ACCT Ch12 Test

Accounting Chapter 12 Corporations: Paid-in Capital and the Balance Sheet
Learning Objective 12-1

1) The formation of a corporation is generally less complicated than the formation of a partnership.
Answer: FALSE
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Content/Knowledge
AICPA Business: Legal/Regulatory
AICPA Functional: Measurement, Reporting
2) A corporation is a separate legal entity formed under the laws of a particular state.
Answer: TRUE
Diff: 1
LO: 12-1
EOC Ref: E12-13
3) Stockholders of a corporation have unlimited liability for the corporation's debt.
Answer: FALSE
Diff: 1
LO: 12-1
EOC Ref: E12-13
4) A disadvantage of the corporation is the separation between the owners of the corporation (the stockholders) and
the managers of the corporation, which can sometimes result in a conflict of interests.
Answer: TRUE
Diff: 1
LO: 12-1
EOC Ref: E12-13
AACSB: Reflective Thinking
5) Which of the following is a TRUE statement about a corporation?
A) The owners of a corporation have co-ownership of the property of the corporation.
B) A corporation is not taxed on the corporation's business income.
C) A corporation has a limited life.
D) The owners of a corporation have limited liability for the corporation's debts.
Answer: D
Diff: 1
LO: 12-1
EOC Ref: E12-13
Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall
6) Which of the following characteristics of a corporation limits a stockholder's loss to the amount of his or her
investment in the stock of the corporation?
A) Transferability of ownership
B) Limited liability
C) Separate legal entity
D) Separation of ownership and management
Answer: B
Diff: 1
LO: 12-1
EOC Ref: E12-13
7) Which of the following statements describes the corporate characteristic termed no mutual agency?
A) The liabilities of the corporation cannot be extended to the personal assets of the shareholder.
B) Shares of stock can be readily bought and sold by investors on the open market.
C) Shareholders are not authorized to sign contracts or make business commitments on behalf of the corporation.
D) Corporations pay income tax on corporate earnings, and shareholders pay personal income tax on corporate
dividends and gains from sale of stock.
Answer: C
Diff: 1
LO: 12-1
EOC Ref: E12-13
8) Which of the following statements describes the corporate characteristic termed limited liability?
Answer: A
Diff: 1
LO: 12-1
EOC Ref: E12-13
9) Which of the following statements describes the corporate characteristic termed double taxation?
Answer: D
Diff: 1
LO: 12-1
EOC Ref: E12-13
2
10) Which of the following statements describes the corporate characteristic of easy transfer of corporate
ownership?
Answer: B
Diff: 1
LO: 12-1
EOC Ref: E12-13
11) Which of the following corporate characteristics is a disadvantage of the corporate form of business?
A) Limited liability
B) Double taxation
C) No mutual agency
D) Transferability of ownership
Answer: B
Diff: 1
LO: 12-1
EOC Ref: E12-13
12) Which of the following is a disadvantage of the corporate form of business?
A) Separation of ownership and management
B) Continuous life
C) The potential to raise large amounts of capital
D) No mutual agency
Answer: A
Diff: 1
LO: 12-1
EOC Ref: E12-13
13) What authority determines how many shares of stock a corporation may issue?
A) A vote by the board of directors
B) The rules of GAAP
C) Regulations of the Securities and Exchange Commission
D) The government laws in the state where the business is incorporated
Answer: D
Diff: 1
LO: 12-1
EOC Ref: E12-13
14) Which of the following describes the term outstanding stock?

A) The shares of stock that are held by the stockholders
B) The shares of stock that have been sold for the highest price
C) The total amount of stock that has been authorized by state law
D) The total amount of stock that has not been sold yet
Answer: A
Diff: 1
LO: 12-1
EOC Ref: E12-13
15) Which of the following characteristics is an advantage of the corporate form of business?
A) Higher degree of government regulation
B) The potential to raise large amounts of capital
C) Separation of ownership and management
D) Double taxation
Answer: B
Diff: 1
LO: 12-1
EOC Ref: E12-13
1) Different classes and types of stock carry different degrees of risk for the shareholder.
Answer: TRUE
Diff: 1
LO: 12-2
EOC Ref: S12-2
2) Corporations must issue common stock, but may or may not decide to issue preferred stock.
Answer: TRUE
Diff: 1
LO: 12-2
EOC Ref: S12-2
3) All forms and classes of stock carry voting rights.
Answer: FALSE
Diff: 1
LO: 12-2
EOC Ref: S12-2
4) Every corporation issues preferred stock.

Answer: FALSE
Diff: 1
LO: 12-2
EOC Ref: S12-2
5) Paid-in capital is equity that is generated internally by corporate business transactions.
Answer: FALSE
Diff: 1
LO: 12-2
EOC Ref: S12-2
6) Retained earnings is equity that is generated internally by corporate business transactions.
Answer: TRUE
Diff: 1
LO: 12-2
EOC Ref: S12-2
7) All corporations must issue both common and preferred shares of stock.
Answer: FALSE
Diff: 1
LO: 12-2
EOC Ref: S12-2
8) Which of the following represents one of the basic rights of stockholders?
A) Stockholders may sell their stock back to the company if they wish.
B) Stockholders may authorize a business contract on behalf of the corporation.
C) Stockholders may participate in management by voting on corporate matters.
D) Stockholders may determine at what price the company issues stock.
Answer: C
Diff: 1
LO: 12-2
EOC Ref: S12-2

B) Stockholders may authorize a business contract on behalf of the corporation.
C) Stockholders may determine at what price the company issues stock.
D) Stockholders may receive dividends from corporate earnings.
Answer: D
Diff: 1
LO: 12-2
EOC Ref: S12-2
B) Stockholders can claim a portion of the corporate assets in the event the company is liquidated.
C) Stockholders may authorize a business contract on behalf of the corporation.
Answer: B
Diff: 1
LO: 12-2
EOC Ref: S12-2
A) Stockholders can maintain their proportionate ownership if the corporation issues new stock.
B) Stockholders may sell their stock back to the company if they wish.
C) Stockholders may authorize a business contract on behalf of the corporation.
Answer: A
Diff: 1
LO: 12-2
EOC Ref: S12-2
12) Which of the following describes the par value of stock?
A) Par value is the current selling price of stock.
B) Par value is the highest price for which a share can sell.
C) Par value is the price paid if the corporation purchases its own stock back.
D) Par value is a nominal, or minimal, amount assigned to shares of stock by the corporation.
Answer: D
Diff: 1
LO: 12-2
EOC Ref: S12-2
13) The two basic sources of equity are:

A) common stock and bonds.
B) common stock and preferred stock.
C) paid-in capital and retained earnings.
D) loans from banks and gifts from donors.
Answer: C
Diff: 1
LO: 12-2
EOC Ref: S12-2
14) Paid-in capital consists of:
A) amounts paid by customers.
B) capital raised by issuing bonds.
C) earnings generated by the corporation.
D) amounts received from stockholders.
Answer: D
Diff: 1
LO: 12-2
EOC Ref: S12-2
15) Which of the following describes retained earnings?
A) Internally generated capital that results from profitable business transactions
B) Externally generated capital that is contributed by shareholders
C) Externally generated capital that is raised from banks and other creditors
D) Internally generated capital that results from employees' contributions
Answer: A
Diff: 1
LO: 12-2
EOC Ref: S12-2
16) Which of the following describes preferred stock?
A) Stock that sells for a very high price
B) Stock that is sold to employees of the company as a performance incentive
C) Stock that is purchased by the corporation for investment purposes
D) Stock which gives shareholders certain preferences and advantages over common stock
Answer: D
Diff: 1
LO: 12-2
EOC Ref: S12-2
17) Which of the following is a TRUE statement about no-par stock?

