a. paid-in capital from treasury stock. b. capital stock. c. retained earnings. d. other income. - [Ans = a. paid-in capital from treasury stock. 10. Porter Corp. purchased its own par value stock on January 1, 2012 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from a. additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings. b. additional paid-in capital without regard as to whether or not there have been previous net "gains" from sales of the same class of stock included therein. c. retained earnings. d. net income. - [Ans = a. additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings. 11. How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions? a. As ordinary earnings shown on the income statement. b. As paid-in capital from treasury stock transactions. c. As an increase in the amount shown for common stock. d. As an extraordinary item shown on the income statement. - [Ans = b. As paid-in capital from treasury stock transactions. 12. Which of the following best describes a possible result of treasury stock transactions by a corporation? a. May increase but not decrease retained earnings. b. May increase net income if the cost method is used. c. May decrease but not increase retained earnings. d. May decrease but not increase net income. - [Ans = c. May decrease but not increase retained earnings 13. Which of the following features of preferred stock makes the security more like debt than an equity instrument? a. Participating b. Voting c. Redeemable d. Noncumulative - [Ans = c. Redeemable 14. According to the FASB, redeemable preferred stock should be a. included with common stock. b. included as a liability. c. excluded from the stockholders' equity heading. d. included as a contra item in stockholders' equity. - [Ans = b. included as a liability. 15. Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as a. an increase in current liabilities. b. an increase in stockholders' equity. c. a footnote. d. an increase in current liabilities for the current portion and long-term liabilities for the long-term portion. - [Ans = c. a footnote. 16. Which of the following statements about property dividends is not true? a. A property dividend is usually in the form of securities of other companies. b. A property dividend is also called a dividend in kind. c. The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred. d. All of these statements are true. - [Ans = c. The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred. 17. Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31, 2012, Houser distributed these shares of stock as a dividend to its stockholders. This is an example of a a. property dividend. b. stock dividend. c. liquidating dividend. d. cash dividend. - [Ans = a. property dividend. 18. A dividend which is a return to stockholders of a portion of their original investments is a a. liquidating dividend. b. property dividend. c. liability dividend. d. participating dividend. - [Ans = a. liquidating dividend. 19. A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to a. Retained Earnings. b. a paid-in capital account. c. Accumulated Depletion. d. Accumulated Depreciation. - [Ans = b. a paid-in capital account. 20. The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding a. increases common stock outstanding and increases total stockholders' equity. b. decreases retained earnings but does not change total stockholders' equity. c. may increase or decrease paid-in capital in excess of par but does not change total stockholders' equity. d. increases retained earnings and increases total stockholders' equity. - [Ans = b. decreases retained earnings but does not change total stockholders' equity. 21. At the date of declaration of a small stock dividend the entry should not include a. a credit to Common Stock Dividend Payable. b. a credit to Paid-in Capital in Excess of Par. c. a debit to Retained Earnings. d. All of these are acceptable. - [Ans = a. a credit to Common Stock Dividend Payable. 22. The balance in Common Stock Dividend Distributable should be reported as a(n) a. deduction from common stock issued. b. addition to capital stock. c. current liability. d. contra current asset. - [Ans = b. addition to capital stock. 23. Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements? a. Dividend preferences b. Liquidation preferences c. Call prices d. Conversion or exercise prices - [Ans = b. Liquidation preferences 24. Younger Company has outstanding both common stock and nonparticipating, non- cumulative preferred stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common stock is unaffected by a. the declaration of a stock dividend on preferred payable in preferred stock when the market price of the preferred is equal to its par value. b. the declaration of a stock dividend on common stock payable in common stock when the market price of the common is equal to its par value. c. the payment of a previously declared cash dividend on the common stock. d. a 2-for-1 split of the common stock. - [Ans = c. the payment of a previously declared cash dividend on the common stock. 25. Dividends are not paid on a. noncumulative preferred stock. b. nonparticipating preferred stock. c. treasury common stock. d. Dividends are paid on all of these. - [Ans = c. treasury common stock 26. How should cumulative preferred dividends in arrears be shown in a corporation's statement of financial position? a. Note disclosure b. Increase in stockholders' equity c. Increase in current liabilities d. Increase in current liabilities for the amount expected to be declared within the year or operating cycle, and increase in long-term liabilities for the balance - [Ans = a. Note disclosure 27. Berry Corporation has 50,000 shares of $10 par common stock authorized. The following transactions took place during 2012, the first year of the corporation's existence: Sold 10,000 shares of common stock for $18 per share. Issued 10,000 shares of common stock in exchange for a patent valued at $200,000. 28. At the end of the Berry's first year, total paid-in capital amounted to a. $80,000. b. $180,000. c. $200,000. d. $380,000. - [Ans = d. $380,000.(10,000 × $18) + $200,000 = $380,000. 29. Pember Corporation started business in 2007 by issuing 200,000 shares of $20 par common stock for $36 each. In 2012, 30,000 of these shares were purchased for $52 per share by Pember Corporation and held as treasury stock. On June 15, 2013, these 30,000 shares were exchanged for a piece of property that had an assessed value of $810,000. Perber's stock is actively traded and had a market price of $60 on June 15, 2013. The cost method is used to account for treasury stock. The amount of paid-in capital from treasury stock transactions resulting from the above events would be a. $1,200,000. b. $720,000. c. $585,000. d. $240,000. - [Ans =d ($60 - $52) × 30,000 = $240,000. 30. On September 1, 2012, Valdez Company reacquired 16,000 shares of its $10 par value common stock for $15 per share. Valdez uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit a. Treasury Stock for $160,000. b. Common Stock for $160,000. c. Common Stock for $160,000 and Paid-in Capital in Excess of Par for $60,000. d. Treasury Stock for $240,000. - [Ans =d 16,000 × $15 = $240,000. 31. Gannon Company acquired 8,000 shares of its own common stock at $20 per share on February 5, 2012, and sold 4,000 of these shares at $27 per share on August 9, 2013. The fair value of Gannon's common stock was $24 per share at December 31, 2012, and $25 per share at December 31, 2013. The cost method is used to record treasury stock transactions. What account(s) should Gannon credit in 2013 to record the sale of 4,000 shares? a. Treasury Stock for $108,000.