Section 2I - Equity

Question 1

Cobb Co. purchased 10,000 shares (2% ownership) of Roe Co. on February 12, 20X1. Cobb received a stock dividend of 2,000 shares on March 31, 20X1, when the carrying amount per share on Roe’s books was $35 and the market value per share was $40. Roe paid a cash dividend of $1.50 per share on September 15, 20X1. In Cobb’s income statement for the year ending October 31, 20X1, what amount should Cobb report as dividend income?

$98,000

$88,000

$18,000

$15,000

Answer 1

$18,000

A stock dividend does not represent income to the investor. The only effect of a stock dividend is a change in the number of shares held and the carrying value per share; the total carrying value remains unchanged. Thus, only the cash dividend results in dividend income (based on 12,000 shares, the number after the stock dividend):

Dividend income for the year ending October 31, 20X1
= 12,000 shares x $1.50
= $18,000

Note: Cobb’s 2% ownership interest requires accounting using the cost method. Under the cost method, dividends are recognized as income when received.

Question 2

A stock dividend does not represent ___to the investor.

The only effect of a stock dividend is a change in the number of __held and the carrying value per share; the total ___remains unchanged

Answer 2

income

shares , carrying value

Question 3

Stock Dividend vs. Stock Split

A stock ___changes neither the par value of the stock nor the total stockholders’ equity. However, the number of shares issued and outstanding is increased.

Small stock dividends are accounted for on the basis of ___value of the shares issued in the form of a stock dividend

Answer 3

dividend

fair

Question 4

Jones Co. had 50,000 shares of $5 par value common stock outstanding at January 1. On August 1, Jones declared a 5% stock dividend followed by a 2-for-1 stock split on September 1. What amount should Jones report as common shares outstanding at December 31?

50,000

105,000

52,500

100,000

Answer 4

105,000

The initial stock outstanding is 50,000 shares. A 5% stock dividend adds 50,000 × 0.05, or 2,500 new shares, for a total of 52,500 shares now outstanding. A 2-for-1 split doubles that amount for a final total of 52,500 × 2, or 105,000 shares now outstanding.

Question 5

Stock dividends do not constitute ___to the investor.

A stock dividend takes nothing from the property of the corporation and adds nothing to the interests of the stockholders; that is, the corporation’s property is not diminished and the interests of the stockholders are not increased. t/f

The proportional ___of each shareholder remains the same. However, the carrying amount per share is affected by the stock dividend, as demonstrated in the following example.

A stock split also involves an increase in the number of ___issued and outstanding. A stock split involves a change in the ____value of the stock.

Accounting for a stock dividend (___value is not changed) depends on whether it is considered to be a small stock dividend or a large stock dividend

Answer 5

income

interest

shares

par or stated

par

Question 6

Dividends that are in arrears are not an accrued liability until ____.

If a dividend is not declared and the stock is cumulative, the entity will report the dividends in arrears through disclosure on the face of the ___ _____ or in the notes.

Answer 6

declared

balance sheet

Question 7

A corporation issuing stock should charge retained earnings for the market value of the shares issued in:

an employee stock bonus.

a purchase of a subsidiary.

a 2-for-1 stock split.

a 10% stock dividend.

Answer 7

a 10% stock dividend.

FASB ASC 505-20-30-3 provides that for issuances of additional shares less than 20% or 25%, the issuing corporation should transfer from earned surplus (retained earnings) “an amount equal to the fair value of the additional shares issued.”

Thus, retained earnings should be charged for an amount equal to the market value of the shares issued in a 10% stock dividend.

Question 8

___ stock dividends are accounted for on the basis of fair value of the shares issued in the form of a stock dividend.

___stock dividends are usually accounted for on the basis of the par or stated value of the stock rather than on the basis of fair value.

Stock dividends resulting in the issuance of additional shares representing less than 20%–25% of the outstanding shares are presumed to be ___stock dividends. Stock dividends involving the issuance of more than 20%–25% of the outstanding stock are presumed to be ___stock dividends.

Answer 8

Small

Large

small

large

Question 9

FASB ASC 505-20-30-3 provides that for issuances of ___less than 20% or 25%, the issuing corporation should transfer from ___ ___“an amount equal to the fair value of the additional shares issued.”

A 30% stock dividend is a large stock dividend that lowers ___ ___only by the ___ value of the newly issued shares.