A) No-par stock has zero value.
B) No-par stock has been purchased by the corporation for investment purposes.
C) No-par stock is a form of common stock that does not carry par value.
D) No-par stock is a form of preferred stock without voting rights.
Answer: C
Diff: 1
LO: 12-2
EOC Ref: S12-2
18) Which of the following types of stock are considered to be LEAST risky for investors?
A) Common stock
B) Par value stock
C) No-par stock
D) Preferred stock
Answer: D
Diff: 2
LO: 12-2
EOC Ref: S12-2
19) Which of the following is an advantage of preferred stock?
A) Preferred shareholders are guaranteed that they will not take a loss on their investment.
B) Preferred shareholders have higher voting rights than common shareholders.
C) Preferred shareholders may sell their shares for a price higher than that of common stock.
D) Preferred shareholders have the first claim on dividend funds.
Answer: D
Diff: 2
LO: 12-2
EOC Ref: S12-2
A) Preferred shareholders generally receive a fixed amount of dividends before common stockholders do.
B) Preferred shareholders are guaranteed that they will not take a loss on their investment.
C) Preferred shareholders have higher voting rights than common shareholders.
D) Preferred shareholders may sell their shares for a price higher than that of common stock.
Answer: A
Diff: 2
LO: 12-2
EOC Ref: S12-2

A) In the event of liquidation, preferred shareholders are guaranteed to get their investment back in full.
B) In the event of liquidation, preferred shareholders have first claim on remaining corporate assets.
C) In the event of liquidation, preferred shareholders may sell their shares for higher amounts than common stock.
D) In the event of liquidation, preferred shareholders may retain their proportionate share of voting rights.
Answer: B
Diff: 2
LO: 12-2
EOC Ref: S12-2
1) When a corporation sells 10,000 shares of $10 par value common stock for $120,000, the Common stock account
is credited for $100,000.
Answer: TRUE
Diff: 1
LO: 12-3
EOC Ref: E12-17
AACSB: Analytic Skills
AICPA Business: Strategic/Critical Thinking
2) Stock sold for amounts in excess of par value results in a gain reported on the income statement.
Answer: FALSE
Diff: 1
LO: 12-3
EOC Ref: E12-17
3) The stock of publicly owned corporations is bought and sold on stock exchanges, such as the New York Stock
Exchange.
Answer: TRUE
Diff: 1
LO: 12-3
EOC Ref: E12-17
4) When a company sells stock for more than the par value, it will record a gain on sale for the amount in excess of
par.
Answer: FALSE
Diff: 1
LO: 12-3
EOC Ref: E12-17
5) Osbourne Company issued 50,000 shares of common stock in exchange for manufacturing equipment. The
equipment was valued at $1,000,000. The stock has par value of $0.01 per share. Osbourne should record a gain on
the sale of stock for the difference between the equipment's market value and the stock's current market value.
Answer: FALSE
Diff: 2
LO: 12-3
EOC Ref: E12-17
6) Most preferred stock is sold at a price higher than its par value.
Answer: FALSE
Diff: 1
LO: 12-3
EOC Ref: E12-17
7) If a company's share prices go up from the original issue price, the company will record income for the amount of
the gain.
Answer: FALSE
Diff: 1
LO: 12-3
EOC Ref: E12-17
8) No gains or losses are ever recorded by a company when they sell or issue shares of their own stock.
Answer: TRUE
Diff: 1
LO: 12-3
EOC Ref: E12-17
9) Which of the following would be included in the entry to record the issuance of 5,000 shares of $10 par value
common stock at $13 per share cash?
A) Cash would be debited for $65,000.
B) Common stock would be debited for $50,000.
C) Common stock would be credited for $65,000.
D) Paid-in capital in excess of parcommon would be debited for $5,000.
Answer: A
Explanation: A) Calculations: 5,000 $13 = $65,000
Diff: 1
LO: 12-3
EOC Ref: E12-17
10
10) Retained earnings represents:

A) the assets of the corporation less the liabilities.
B) capital contributed by the stockholders of a corporation.
C) the accumulated profits of the corporation less dividends paid out.
D) a liability on the corporate balance sheet.
Answer: C
Diff: 1
LO: 12-3
EOC Ref: E12-17
11) Which of the following occurs when a shareholder invests cash in a corporation in exchange for stock?
A) Both liabilities and stockholders' equity are increased.
B) Both assets and stockholders' equity are increased.
C) One asset is increased and another asset is decreased.
D) Both assets and liabilities are increased.
Answer: B
Diff: 1
LO: 12-3
EOC Ref: E12-17
12) The following information is from the balance sheet of Tudor Corporation as of December 31, 2014.
Preferred stock, $100 par
Paid-in capital in excess of parpreferred
Common stock, $1 par
Paid-in capital in excess of parcommon
Retained earnings
Total stockholders' equity
$ 500,000
35,000
190,000
380,000
131,500
$1,236,500
What was the average issue price of the common stock shares?
A) $1.90
B) $1.00
C) $3.00
D) $13.15
Answer: C
Explanation: C) Calculations: $190,000/$1 par= 190,000 shares issued
($190,000 + $380,000)/190,000 shares = $3
Diff: 3
LO: 12-3
EOC Ref: E12-17
11
Retained earnings
$ 500,000
35,000
190,000
380,000
131,500
$1,236,500
What is the average issue price of the preferred stock shares?

A) $107
B) $100
C) $176
D) $5,000
Answer: A
Explanation: A) Calculations:
$500,000/$100 par =5,000 shares issued.
($500,000 + $35,000)/ 5,000= $107
Diff: 3
LO: 12-3
EOC Ref: E12-17
Retained earnings
$ 500,000
35,000
190,000
380,000
131,500
$1,236,500
What was the total paid-in capital as of December 31, 2014?

