D104 OA2 LC-MQ-UT Unit 6 Questions with
Verified Correct Answers
In every corporation, what is the one class of stock that represents the basic ownership
interest called?
Common stock
Each corporation has Common Stock, the one class of stock that represents basis ownership
interest.
Who does the residual interest in a corporation belong to?
The common stockholders
The holders of common stock own the residual interest in the corporation and bears the
ultimate risk of loss and assets upon dissolution.
Which type of preferred stock generates a dividend in arrears?
Cumulative preferred stock
Only cumulative preferred stock requires that if a corporation fails to pay a dividend in any
year, it must make it up in a later year before paying any dividends to common stockholders.
If the directors fail to declare a dividend at the normal date for dividend action, the dividend
is said to have been "passed." Any passed dividend on cumulative preferred stock constitutes
a dividend in arrears.
,Duszynski Company issues 20,000 shares of its $.50 par value common stock having a
market value of $25 per share and 6,000 shares of its $25 par value preferred stock
having a market value of $50 per share for a lump sum of $750,000.
What is the amount of the proceeds allocated to the common stock?
$468,750
When the fair value of the stock is known, stocks issued at a lump sum are calculated using
the proportional method.
The fair value of the common stock is: 20,000 shares x $25 = $500,000.
The fair value of the preferred stock is: 6,000 shares x $50 = $300,000.
Common stock makes up 62.5% of the fair value [$500,000 / ($500,000 + $300,000) = .625].
Therefore, the proceeds associated with the common stock is calculated as: $750,000
purchase price x 62.5% = $486,750.
On September 14, 2017, Gayot Company reacquired 12,000 shares of its $1 par value
common stock for $40 per share. Gayot uses the cost method to account for treasury
stock.
What is the debit side of the journal entry to record the reacquisition of the stock?
Treasury Stock for $480,000
Under the cost method, when a company purchases treasury stock, it records the transaction
,at the price it paid in the Treasury Stock account.
The journal entry for this transaction is:
Debit: Treasury Stock $480,000,
Credit Cash $480,000.
An analysis of stockholders' equity of Hahn Corporation as of January 1, 2021, is as
follows:
Common stock, par value $20; authorized 100,000 shares; issued and outstanding
90,000 shares: $1,800,000
Paid-in capital in excess of par: $900,000
Retained earnings: $760,000
Total: $3,460,000
Hahn uses the cost method of accounting for treasury stock and during 2021 entered
into the following transactions:
Acquired 2,500 shares of its stock for $75,000.
Sold 2,000 treasury shares at $35 per share.
Sold the remaining treasury shares at $20 per share.
Assuming no other equity transactions occurred during 2021, what should Hahn report
on December 31, 2021, as total additional paid-in capital?
$905,000
The difference in the cost of treasury stock and the subsequent sale is recorded in the Paid-in
Capital account. In this case, Hahn purchased the original treasury stock at $30 per share
, ($75,000/2,500 shares).
To record the subsequent sale of 2,000 shares, the $30 cost per share is posted to the treasury
stock account and the $5 difference is posted to the paid-in capital account. The same is true
when the remaining 500 shares of treasury stock are sold at a price of $10 per share lower
than the original purchase price.
Therefore, the balance of the paid-in capital account can be calculated by: $900,000 + (2000
shares x $5) - (500 shares x $10) = $905,000.
Also, consider the journal entries for each of the transactions:
Purchase of $2,500 shares of treasury stock:
Debit Treasury Stock $75,000;
Credit Cash $75,000;
Sold 2,000 shares of treasury stock;
Debit Cash $70,000;
Credit Treasury Stock $60,000 (2,000 shares x $30 purchase price);
Credit Paid-In Capital Excess of Par $10,000;
Sold remaining 500 shares of treasury stock:
Debit Cash $10,000;
Debit Paid-In Capital Excess of Par $5,000;
Credit Treasury Stock $15,000 (500 shares x $30 purchase price);
Verified Correct Answers
In every corporation, what is the one class of stock that represents the basic ownership
interest called?
