CHAPTER 14
STOCKHOLDERS’ EQUITY
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. A corporation is incorporated in only one state regardless of the number of states in which
it operates.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IFRS: None
2. The most common type of form of organization in the United States is the sole
proprietorship.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IFRS: None
3. Common stock is the residual corporate interest that bears the ultimate risks of loss.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IFRS: None
4. Earned capital consists of additional paid-in capital and retained earnings.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
5. True no-par stock should be carried in the accounts at its issue price without any
additional paid-in capital reported.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
6. Companies allocate the proceeds received from a lump-sum sale of securities based on
the securities’ par values.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
7. Companies should record stock issued for services or noncash property at either the fair
value of the stock issued or the fair value of the consideration received, whichever is more
clearly determinable.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
8. Participating preferred stock requires that if a company fails to pay a dividend in any year,
it must pay those dividends in a later year before paying any common dividends.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
and Control: Financial Statement Preparation, IFRS: None
9. Callable preferred stock permits the corporation at its option to redeem the outstanding
preferred shares at specified future dates and at stipulated prices.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
10. Treasury stock is a company’s own stock that has been reacquired and retired.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
,14 - 2 Test Bank for Intermediate Accounting, Eighteenth Edition
11. The cost method records all transactions in treasury shares at their cost and reports the
treasury stock as a deduction from capital stock only.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
12. When a corporation sells treasury stock below its cost, it usually debits the difference
between cost and selling price to Paid-in Capital from Treasury Stock.
Ans: T, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
13. The laws of some states require that corporations restrict their legal capital from
distribution to stockholders.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
14. The SEC requires companies to disclose their dividend policy in their annual report.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
15. All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a
corporation.
Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
16. Dividends payable in assets of the corporation other than cash are called property
dividends or dividends in kind.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
17. When a stock dividend is less than 20-25 percent of the number of common shares
outstanding, a company is required to transfer the fair value of the stock issued from
retained earnings.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
18. Stock splits and large stock dividends have the same effect on a company’s retained
earnings and total stockholders’ equity.
Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
19. The rate of return on common stock equity is computed by dividing net income by the
average common stockholders’ equity.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
20. The payout ratio is determined by dividing cash dividends paid to common stockholders
by net income available to common stockholders.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
, Stockholders’ Equity 14- 3
MULTIPLE CHOICE—Conceptual
21. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
22. The rights of common stockholders generally include the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of preferred stock.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
23. Which of the following statements is true regarding an S Corporation?
a. Stockholders in an S Corporation are subject to double taxation.
b. An S Corporation does not pay income tax.
c. An S Corporation typically has more than 100 stockholders.
d. All of these statements are true regarding S Corporations.
Ans: B, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
and Control: Financial Statement Preparation, IFRS: None
S
24. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to accumulate
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, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
S
25. Common stockholders of a business enterprise are said to be the residual owners which
means that they
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise
ownership.
d. can negotiate individual contracts on behalf of the enterprise.
Ans: C, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
and Control: Financial Statement Preparation, IFRS: None
26. Total stockholders' equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by a company.
c. claims against a portion of the total assets of a company.
d. the earnings that have been retained in the business.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
, 14 - 4 Test Bank for Intermediate Accounting, Eighteenth Edition
27. A primary source of stockholders' equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
and Control: Financial Statement Preparation, IFRS: None
28. Stockholders' equity is generally classified into two major categories which are
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, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
29. The accounting problem in a lump sum issuance is the allocation of proceeds between the
classes of securities. An acceptable method of allocation is
a. the pro forma method.
b. the proportional method.
c. the incremental method.
d. either the proportional method or the incremental method.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
30. 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. market value of the services received or the market value of the shares issued.
Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
31. 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.
a. 1
b. 2
c. 3
d. 1 or 3
Ans: A, LO: 1, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
32. Which of the following could create a secret reserve by undervaluing assets?
a. Inadequate depreciation is charged to income.
b. A capital expenditure is charged to expense.
c. Accrued expenses are recorded.
d. Impairment losses are reversed.
Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
and Control: Financial Statement Preparation, IFRS: None
STOCKHOLDERS’ EQUITY
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
1. A corporation is incorporated in only one state regardless of the number of states in which
it operates.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IFRS: None
2. The most common type of form of organization in the United States is the sole
proprietorship.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IFRS: None
3. Common stock is the residual corporate interest that bears the ultimate risks of loss.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: None, IFRS: None
4. Earned capital consists of additional paid-in capital and retained earnings.
Ans: F, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
5. True no-par stock should be carried in the accounts at its issue price without any
additional paid-in capital reported.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
6. Companies allocate the proceeds received from a lump-sum sale of securities based on
the securities’ par values.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
7. Companies should record stock issued for services or noncash property at either the fair
value of the stock issued or the fair value of the consideration received, whichever is more
clearly determinable.