A) $1,236,600
B) $1,105,000
C) $956,000
D) $131,500
Answer: B
Explanation: B) Calculations: $500,000 + $35,000 + $190,000 +$380,000 = $1,105,000
Diff: 2
LO: 12-3
EOC Ref: E12-17
12
15) Bradley Corporation issued 10,000 shares of common stock on January 1, 2013. The stock has par value of
$0.01 per share and was sold for cash at par. The journal entry to record this transaction would:
A) debit Cash $100 and credit Common stock $100.
B) credit Cash $10,000 and debit Common stock $10,000.
C) debit Paid-in capital $9,900,and credit Common stock $9,900.
D) debit Cash $10,000, credit Common stock $100, and credit Paid-in capital $9,900.
Answer: A
Diff: 1
LO: 12-3
EOC Ref: E12-17
$0.01 per share and was sold at $25 per share. The journal entry for this transaction would:
A) debit Cash $250,000, credit Paid-in capital $100, and credit Common stock $249,900.
B) credit Cash $250,000 and debit Paid-in capital $250,000.
C) credit Cash $250,000, debit Common stock $100, and debit Paid-in capital $249,900.
D) debit Cash $250,000, credit Common stock $100, and credit Paid-in capital $249,900.
Answer: D
Diff: 1
LO: 12-3
EOC Ref: E12-17
17) Chaney Corporation issued 20,000 shares of common stock on January 1, 2014. The stock has par value of
$1.00 per share and was sold at $30 per share. The journal entry for this transaction would:
A) credit Cash $600,000, debit Common stock $20,000, and debit Paid-in capital $580,000.
B) debit Cash $600,000 and credit Paid-in capital $600,000.
C) debit Cash $600,000, credit Common stock $20,000, and credit Paid-in capital $580,000.
D) debit Cash $600,000 and credit Common stock $600,000.
Answer: C
Diff: 1
LO: 12-3
EOC Ref: E12-17
18) Dallkin Corporation issued 5,000 shares of common stock on January 1, 2013. The stock has no par value and
was sold at $18 per share. The journal entry for this transaction would:
A) debit Cash $90,000 and credit Common stock $90,000.
B) debit Cash $90,000 and credit Paid-in capital $600,000.
C) credit Cash $90,000 and debit Common stock $90,000.
D) credit Cash $90,000, debit Paid-in capital $5,000, and debit Common stock $85,000.
Answer: A
Diff: 1
LO: 12-3
EOC Ref: E12-17
13
19) On December 2, 2014, Ewell Company purchases a piece of land from the original owner. In payment for the
land, Ewell Company issues 8,000 shares of common stock with $1.00 par value. The land has been appraised at a
market value of $400,000. The journal entry to record this transaction would include which of the following items?
A) Debit Common stock $8,000 and debit Paid-in capital $392,000.
B) Credit Common stock $8,000 and credit Paid-in capital $392,000.
C) Credit Common stock $400,000.
D) Debit Cash $400,000.
Answer: B
Diff: 2
LO: 12-3
EOC Ref: E12-17
20) Osbourne Company issued 50,000 shares of common stock in exchange for manufacturing equipment. The
equipment was valued at $1,000,000. The stock has par value of $0.01 per share. The entry to record this
transaction would include which of the following line items?
A) Debit Cash $5,000.
B) Credit Gain on sale of common stock $1,050,000.
C) Credit Paid-in capital $999,500.
D) Credit Common stock $1,000,000.
Answer: C
Diff: 3
LO: 12-3
EOC Ref: E12-17
21) Peterson Company issued 4,000 shares of preferred stock for $240,000. The stock has a par value of $60 per
share. The journal entry to record this transaction would:
A) credit Cash $240,000, debit Common stock $4,000, and debit Paid-in capital $236,000.
B) debit Cash $240,000, credit Common stock $4,000, and credit Paid-in capital $236,000.
C) credit Cash $240,000 and debit Preferred stock $240,000.
D) debit Cash $240,000 and credit Preferred stock $240,000.
Answer: D
Diff: 3
LO: 12-3
EOC Ref: E12-17
14
22) Lerner Company had the following transactions in 2013, its first year of operations.
Issued 20,000 shares of common stock. Stock has par value of $1.00 per share and was issued at $14.00
per share.
Issued 1,000 shares of $100 par value preferred stock. Shares were issued at par.
Earned net income of $35,000.
Paid no dividends.
At the end of 2013, what is the total amount of Stockholders' equity?
A) $415,000
B) $120,000
C) $260,000
D) $380,000
Answer: A
Explanation: A) Calculations: (20,000 $14) + (1,000 $100) + $35,000 = $415,000
Diff: 2
LO: 12-3
EOC Ref: E12-17
per share.
Paid no dividends.
At the end of 2013, what is the total amount of Paid-in capital?
A) $415,000
B) $120,000
C) $280,000
D) $380,000
Answer: D
Explanation: D) Calculations: (20,000 $14) + (1,000 $100) = $380,000
Diff: 2
LO: 12-3
EOC Ref: E12-17
15
24) Moretown Company had the following transactions in 2014, its first year of operations.
per share.
Paid no dividends.
At the end of 2014, what is the total amount of Stockholders' equity?
A) $30,000
B) $610,000
C) $540,000
D) $70,000
Answer: B
Explanation: B) Calculations: (30,000 $18) + $70,000 = $610,000
Diff: 2
LO: 12-3
EOC Ref: E12-17
per share.
Paid no dividends.
At the end of 2014, what is the total amount of Paid-in capital?
A) $30,000
B) $610,000
C) $540,000
D) $70,000
Answer: C
Explanation: C) Calculations: (30,000 $18) = $540,000
Diff: 2
LO: 12-3
EOC Ref: E12-17
16
26) Notebook Company had the following transactions in 2013, its first year of operations.
per share.
Issued 100 shares of $100 par value preferred stock. Shares were issued at par.
Paid dividends of $5,000.
At the end of 2013, how much was the total Stockholders' equity?
A) $200,000
B) $110,000
C) $90,000
D) $100,000
Answer: A
Explanation: A) Calculations: (2,000 $50) + (100 $100) + ($95,000 - $5,000) = $200,000
Diff: 2
LO: 12-3
EOC Ref: E12-17
per share.
At the end of 2013, how much was the total Paid-in capital?
A) $190,000
B) $110,000
C) $90,000
D) $200,000
Answer: B
Explanation: B) Calculations: (2,000 $50) + (100 $100) = $110,000
Diff: 2
LO: 12-3
EOC Ref: E12-17
17
28) Overton Company had the following transactions in 2012, its first year of operations.
per share.
Paid dividends of $5.00 per share.
At the end of 2012, how much is the total Stockholders' equity?
A) $150,000
B) $325,000
C) $175,000
D) $200,000
Answer: B
Explanation: B) Calculations: (5,000 $30) + $200,000 - ($5 5,000) = $325,000
Diff: 3
LO: 12-3
EOC Ref: E12-17
per share.
At the end of 2012, how much is the total Paid-in capital?
A) $150,000
B) $325,000
C) $175,000
D) $200,000
Answer: A
Explanation: A) Calculations: (5,000 $30) = $150,000
Diff: 3
LO: 12-3
EOC Ref: E12-17
30) Which of the following is the correct order of accounts in the stockholders' equity section of the balance sheet?
(Assume preferred stock is issued at par.)
A) Common stock, Preferred stock, Paid-in capital in excess of par, Retained earnings.
B) Common stock, Paid-in capital in excess of par, Preferred stock, Retained earnings
C) Preferred stock, Paid-in capital in excess of par, Common stock, Retained earnings
D) Preferred stock, Common stock, Paid-in capital in excess of par, Retained earnings
Answer: D
Diff: 3
LO: 12-3
EOC Ref: E12-17
18
$0.01 per share and was sold at par. Please provide the journal entry for this transaction.
Answer:
Cash
Common stock
100
100
Explanation:
Diff: 1
LO: 12-3
EOC Ref: E12-17
$0.01 per share and was sold at $25 per share. Please provide the journal entry for this transaction.
Answer:
Cash
Common stock
Paid-in capital in excess of par
250,000
100
249,900
Explanation: This question is not available in MyAccountingLab.

Diff: 1
LO: 12-3
EOC Ref: E12-17
33) Chaney Corporation issued 20,000 shares of common stock on January 1, 2014. The stock has par value of
$1.00 per share and was sold at $30 per share. Please provide the journal entry for this transaction.
Answer:
Cash
Common stock
600,000
20,000
580,000

Diff: 1
LO: 12-3
EOC Ref: E12-17
19
34) Dallkin Corporation issued 5,000 shares of common stock on January 1, 2015. The stock has no par value and
was sold at $18 per share. Please provide the journal entry for this transaction.
Answer:
Cash
Common stock
90,000
90,000

Diff: 1
LO: 12-3
EOC Ref: E12-16
35) On December 2, 2014, Ewell Company purchases a piece of land from the original owner. In payment for the
land, Ewell Company issues 8,000 shares of common stock with $1.00 par value. The land has been appraised at a
market value of $400,000. Please provide the journal entry for this transaction.
Answer:
Land
Common stock
400,000
8,000
392,000

Diff: 2
LO: 12-3
EOC Ref: E12-17
36) Peterson Company issued 4,000 shares of preferred stock for $240,000. The stock has a par value of $60 per
share. Please provide the journal entry for this transaction.
Answer:
Cash
Preferred stock
240,000
240,000

Diff: 2
LO: 12-3
EOC Ref: E12-17
20
share.
Issued 20,000 shares of common stock. Stock has par value of $1.00 per share and was issued at $14.00 per
Paid no dividends.
The company charter authorizes 1,000,000 shares of common stock and 100,000 shares of preferred stock.
Please provide the stockholders' equity section of the balance sheet at December 31, 2013. Include information on
par values, and the number of shares authorized and issued, where necessary. No subtotals are needed for total paidin capital, but please show total stockholders' equity on the bottom line.
Account
Par value info
Shares authorized
Shares issued
Balance
Answer:
Account
Preferred stock
Common stock
Paid-in capital in
excess of par
Retained earnings
Total stockholders'
equity
Shares
authorized
Shares issued
100,000 shares
1,000 shares
$100.00 par value
authorized
issued
1,000,000 shares
20,000 shares
$1.00 par value
authorized
issued
Par value info
Balance
$100,000
20,000
260,000
35,000
$415,000