Common stock
Each corporation has Common Stock, the one class of stock that represents basis ownership
interest.
Who does the residual interest in a corporation belong to?
The common stockholders
The holders of common stock own the residual interest in the corporation and bears the
ultimate risk of loss and assets upon dissolution.
Which type of preferred stock generates a dividend in arrears?
Cumulative preferred stock
Only cumulative preferred stock requires that if a corporation fails to pay a dividend in any
year, it must make it up in a later year before paying any dividends to common stockholders.
If the directors fail to declare a dividend at the normal date for dividend action, the dividend
is said to have been "passed." Any passed dividend on cumulative preferred stock constitutes
a dividend in arrears.
,Duszynski Company issues 20,000 shares of its $.50 par value common stock having a
market value of $25 per share and 6,000 shares of its $25 par value preferred stock
having a market value of $50 per share for a lump sum of $750,000.
What is the amount of the proceeds allocated to the common stock?
$468,750
When the fair value of the stock is known, stocks issued at a lump sum are calculated using
the proportional method.
The fair value of the common stock is: 20,000 shares x $25 = $500,000.
The fair value of the preferred stock is: 6,000 shares x $50 = $300,000.
Common stock makes up 62.5% of the fair value [$500,000 / ($500,000 + $300,000) = .625].
Therefore, the proceeds associated with the common stock is calculated as: $750,000
purchase price x 62.5% = $486,750.
On September 14, 2017, Gayot Company reacquired 12,000 shares of its $1 par value
common stock for $40 per share. Gayot uses the cost method to account for treasury
stock.
What is the debit side of the journal entry to record the reacquisition of the stock?
Treasury Stock for $480,000
Under the cost method, when a company purchases treasury stock, it records the transaction
,at the price it paid in the Treasury Stock account.
The journal entry for this transaction is:
Debit: Treasury Stock $480,000,
Credit Cash $480,000.
An analysis of stockholders' equity of Hahn Corporation as of January 1, 2021, is as
follows:
Common stock, par value $20; authorized 100,000 shares; issued and outstanding
90,000 shares: $1,800,000
Paid-in capital in excess of par: $900,000
Retained earnings: $760,000
Total: $3,460,000
Hahn uses the cost method of accounting for treasury stock and during 2021 entered
into the following transactions:
Acquired 2,500 shares of its stock for $75,000.
Sold 2,000 treasury shares at $35 per share.
Sold the remaining treasury shares at $20 per share.
Assuming no other equity transactions occurred during 2021, what should Hahn report
on December 31, 2021, as total additional paid-in capital?
$905,000
The difference in the cost of treasury stock and the subsequent sale is recorded in the Paid-in
Capital account. In this case, Hahn purchased the original treasury stock at $30 per share
, ($75,000/2,500 shares).
To record the subsequent sale of 2,000 shares, the $30 cost per share is posted to the treasury
stock account and the $5 difference is posted to the paid-in capital account. The same is true
when the remaining 500 shares of treasury stock are sold at a price of $10 per share lower
than the original purchase price.
Therefore, the balance of the paid-in capital account can be calculated by: $900,000 + (2000
shares x $5) - (500 shares x $10) = $905,000.
Also, consider the journal entries for each of the transactions:
Purchase of $2,500 shares of treasury stock:
Debit Treasury Stock $75,000;
Credit Cash $75,000;
Sold 2,000 shares of treasury stock;
Debit Cash $70,000;
Credit Treasury Stock $60,000 (2,000 shares x $30 purchase price);
Credit Paid-In Capital Excess of Par $10,000;
Sold remaining 500 shares of treasury stock:
Debit Cash $10,000;
Debit Paid-In Capital Excess of Par $5,000;
Credit Treasury Stock $15,000 (500 shares x $30 purchase price);