Ans: T, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
8. Participating preferred stock requires that if a company fails to pay a dividend in any year,
it must pay those dividends in a later year before paying any common dividends.
Ans: F, LO: 1, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
and Control: Financial Statement Preparation, IFRS: None
9. Callable preferred stock permits the corporation at its option to redeem the outstanding
preferred shares at specified future dates and at stipulated prices.
Ans: T, LO: 1, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
10. Treasury stock is a company’s own stock that has been reacquired and retired.
Ans: F, LO: 2, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
,14 - 2 Test Bank for Intermediate Accounting, Eighteenth Edition
11. The cost method records all transactions in treasury shares at their cost and reports the
treasury stock as a deduction from capital stock only.
Ans: F, LO: 2, Bloom: K, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
12. When a corporation sells treasury stock below its cost, it usually debits the difference
between cost and selling price to Paid-in Capital from Treasury Stock.
Ans: T, LO: 2, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
13. The laws of some states require that corporations restrict their legal capital from
distribution to stockholders.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
14. The SEC requires companies to disclose their dividend policy in their annual report.
Ans: F, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
15. All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a
corporation.
Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
16. Dividends payable in assets of the corporation other than cash are called property
dividends or dividends in kind.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
17. When a stock dividend is less than 20-25 percent of the number of common shares
outstanding, a company is required to transfer the fair value of the stock issued from
retained earnings.
Ans: T, LO: 3, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
18. Stock splits and large stock dividends have the same effect on a company’s retained
earnings and total stockholders’ equity.
Ans: F, LO: 3, Bloom: C, Difficulty: Moderate, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
19. The rate of return on common stock equity is computed by dividing net income by the
average common stockholders’ equity.
Ans: F, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
20. The payout ratio is determined by dividing cash dividends paid to common stockholders
by net income available to common stockholders.
Ans: T, LO: 4, Bloom: K, Difficulty: Easy, Min: 1, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Analysis, IFRS: None
, Stockholders’ Equity 14- 3
MULTIPLE CHOICE—Conceptual
21. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
22. The rights of common stockholders generally include the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of preferred stock.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
Ans: B, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
23. Which of the following statements is true regarding an S Corporation?
a. Stockholders in an S Corporation are subject to double taxation.
b. An S Corporation does not pay income tax.
c. An S Corporation typically has more than 100 stockholders.
d. All of these statements are true regarding S Corporations.
Ans: B, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
and Control: Financial Statement Preparation, IFRS: None
S
24. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to accumulate
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, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
S
25. Common stockholders of a business enterprise are said to be the residual owners which
means that they
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise
ownership.
d. can negotiate individual contracts on behalf of the enterprise.
Ans: C, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
and Control: Financial Statement Preparation, IFRS: None
26. Total stockholders' equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by a company.
c. claims against a portion of the total assets of a company.
d. the earnings that have been retained in the business.
Ans: C, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
, 14 - 4 Test Bank for Intermediate Accounting, Eighteenth Edition
27. A primary source of stockholders' equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.
Ans: D, LO: 1, Bloom: K, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
and Control: Financial Statement Preparation, IFRS: None
28. Stockholders' equity is generally classified into two major categories which are
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, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting and
Control: Financial Statement Preparation, IFRS: None
29. The accounting problem in a lump sum issuance is the allocation of proceeds between the
classes of securities. An acceptable method of allocation is
a. the pro forma method.
b. the proportional method.
c. the incremental method.
d. either the proportional method or the incremental method.
Ans: D, LO: 1, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
30. 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. market value of the services received or the market value of the shares issued.
Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis,
AICPA PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
31. 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.
a. 1
b. 2
c. 3
d. 1 or 3
Ans: A, LO: 1, Bloom: C, Difficulty: Difficult, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Measurement, Interpretation and Analysis, AICPA
PC: None, IMA: Reporting and Control: Financial Statement Preparation, IFRS: None
32. Which of the following could create a secret reserve by undervaluing assets?
a. Inadequate depreciation is charged to income.
b. A capital expenditure is charged to expense.
c. Accrued expenses are recorded.
d. Impairment losses are reversed.
Ans: B, LO: 1, Bloom: C, Difficulty: Moderate, Min: 2, AACSB: Knowledge, AICPA BC: None, AICPA AC: Reporting, AICPA PC: None, IMA: Reporting
and Control: Financial Statement Preparation, IFRS: None