Diff: 2
LO: 12-3
EOC Ref: E12-17
21
per share.
Paid no dividends.
Account
Par value info
Shares authorized
Shares issued
Balance
Answer:
Account
Common stock
Paid-in capital in
excess of par
Retained earnings
Total stockholders'
equity
Shares
authorized
Shares issued
1,000,000 shares
30,000 shares
$1.00 par value
authorized
issued
Par value info
Balance
$30,000
510,000
70,000
$610,000

Diff: 2
LO: 12-3
EOC Ref: E12-17
22
per share.
Account
Par value info
Shares authorized
Shares issued
Balance
Answer:
Account
Preferred stock
Common stock
Paid-in capital in
excess of par
Retained earnings
Total stockholders'
equity
Shares
authorized
Shares issued
100,000 shares
$100.00 par value
authorized 100 shares issued
1,000,000 shares
2,000 shares
$1.00 par value
authorized
issued
Par value info
Balance
$10,000
2,000
98,000
90,000
$200,000

Diff: 2
LO: 12-3
EOC Ref: E12-17
23
per share.
Account
Par value info
Shares authorized
Shares issued
Balance
Answer:
Account
Shares
authorized
Shares issued
1,000,000 shares
5,000 shares
$0.01 par value
authorized
issued
Par value info
Common stock
Paid-in capital in
excess of par
Retained earnings
Total stockholders'
equity
Balance
$50
149,950
175,000
$325,000

Diff: 2
LO: 12-3
EOC Ref: E12-17
1) When a company records the year-end closing entries, the first step is to close the Revenues to Retained earnings.
Answer: FALSE
Diff: 1
LO: 12-4
EOC Ref: E12-19
24
2) When a company records the year-end closing entries, the Income summary balance, before it is closed to
Retained earnings, should be equal to the Net income or Net loss for the year.
Answer: TRUE
Diff: 1
LO: 12-4
EOC Ref: E12-19
3) A net loss for the year increases the balance in Retained earnings.
Answer: FALSE
Diff: 1
LO: 12-4
EOC Ref: E12-19
4) Ajax Company was founded in 2009. Its yearly earnings are shown here:
2012: Net income of $4,000
2015: Net loss of $30,000
No dividends were paid. At the end of the year 2015, Ajax would have a Retained earnings deficit of $1,000.
Answer: TRUE
Diff: 2
LO: 12-4
EOC Ref: E12-19
5) Retained earnings as shown on the balance sheet can, under certain circumstances, show a negative balance.
Answer: TRUE
Diff: 1
LO: 12-4
EOC Ref: E12-19
25
6) Which of the following describes the correct sequence of year-end closing entries?
A) Close Revenues to Income summary; close Expenses to Income summary; close Income summary to Retained
earnings.
B) Close Expenses to Income summary; close Revenues to Income summary; close Income summary to Retained
earnings.
C) Close Revenues to Income summary; close Income summary to Retained earnings; close Expenses to Retained
earnings.
D) Close Revenues to Retained earnings; close Expenses to Retained earnings; close Income summary to Retained
earnings.
Answer: A
Diff: 1
LO: 12-4
EOC Ref: E12-19
7) A company had $80,000 of Sales revenue and $75,000 of Expenses. Which of the following would be the first of
three year-end closing entries?
A) Debit Retained earnings $5,000 and credit Income summary $5,000.
B) Debit Expenses $75,000 and credit Income summary $75,000.
C) Debit Income summary $5,000 and credit Retained earnings $5,000.
D) Debit Revenues $80,000 and credit Income summary $80,000.
Answer: D
Diff: 1
LO: 12-4
EOC Ref: E12-19
8) A company had $80,000 of Sales revenue and $75,000 of Expenses. Which of the following would be the second
of three year-end closing entries?
A) Debit Income summary $75,000 and credit Expenses $75,000.
Answer: A
Diff: 1
LO: 12-4
EOC Ref: E12-19
26
9) A company had $80,000 of Sales revenue and $75,000 of Expenses. Which of the following would be the third of
three year-end closing entries? (Assume no dividends were paid.)
A) Debit Income summary $75,000 and credit Expenses $75,000.
Answer: C
Diff: 2
LO: 12-4
EOC Ref: E12-19
10) Hot Tamale Company had $120,000 of revenues and $125,000 of expenses. No dividends were paid. The first
of the year-end closing entries should include which of the following line items?
A) Credit Retained earnings $120,000.
B) Debit Retained earnings $120,000.
C) Debit Income summary $120,000.
D) Credit Income summary $120,000.
Answer: D
Diff: 1
LO: 12-4
EOC Ref: E12-19
11) Hot Tamale Company had $120,000 of revenues and $125,000 of expenses. No dividends were paid. The
second of the year-end closing entries should include which of the following line items?
Answer: C
Diff: 1
LO: 12-4
EOC Ref: E12-19
12) Hot Tamale Company had $120,000 of revenues and $125,000 of expenses. No dividends were paid. The third
of the year-end closing entries should include which of the following line items?
Answer: B
Diff: 2
LO: 12-4
EOC Ref: E12-19
27
13) Hot Tamale Company had $120,000 of revenues and $125,000 of expenses. No dividends were paid. These
factors will result in which of the following?
A) Retained earnings will go down.
B) Retained earnings will go up.
C) Paid-in capital will go down.
D) Paid-in capital will go up.
Answer: A
Diff: 2
LO: 12-4
EOC Ref: E12-19
14) Hot Tamale Company had $120,000 of revenues and $113,000 of expenses. No dividends were paid. These
factors will result in which of the following?
A) Retained earnings will go down.
B) Retained earnings will go up.
C) Paid-in capital will go down.
D) Paid-in capital will go up.
Answer: B
Diff: 1
LO: 12-4
EOC Ref: E12-19
15) Which of the following describes a retained earnings deficit?
A) When the company records a net loss for the year
B) When the retained earnings is less than the total paid-in capital
C) When the retained earnings is a negative amount
D) When the company does not pay out any dividends
Answer: C
Diff: 1
LO: 12-4
EOC Ref: E12-19
28
16) Please refer to the equity section of the balance sheet shown below:
Preferred stock
Common stock
Retained earnings
$100 par, 10,000 shares authorized, 1,000

shares issued
$1 par, 500,000 shares authorized, 20,000
shares issued
$100,000
20,000
350,000
(74,000)
$396,000
The amount shown for Retained earnings would be called a(n):

A) net loss.
B) earnings shortfall.
C) retained earnings deficit.
D) loss on sale of stock.
Answer: C
Diff: 1
LO: 12-4
EOC Ref: E12-19
17) Ajax Company was founded in 2012. Its yearly earnings are shown here:
2015: Net loss of $30,000
No dividends were paid. At the end of the year 2015, what amount would be shown on the balance sheet for
Retained earnings?
A) Negative $1,000
B) Positive $29,000
C) Positive $31,000
D) Negative $30,000
Answer: A
Explanation: A) Calculations: $4,000 + $23,000 + $2,000 - $30,000 = $(1,000)
Diff: 2
LO: 12-4
EOC Ref: E12-19
29
18) Beta Company was founded in 20013. Its yearly earnings and dividend payments are shown here:
2013: Net income of $4,000, paid zero dividends
2014: Net income of $20,000, paid $10,000 dividends
2016: Net loss of $22,000, paid zero dividends
At the end of 2016, what would be the balance in Retained earnings?
A) Negative $22,000
B) Positive $32,000
C) Negative $5,000
D) Positive $1,000
Answer: C
Explanation: C) Calculations: $4,000 + $20,000 - $10,000 + $8,000 - $5,000 - $22,000 = $(5,000)
Diff: 2
LO: 12-4
EOC Ref: E12-19
19) Beta Company was founded in 2012. Its yearly earnings and dividend payments are shown here:
2012: Net income $4,000, paid zero dividends
2013: Net income $20,000, paid $10,000 dividends
2015: Net loss of $22,000, paid zero dividends
At the end of 2015, which of the following statements would be accurate?
A) Beta has a cumulative operating loss.
B) Beta has a retained earnings deficit.
C) Beta has retained earnings surplus.
D) Beta has negative contributed capital.
Answer: B
Explanation: B) Calculation: $4,000 + $20,000 - $10,000 + $8,000 -$5,000 - $22,000 = $(5,000)
Diff: 2
LO: 12-4
EOC Ref: E12-19
30
20) A company had $90,000 of Sales revenue and $55,000 of Expenses. Please provide the first of three year-end
closing entries.
Answer:
Sales revenues
Income summary
90,000
90,000

