Exam 2 Multiple Choice Flashcards
(15 cards)
Which of the following represents the total number of shares that a corporation may issue under the terms of its articles of incorporation?
- Authorized shares
- Issued shares
- Unissued shares
- Outstanding shares
Authorized shares.
In January 2025, Hall Corporation, a newly formed company, issued 10,000 shares of its $2 par common stock for $4 per share. On July 1, 2025, Hall Corporation reacquired 1,000 shares of its outstanding stock for $3 per share. The acquisition of these treasury shares:
- Decreased total stockholders’ equity.
- Increased total stockholders’ equity
- Did not change total stockholders’ equity.
- Decreased the number of issued shares.
Decreased total stockholders’ equity.
The cumulative feature of preferred stock:
- Limits the cumulative dividends to the par value of the preferred stock.
- Requires that dividends not paid in any year must be paid in a later year before dividends are distributed to common shareholders.
- Means that the shareholder can accumulate preferred stock until it is equal to the par value of common stock at which time it can be converted into common stock.
- Enables a preferred stockholder to accumulate dividends until they equal the par value of the stock and receive the stock in place of the cash dividends.
Requires that dividends not paid in any year must be paid in a later year before dividends are distributed to common shareholders.
The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding:
- Increases common stock outstanding and increases total stockholders’ equity.
- Decreases retained earnings but does not change total stockholders’ equity.
- May increase or decrease paid-in capital in excess of par but does not change total stockholders’ equity.
- Increases retained earnings and increases total stockholders’ equity.
Decreases retained earnings but does not change total stockholders’ equity.
What effect does the issuance of a 3-for-1 stock split have on the Par Value per Share and the Retained Earnings?
A.
Par Value per Share - No effect
Retained Earnings - No effect
B.
Par Value per Share - Increase
Retained Earnings - No effect
C.
Par Value per Share - Decrease
Retained Earnings - No effect
D.
Par Value per Share - Decrease
Retained Earnings - Decrease
Par Value per Share - Decrease
Retained Earnings - No effect
On December 31, 2025, Allen Company issued a 2-for-1 stock split when the stockholders’ equity section was as follows:
- Common stock, $10 par value; 30,000 shares authorized; 9,000 shares issued and outstanding: 90,000
- Paid-in capital in excess of par: 116,000
- Retained earnings: 184,000
= 390,000 (total stockholders’ equity)
After the split, what would the number of shares issued and outstanding be? What would the par be per share?
Total par value (9,000 x 10): 90,000
Shares issued and outstanding (9,000 x 2): 18,000
New par value per share ($10 / 2): $5 per share
Total par value (18,000 x 5): 90,000
On July 1, 2025, an interest payment date, $150,000 of Parks Company bonds were converted into 3,000 shares of Parks Company common stock, each having a par value of $45 and a market value of $54. There is $6,000 of unamortized discount on the bonds. If the book value method is used, Parks would record…?
D - Bond Payable: 150,000
C - Discount on Bond Payable: 6,000
C - Common Stock (3,000 x 45): 135,000
C - Paid-in Capital: 9,000
A $9,000 increase in paid-in capital in excess of par.
In 2024, Tower, Inc. issued 90,000 shares of $100 par value convertible preferred stock for $103 per share. Each share of preferred stock can be converted into three shares of Tower’s $25 par value common stock at the option of the preferred stockholder. In August 2025, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What amount will be credited to paid-in capital in excess of par from common stock as a result of the conversion?
D - Preferred Stock (90,000 x 100): 9,000,000
D - Paid-in Capital - Preferred Stock (90,000 x 3): 270,000
C - Common Stock (270,000 x 25): 6,750,000
C - Paid-in Capital - Common Stock: 2,520,000
$2,520,000
In computing diluted earnings per share, the treasury stock method is used for options to reflect the assuming reacquisition of common stock at the average market price during the period. If the exercise price of the options exceeds the average market price, the computation would:
- Fairly present diluted earnings per share on a prospective basis.
- Fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
- Reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share.
- Be anti-dilutive.
Be anti-dilutive.
In computing the weighted average of shares outstanding, when a stock dividend or stock split occurs during the period, the additional shares are:
- Weighted by the number of days outstanding.
- Weighted by the number of months outstanding.
- Considered outstanding at the beginning of the year.
- Considered outstanding at the beginning of the earliest year reported.
Considered outstanding at the beginning of the earliest year reported.
What effect will the acquisition of treasury stock have on total stockholders’ equity and on earnings per share, respectively?
- Decrease and no effect.
- Increase and no effect.
- Decrease and increase.
- Increase and decrease.
Decrease and increase.
In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should be added as an adjustment to the numerator (net earnings)?
- Annual preferred dividend.
- Annual preferred dividend times (one minus the income tax rate).
- Annual preferred dividend times the income tax rate.
- Annual preferred dividend divided by the income tax rate.
Annual preferred dividend.
How should anti-dilutive securities be treated in earnings per share calculations?
They should be ignored.
Hill Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $2,940,000 for the year ending December 31, 2025. Earnings per share of common stock for 2025 would be…?
600,000 x (6 / 12) = 300,000
600,000 + 900,000 = 1,500,000
1,500,000 x (6 / 12): 750,000
300,000 + 750,000 = 1,050,000
2,940,000 / 1,050,000 = 2.80
$2.80
The conversion of preferred stock is most commonly recorded by the:
- Incremental method.
- Book value method.
- Market value method.
- Par value method.
The book value method.