Diff: 1
LO: 12-4
EOC Ref: E12-19
21) A company had $90,000 of Sales revenue and $55,000 of Expenses. Please provide the second of three year-end
closing entries.
Answer:
Income summary
Expenses
55,000
55,000

Diff: 1
LO: 12-4
EOC Ref: E12-19
22) A company had $90,000 of Sales revenue and $55,000 of Expenses. Please provide the third of three year-end
closing entries. (Assume no dividends were paid.)
Answer: Income summary

Retained earnings
35,000
35,000
Explanation: Calculations: $90,000 - $55,000 = $35,000

This question is not available in MyAccountingLab.
Diff: 1
LO: 12-4
EOC Ref: E12-19
31
23) Hot Tamale Company had $120,000 of Revenues and $125,000 of Expenses. No dividends were paid. Please
provide the first of the year-end closing entries.
Answer:
Revenues
Income summary
120,000
120,000

Diff: 1
LO: 12-4
EOC Ref: E12-19
provide the second of the year-end closing entries.
Answer:
Income summary
Expenses
125,000
125,000

Diff: 1
LO: 12-4
EOC Ref: E12-19
provide the third of the year-end closing entries.
Answer:
Retained earnings
Income summary
5,000
5,000
Explanation: Calculations: $125,000 - $120,000 = $5,000

Diff: 2
LO: 12-4
EOC Ref: E12-19
32

1) Declaring and paying dividends causes a decrease in both assets and equity.
Answer: TRUE
Diff: 1
LO: 12-5
EOC Ref: E12-21
2) Paying dividends causes a decrease in total paid-in capital.
Answer: FALSE
Diff: 1
LO: 12-5
EOC Ref: E12-21
3) If preferred stock is non-cumulative, then the company does NOT need to pay dividends that were passed in
previous years.
Answer: TRUE
Diff: 3
LO: 12-5
EOC Ref: E12-21
4) If preferred stock is cumulative, then the company does NOT need to pay dividends that were passed in previous
years.
Answer: FALSE
Diff: 3
LO: 12-5
EOC Ref: E12-21
5) A dividend's declaration date is the date the board of directors announces the intention to pay the dividend.
Answer: TRUE
Diff: 1
LO: 12-5
EOC Ref: E12-21
33
6) The journal entry to record the declaration of a dividend includes a credit to Cash.
Answer: FALSE
Diff: 1
LO: 12-5
EOC Ref: E12-21
7) When a company has issued both preferred and common stock, the preferred stockholders are allocated their
dividends first.
Answer: TRUE
Diff: 1
LO: 12-5
EOC Ref: E12-21
8) On November 1, 2013, Oster Company declared a dividend of $3.00 per share. Oster Company has 20,000 shares
of common stock outstanding, and no preferred stock. The date of record is November 15, and the payment date is
November 30, 2013. No journal entry is made on the date of record.
Answer: TRUE
Diff: 1
LO: 12-5
EOC Ref: E12-21
9) Most preferred stock is non-cumulative.
Answer: FALSE
Diff: 1
LO: 12-5
EOC Ref: E12-21
10) Which of the following is TRUE of dividends?
A) Dividends are a distribution of cash or other assets to the stockholders.
B) Dividends increase assets and decrease total stockholders' equity of a corporation.
C) Dividends decrease paid-in capital.
D) Dividends increase stockholders' equity.
Answer: A
Diff: 1
LO: 12-5
EOC Ref: E12-21
34
11) A corporation declares a dividend of $.75 per share on 12,500 shares of common stock. Which of the following
would be included in the entry to record the declaration?
A) Retained earnings would be debited for $9,375.
B) Paid-in capital in excess of par would be credited for $9,375.
C) Retained earnings would be credited for $9,375.
D) Dividends payable would be debited for $9,375.
Answer: A
Diff: 2
LO: 12-5
EOC Ref: E12-21
12) On which of the following dates do dividends become a liability of a corporation?
A) On the declaration date
B) On the date of record
C) At the end of the fiscal year
D) On the payment date
Answer: A
Diff: 1
LO: 12-5
EOC Ref: E12-21
13) Which of the following would be included in the entry to record the payment of a previously declared dividend
of $.25 per share on 12,500 shares of common stock?
A) Retained earnings would be debited for $3,125.
B) Cash would be debited for $3,125.
C) Dividends payable would be credited for $3,125.
D) Dividends payable would be debited for $3,125.
Answer: D
Explanation: D) Calculations: $0.25 12,500 = $3,125
Diff: 1
LO: 12-5
EOC Ref: E12-21
14) Which of the following occurs when a previously declared dividend is paid?
A) Assets increase.
B) Equity increases.
C) Liabilities decrease.
D) Liabilities increase.
Answer: C
Diff: 1
LO: 12-5
EOC Ref: E12-21
35
15) Which of the following occurs when a dividend is declared?

A) Liabilities increase.
B) Equity increases.
C) Liabilities decrease.
D) Assets increase.
Answer: A
Diff: 1
LO: 12-5
EOC Ref: E12-21
16) Which of the following is TRUE of dividends in arrears?
A) Dividends in arrears are a liability on the balance sheet.
B) Dividends in arrears are passed dividends on noncumulative preferred stock.
C) Dividends in arrears are passed dividends on cumulative preferred stock.
D) Dividends in arrears are passed dividends on common stock.
Answer: C
Diff: 2
LO: 12-5
EOC Ref: E12-21
17) A corporation has 10,000 shares of 10%, $50 par noncumulative preferred stock outstanding and 20,000 shares
of no-par common stock outstanding. At the end of the current year, the corporation declares a dividend of
$120,000.
How is the dividend allocated between preferred and common stockholders?
A) The dividend is allocated $5,000 to preferred shareholders and $115,000 to common shareholders.
B) The dividend is allocated $50,000 to preferred shareholders and $70,000 to common shareholders.
C) The dividend is allocated $60,000 to preferred shareholders and $60,000 to common shareholders.
D) The dividend is allocated $12,000 to preferred shareholders and $108,000 to common shareholders.
Answer: B
Explanation: B) Calculations:
Preferred: $50 10% 10,000 shares = $50,000
Common: $120,000 - $50,000 = $70,000
Diff: 2
LO: 12-5
EOC Ref: E12-21
36
18) A corporation has 10,000 shares of 10%, $50 par noncumulative preferred stock outstanding and 20,000 shares
of no-par common stock outstanding. At the end of the current year, the corporation declares a dividend of
$120,000.
What is the dividend per share for preferred shares and for common shares?
A) The dividend per share is $5.00 to preferred shares and $3.50 to common shares.
B) The dividend per share is $6.67 to preferred shares and $1.50 to common shares.
C) The dividend per share is $1.00 to preferred shares and $6.75 to common shares.
D) The dividend per share is $50.00 to preferred shares and $1.00 to common shares.
Answer: A
Explanation: A) Calculations: Preferred: $50 10% = $5 per share 10,000 shares = $50,000 total
Common: $120,000 - $50,000 = $70,000 / 20,000 shares = $3.50
Diff: 2
LO: 12-5
EOC Ref: E12-21
19) On November 1, 2014, Oster Company declared a dividend of $3.00 per share. Oster Company has 20,000
shares of common stock outstanding and no preferred stock. Which of the following is the journal entry needed to
record the declaration of dividends?
A) Debit Dividends payable $60,000 and credit Retained earnings $60,000.
B) Debit Retained earnings $60,000 and credit Cash $60,000.
C) Debit Retained earnings $60,000 and credit Dividends payable $60,000.
D) Debit Cash $60,000 and credit Dividends payable $60,000.
Answer: C
Explanation: C) Calculations: $3 20,000 = $60,000
Diff: 1
LO: 12-5
EOC Ref: E12-21
shares of common stock outstanding and no preferred stock. The date of record is November 15, and the payment
date is November 30, 2014. Which of the following statements is TRUE about the date of record?
A) No journal entry is made on the date of record.
B) The liability must be recorded on the date of record.
C) Cash is disbursed to shareholders on the date of record.
D) The company transfers cash to a brokerage firm on the date of record.
Answer: A
Diff: 1
LO: 12-5
EOC Ref: E12-21
37
date is November 30, 2014. Which of the following is the journal entry needed on November 30?
A) Debit Retained earnings $60,000 and credit Dividends payable $60,000.
B) Debit Dividends payable $60,000 and credit Cash $60,000.
C) Debit Cash $60,000 and credit Dividends payable $60,000.
D) Debit Retained earnings $60,000 and credit Cash $60,000.
Answer: B
Explanation: B) Calculations: $3 20,000 = $60,000
Diff: 1
LO: 12-5
EOC Ref: E12-21
22) Pearland Company has 2,000 shares of preferred stock outstanding. The preferred stock has a $100 par value, a
5% dividend rate, and is non-cumulative. If Pearland has sufficient funds to pay dividends, what is the total amount
of dividends that will be paid out to preferred shareholders?
A) $10,000
B) $2,000
C) $1,000
D) $5,000
Answer: A
Explanation: A) Calculations: ($100 5%) $2,000 = $10,000
Diff: 1
LO: 12-5
EOC Ref: E12-21
23) Which of the following is TRUE about the date of record?
A) On the date of record, the company issues new shares of stock.
B) On the date of record, the company disburses dividend payments to shareholders.
C) On the date of record, the company records the dividend payable amount.
D) On the date of record, the company determines who owns the shares of stock as of that date.
Answer: D
Diff: 1
LO: 12-5
EOC Ref: E12-21
38
24) Occidental Produce Company has 40,000 shares of common stock outstanding and 2,000 shares of preferred
stock outstanding. The common stock is $0.01 par value; the preferred stock is 4% non-cumulative, with $100 par
value. On October 15, 2014, the company declares a total dividend payment of $40,000. How much dividend will
be paid to the preferred shareholders?
A) $40,000
B) $2,000
C) $8,000
D) $4,500
Answer: C
Explanation: C) Calculations: ($100 4%) $2000 = $8,000
Diff: 2
LO: 12-5
EOC Ref: E12-21
value. On October 15, 2014, the company declares a total dividend payment of $40,000. What is the total amount
of dividends that will be paid to the common shareholders?
A) $40,000
B) $32,000
C) $400
D) $4,500
Answer: B
Explanation: B) Calculations: 40,000 - [($100 4%) $2000] = $32,000
Diff: 2
LO: 12-5
EOC Ref: E12-21
value. On October 15, 2014, the company declares a total dividend payment of $40,000. What is the amount of
dividend which will be paid for each share of common stock?
A) $0.80
B) $400.00
C) $4.00
D) $1.00
Answer: A
Explanation: A) Calculations: 40,000 - [($100 4%) $2000] = $32,000
$32,000/$40,000 = $0.80
Diff: 3
LO: 12-5
EOC Ref: E12-21
39
27) Which of the following is the correct description of dividends in arrears, as it applies to cumulative preferred
stock?
A) The cumulative amount of dividends which were not paid in previous years
B) The cumulative amount of dividends that were paid in previous years
C) The amount of dividends that were paid late
D) The amount of dividends that will be paid in the coming year
Answer: A
Diff: 1
LO: 12-5
EOC Ref: E12-21
28) Orleans Company was incorporated on January 1, 2012. Orleans issued 4,000 shares of common stock and 500
shares of preferred stock on that date. The preferred shares are cumulative, $100 par, with an 8% dividend rate.
Orleans has not paid any dividends yet. In 2015, Orleans had its first profitable year, and on November 1, 2015,
Orleans declared a total dividend of $28,000. What is the total amount that will be paid out to preferred
shareholders?
A) $4,000
B) $16,000
C) $3,200
D) $28,000
Answer: B
Explanation: B) Calculations: [($100 8%) $500] 4 = $16,000
Diff: 2
LO: 12-5
EOC Ref: E12-21
29) Orleans Company was incorporated on January 1, 2012. Orleans issued 4,000 shares of common stock and 500
shares of preferred stock on that date. The preferred shares are cumulative, $100 par, with an 8% dividend rate.
Orleans has not paid any dividends yet. In 2015, Orleans had its first profitable year, and on November 1, 2015,
Orleans declared a total dividend of $28,000. What is the total amount that will be paid out to common
shareholders?
A) $4,000
B) $16,000
C) $12,000
D) $28,000
Answer: C
Explanation: C) Calculations: [($100 8%) $500] 4 = $16,000
$28,000 - $16,000 = $12,000
Diff: 3
LO: 12-5
EOC Ref: E12-21
40
30) From its inception through the year of 2014, Quicksales Company was profitable and made strong dividend
payments each year. In the year 2015, Quicksales had major losses and paid no dividends. In 2016, the company
started making large profits again, and they were able to pay dividends to all shareholdersboth common and
preferred. There are 1,500 shares of cumulative, 7% preferred stock outstanding. The preferred stock has a par
value of $100. What is the total amount of dividends which should be paid to the preferred shareholders in
December, 2016?
A) $210
B) $22,000
C) $10,500
D) $21,000
Answer: D
Explanation: D) Calculations: 1,500 ($100 7%) = $10,500
$10,500 2 = $21,000
Diff: 2
LO: 12-5
EOC Ref: E12-21
31) A corporation has 15,000 shares of 10%, $50 par cumulative preferred stock outstanding and 25,000 shares of
no-par common stock outstanding. Dividends of $37,500 are in arrears. At the end of the current year, the
corporation declares a dividend of $120,000.
How is the dividend allocated between preferred and common shareholders?
A) The dividend is allocated $7,500 to preferred shareholders and $112,500 to common shareholders.
B) The dividend is allocated $112,500 to preferred shareholders and $7,500 to common shareholders.
C) The dividend is allocated $120,000 to preferred shareholders and $0 to common shareholders.
D) The dividend is allocated $75,000 to preferred shareholders and $45,000 to common shareholders.
Answer: B
Explanation: B) Calculations: Preferred: $50 10% 15,000 shares = $75,000 current year + $37,500 in arrears =
$112,500
Common: $120,000 - $112,500 = $7,500
Diff: 3
LO: 12-5
EOC Ref: E12-21
41
32) A corporation has 15,000 shares of 10%, $50 par cumulative preferred stock outstanding and 25,000 shares of
no-par common stock outstanding. Dividends of $37,500 are in arrears. At the end of the current year, the
corporation declares a dividend of $120,000.
What is the dividend per share for preferred shares and for common shares?
A) The dividend per share is $.50 to preferred shares and $4.60 to common shares.
B) The dividend per share is $8.00 to preferred shares and $0 to common shares.
C) The dividend per share is $7.50 to preferred shares and $.30 to common shares.
D) None of the above are correct.
Answer: C
Explanation: C) Calculations:
Preferred: $50 10% 15,000 shares = $75,000 current year + $37,500 in
arrears = $112,500 / 15,000 shares = $7.50
Common: $120,000 - $112,500 = $7,500 / 25,000 shares = $0.30
Diff: 3
LO: 12-5
EOC Ref: E12-21
shares of common stock outstanding and no preferred stock. Please provide the journal entry for the declaration of
dividends.
Answer:
Retained earnings
Dividends payable
60,000
60,000

Diff: 1
LO: 12-5
EOC Ref: E12-21
date is November 30, 2014. Please provide the journal entry needed on November 30.
Answer:
Dividends payable
Cash
60,000
60,000

Diff: 1
LO: 12-5
EOC Ref: E12-21
42
35) Pearland Company has 50,000 shares of common stock outstanding and 2,000 shares of preferred stock
outstanding. The common stock is $1.00 par value. The preferred stock has a $100 par value, a 5% dividend rate,
and is non-cumulative. On October 31, 2013, the company declares dividends of $0.25 per share for common stock
and $5.00 per share for preferred stock. Please provide the journal entry for the declaration of dividends.
Answer:
Retained earnings
Dividends payable, preferred
Dividends payable, common
22,500
10,000
12,500
Explanation: Calculations:
2,000 (100 5%) = 10,000
50,000 0.25 = 12,500
Diff: 2
LO: 12-5
EOC Ref: E12-21
1) The book value of common stock is equal to the total equity less the book value of preferred stock, divided by the
number or common shares outstanding.
Answer: TRUE
Diff: 1
LO: 12-6
EOC Ref: E12-22
2) Which of the following is the price for which a person can buy or sell a share of stock?
A) Book value
B) Market value
C) Liquidation value
D) Amortized value
Answer: B
Diff: 1
LO: 12-6
EOC Ref: E12-22
43
3) Which of the following is the amount guaranteed to preferred shareholders in the event the company goes out of
business?
A) Book value
B) Market value
D) Amortized value
Answer: C
Diff: 1
LO: 12-6
EOC Ref: E12-22
4) Which of the following is the amount of stockholders' equity on the company's ledger for each share of stock?
A) Book value
B) Market value
D) Amortized value
Answer: A
Diff: 1
LO: 12-6
EOC Ref: E12-22
5) Please refer to the equity section shown below:
Preferred stock, $100 par, 4% non-cumulative
1,000 shares authorized, 200 shares outstanding
Common stock, $0.01 par
1,000,000 shares authorized, 40,000 shares outstanding
Retained earnings
$20,000
400
359,600
820,000
$1,200,000
Assume the preferred shares have no stated liquidation value. The preferred shares are non-cumulative, so there are
no dividends in arrears.
Please calculate the book value per share of common stock.
A) $30.00 per share
B) $8.99 per share
C) $9.00 per share
D) $29.50 per share
Answer: D
Explanation: D) Calculations:
$1,200,000 - $20,000 = $1,180,000
$1,180,000/40,000 = $29.50
Diff: 1
LO: 12-6
EOC Ref: E12-22
44
6) Please refer to the equity section of the balance sheet, below:

Retained earnings
$500
399,500
150,000
$550,000
Please calculate the book value per share of common stock.

A) $3.00 per share
B) $8.00 per share
C) $11.00 per share
D) $29.50 per share
Answer: C
Explanation: C) Calculations: $550,000/50,000 = $11.00
Diff: 1
LO: 12-6
EOC Ref: E12-22
7) Porpoise Company has the following balances:
Common stock: $2,000
Paid-in capital in excess of par: $298,000
Retained earnings: $420,000
The company has no preferred stock and has 24,000 shares of common stock outstanding.
How much is the book value per share of common stock?
A) $12.50 per share
B) $30.00 per share
C) $12.42 per share
D) $29.80 per share
Answer: B
Explanation: B) Calculations: ($2,000 + $298,000 +$420,000)/24,000 = $30.00
Diff: 1
LO: 12-6
EOC Ref: E12-22
45

Preferred stock, $50 par, 4%, cumulative
Retained earnings
$5,000
120
359,600
153,280
$518,000
Assume there are no dividends in arrears. What is the book value per share of preferred stock?
A) $50.00 per share
B) $42.75 per share
C) $52.00 per share
D) $41.00 per share
Answer: A
Explanation: A) Calculations: $5,000/100 = $50.00
Diff: 1
LO: 12-6
EOC Ref: E12-22
Retained earnings
$5,000
120
359,600
153,280
$518,000
Assume there are no dividends in arrears. What is the book value per share of common stock?
A) $50.00 per share
B) $42.75 per share
C) $52.00 per share
D) $41.00 per share
Answer: B
Explanation: B) Calculations: ($518,000 - $5,000)/12,000 = $42.75
Diff: 2
LO: 12-6
EOC Ref: E12-22
46
Retained earnings
$5,000
120
359,600
153,280
$518,000
Assume there are $600 of preferred dividends in arrears which includes the current year. What is the book value per
share of preferred stock?
A) $42.70 per share
B) $43.17 per share
C) $56.00 per share
D) $41.00 per share
Answer: C
Explanation: C) Calculations: ($5,000 + 600)/100 = $56.00
Diff: 2
LO: 12-6
EOC Ref: E12-22
Retained earnings
$5,000
120
359,600
153,280
$518,000
Assume there are $600 of preferred dividends in arrears which includes the current year. What is the book value per
share of common stock?
A) $42.70 per share
B) $43.17 per share
C) $56.00 per share
D) $41.00 per share
Answer: A
$518,000 - (5,000 + 600) = $512,400
$512,400/12,000 = $42.70
Diff: 3
LO: 12-6
EOC Ref: E12-22
47

1) If a company has a strong rate of return on common stockholders' equity, that is an indication of strong
profitability.
Answer: TRUE
Diff: 1
LO: 12-7
EOC Ref: S12-11
2) If a company has a strong rate of return on total assets, that shows that they can easily pay off their current
liabilities with their current assets.
Answer: FALSE
Diff: 1
LO: 12-7
EOC Ref: S12-11
3) If a company has a strong rate of return on common stockholders' equity, that is an indication of good cash flow.
Answer: FALSE
Diff: 1
LO: 12-7
EOC Ref: S12-11
4) Which of the following measures a company's success in using assets to earn income?
A) The rate of return on stockholders' equity
B) Days sales in receivables
C) Inventory turnover
D) The rate of return on total assets
Answer: D
Diff: 1
LO: 12-7
EOC Ref: S12-11
48
5) Which of the following shows the relationship between net income available to common shareholders and
average common equity?
A) Net income
B) The rate of return on total assets
C) Inventory turnover
D) The rate of return on common stockholders' equity
Answer: D
Diff: 1
LO: 12-7
EOC Ref: S12-11
6) The rate of return on total assets and the rate of return on common stockholders' equity are used to evaluate the:
A) profitability of the business.
B) liquidity of the business.
C) ability to pay current liabilities with current assets.
D) cash flow of the business.
Answer: A
Diff: 1
LO: 12-7
EOC Ref: S12-11
7) Rattner Company has the following information available for the year 2014:
Total assets, January 1
Total assets, December 31
Net income
Interest expense
$420,000
500,000
37,400
4,000
How much is the return on total assets? (Please round to two decimal places.)
A) 0.10
B) 0.04
C) 0.09
D) 0.12
Answer: C
Explanation: C) Calculations:
(420,000 + 500,000)/2 = 460,000
(37,400 + 4,000)/460,000 = 0.09
Diff: 2
LO: 12-7
EOC Ref: S12-11
49
8) Quad Sales has the following information for the year 2015:
Total assets, January 1
Total assets, December 31
Net income
Interest expense
$102,000
108,000
2,100
0
How much is the return on total assets? (Please round to two decimal places.)
A) 0.10
B) 0.02
C) 0.09
D) 0.12
Answer: B
Explanation: B) Calculations:
(102,000 + 108,000)/2 = 105,000
2,100/105,000 = 0.02
Diff: 2
LO: 12-7
EOC Ref: S12-11
9) Reed Company reports the following information for the year 2013:
Net income
Preferred dividends
Common equity, Jan 1
Common equity, Dec 31
$46,000
12,000
800,000
900,000
Please calculate the rate of return on common stockholders' equity. Please round to 3 decimal places.
A) 0.054
B) 0.040
C) 0.043
D) 0.014
Answer: B
Explanation: B) Calculations: ($46,000 - $12,000)/ [($800,000 + $900,000)/2] = 0.040
Diff: 2
LO: 12-7
EOC Ref: S12-11
50
10) Sheffield Company had $42,000 of net income in 2013. Equity at the beginning of the year was $1,200,000 and
at the end of the year was $1,600,000. Sheffield has no preferred stock. Please calculate the rate of return on
common stockholders' equity. (Round to 3 decimal places.)
A) 0.035
B) 0.026
C) 0.030
D) 0.032
Answer: C
Explanation: C) Calculations: $42,000/ [($1,200,000 + $1,600,000)/2] = 0.030
Diff: 1
LO: 12-7
EOC Ref: S12-11
1) Normally, a company's book income and tax income should be the same.
Answer: FALSE
Diff: 1
LO: 12-8
EOC Ref: S12-12
2) Deferred tax can either be an asset or a liability.
Answer: TRUE
Diff: 1
LO: 12-8
EOC Ref: S12-12
51
3) Origami Company is considering a new project and needs to raise $800,000 of capital. Their after-tax net income
would be $75,000 if they do not implement the new project. If the new project is implemented, it will add an
additional $50,000 of profits before tax and interest. Origami's income tax rate is 40%. If they use debt financing,
the interest will be at 5%. Origami has 25,000 shares of common stock outstanding and no preferred stock. They
would have to issue an additional 10,000 shares of common stock to finance the project with equity capital.
If Origami decides to use equity financing, their earnings per share will be higher than if they use debt.
Answer: FALSE
Explanation: Calculations: $50,000 - ($800,000 5%) = $10,000
$10,000 - ($10,000 40%) = $6,000
($75,000 + $6,000)/25,000 = $3.24
$50,000 - ($50,000 40%) =$30,000
($75,000 + $30,000)/35,000 =$3.00
Diff: 3
LO: 12-8
EOC Ref: S12A-1
4) A company's income tax expense is calculated on the basis of book income, but the income tax payable amount is
based on the:
A) sales tax rate applied to sales revenues.
B) amount of payroll tax that has not been paid yet.
C) amount of taxable income, as calculated on the income tax return.
D) amount of dividends paid to shareholders.
Answer: C
Diff: 1
LO: 12-8
EOC Ref: S12-12
5) Which of the following factors may cause a difference between book income and taxable income?
A) The company uses straight-line depreciation for books and accelerated depreciation for tax.
B) The company pays its federal income taxes quarterly as opposed to annually.
C) The company sells stock right before the end of the year.
D) The company has a deposit in transit at year-end.
Answer: A
Diff: 1
LO: 12-8
EOC Ref: S12-12
52
6) Deferred tax would normally arise from which of the following situations?
A) When a company pays income tax quarterly versus yearly
B) When a company pays off all of its debts at the end of the year
C) When a company makes a different choice for its tax return versus its book net income
D) When a company withholds income tax from its employees' payroll
Answer: C
Diff: 2
LO: 12-8
EOC Ref: S12-12
7) Onyx Company's income statement shows net income before income tax of $38,000. The company's tax return
shows taxable income of $34,000. Company's tax rate is 40%. Which of the following entries would be used to
record tax expense and tax payable?
A) Debit Income tax expense $15,200 and credit Cash $15,200.
B) Debit Deferred tax liability $13,600 and credit Income tax payable $13,600.
C) Debit Income tax expense $15,200, credit Deferred tax liability $1,600 and credit Income tax payable $13,600.
D) Debit Deferred tax liability $1,600, debit Income tax expense $13,600 and credit Income tax payable $15,200.
Answer: C
Explanation: C) Calculation: $38,000 40% = $15,200
$34,000 40% = $13,600
Diff: 2
LO: 12-8
EOC Ref: S12-12
1) Which one of the following describes financial leverage?
A) To pay off all long-term debt in order to reduce interest expense
B) To finance with equity capital
C) To offer discounts to customers for early payment of invoices
D) To earn more income on borrowed money than the related interest expense
Answer: D
Diff: 1
LO: 12-9
EOC Ref: S12A-1
53
the interest will be at 5%. Origami has 25,000 shares of common stock outstanding and no preferred stock.
If Origami decides to implement the project using debt financing, what will be the earnings per share amount?
(Please round to the nearest cent.)
A) $3.24
B) $4.14
C) $3.40
D) $4.20
Answer: A
$50,000 - ($800,000 5%) = $10,000
$10,000 - ($10,000 40%) = $6,000
($75,000 + 6,000)/25,000 = $3.24
Diff: 3
LO: 12-9
EOC Ref: S12A-1
the interest will be at 5%. Origami has 25,000 shares of common stock outstanding, and no preferred stock. They
would have to issue an additional 10,000 shares of common stock to finance the project with equity capital.
If Origami decides to implement the project using equity financing, what will be the earnings per share amount?
(Please round to the nearest cent.)
A) $3.24
B) $4.14
C) $3.40
D) $3.00
Answer: D
Explanation: D) Calculations:
$50,000 - ($50,000 40%) = $30,000
($75,000 + $30,000)/35,000 = $3.00
Diff: 3
LO: 12-9
EOC Ref: S12A-1
54
4) Onyx Company's income statement shows net income before income tax of $38,000. The company's tax return
shows taxable income of $34,000. Company's tax rate is 40%. What journal entry is needed to record income tax
expense and tax payable?
Answer:
Income tax expense
Deferred tax liability
Income tax payable
15,200
1,600
13,600
Explanation: Calculations: $38,000 .4 = $15,200

$34,000 .4 = $13,600
Diff: 2
LO: 12-9
EOC Ref: S12-12
55

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Accounting Chapter 12 Corporations: Paid-in Capital and the Balance Sheet

Learning Objective 12-1

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

14) Which of the following describes the term outstanding stock?

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

4) Every corporation issues preferred stock.

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9) Which of the following represents one of the basic rights of stockholders?

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13) The two basic sources of equity are:

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17) Which of the following is a TRUE statement about no-par stock?

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21) Which of the following is an advantage of preferred stock?

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

10) Retained earnings represents:

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What is the average issue price of the preferred stock shares?

What was the total paid-in capital as of December 31, 2014?

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Explanation: This question is not available in MyAccountingLab.

Explanation: This question is not available in MyAccountingLab.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Explanation: This question is not available in MyAccountingLab.

Explanation: This question is not available in MyAccountingLab.

Explanation: This question is not available in MyAccountingLab.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Par value info

Explanation: This question is not available in MyAccountingLab.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Par value info

Par value info

Explanation: This question is not available in MyAccountingLab.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Par value info

Explanation: This question is not available in MyAccountingLab.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Par value info

Par value info

Explanation: This question is not available in MyAccountingLab.

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

$100 par, 10,000 shares authorized, 1,000

The amount shown for Retained earnings would be called a(n):

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Explanation: This question is not available in MyAccountingLab.

Explanation: This question is not available in MyAccountingLab.

Answer: Income summary

Explanation: Calculations: $90,000 - $55,000 = $35,000

Copyright 2012 Pearson Education, Inc. Publishing as Prentice Hall

Explanation: This question is not available in MyAccountingLab.