Answer 9

Shares

earned surplus (retained earnings)

retained earnings ,

par value

Question 10

On December 31, 20X1 and 20X2, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No dividends were in arrears as of December 31, 20X0. Apex did not declare a dividend during 20X1. During 20X2, Apex paid a cash dividend of $10,000 on its preferred stock. Apex should report dividends in arrears in its 20X2 financial statements as:

an accrued liability of $20,000.

a disclosure of $20,000.

an accrued liability of $15,000.

a disclosure of $15,000.

Answer 10

disclosure of $20,000………300423

Question 11

Preferred stock may be cumulative or noncumulative. t/f

If ____, any preferred dividends not paid in prior years (dividends in arrears) plus the current year’s preferred dividend must be paid before any dividends can be paid to common stockholders.

____preferred stock has a preference right only with respect to the current year’s dividends. Prior years’ undeclared dividends are gone forever.

Preferred stock may be participating or nonparticipating.

Participating preferred stock participates with ____stock in dividend distributions in excess of specified amounts for preferred and common.

Answer 11

true

cumulative

noncumulative

true

common

Question 12

In 20X0, Fogg, Inc., issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, 20X2, when Fogg acquired some of the issued shares for $20 per share and retired them. Which of the following statements correctly states an effect of this acquisition and retirement?

Additional paid-in capital is decreased.

20X2 net income is increased.

20X0 net income is decreased.

Retained earnings are increased.

Answer 12

Additional paid-in capital is decreased………300522

Question 13

In 20X1, Seda Corp. acquired 6,000 shares of its $1 par value common stock at $36 per share. During 20X2, Seda issued 3,000 of these shares at $50 per share. Seda uses the cost method to account for its treasury stock transactions. What accounts and amounts should Seda credit in 20X2 to record the issuance of the 3,000 shares?

Treasury stock: $144,000; Retained earnings: $6,000

Treasury stock: $108,000; Common stock: $42,000

Treasury stock: $108,000; Additional paid-in capital: $42,000

Treasury stock: $102,000; Additional paid-in capital: $42,000; Retained earnings: $6,000

Answer 13

Treasury stock: $108,000; Additional paid-in capital: $42,000……….300531

Question 14

Treasury stock is a corporation’s own previously issued and outstanding stock that is reacquired but not retired. After being reacquired, the shares are still considered to be___ but not ___

Two methods are used to account for transactions involving treasury stock—the ____method and the ____ value method. Both methods are considered to be GAAP.

Answer 14

issued but not outstanding

Cost, par value

Question 15

A company whose stock is trading at $10 per share has 1,000 shares of $1 par common stock outstanding when the board of directors declares a 30% common stock dividend. Which of the following adjustments should be made when recording the stock dividend?

Additional paid-in capital is credited for $2,700.

Treasury stock is debited for $300.

Retained earnings is debited for $300.

Common stock is debited for $3,000.

Answer 15

Retained earnings is debited for $300.

When the 30% dividend is issued, 1,000 shares are outstanding. Thus, 30% of 1,000 shares (300 shares) will be issued in the stock dividend.

A 30% stock dividend is a large stock dividend that lowers retained earnings only by the par value of the newly issued shares.

No additional paid-in capital is recorded, and common stock is credited for 300 × $1 par for $300, and retained earnings is debited by the same amount. The fair value of the stock is not used.

Retained earnings $ 300

Common stock to be distributed$ 300

Question 16

On incorporation, Dee, Inc., issued common stock at a price in excess of its par value. No other stock transactions occurred, except treasury stock was acquired for an amount exceeding this issue price. If Dee uses the par value method of accounting for treasury stock appropriate for retired stock, what is the effect of the acquisition on the following?

Net common stock: No effect; Additional paid-in capital: Decrease; Retained earnings: Decrease

Net common stock: Decrease; Additional paid-in capital: Decrease; Retained earnings: Decrease

Net common stock: Decrease; Additional paid-in capital: No effect; Retained earnings: Decrease

Net common stock: No effect; Additional paid-in capital: Decrease; Retained earnings: No effect

Answer 16

Net common stock: Decrease; Additional paid-in capital: Decrease; Retained earnings: Decrease

Question 17

On February 28, 20X4, Rand, Simp, and Teng formed a partnership. Rand contributed equipment that had an original cost of $45,000, current carrying value of $23,000, and a fair value of $37,000. Simp contributed real estate with an original cost of $124,000, current carrying amount of $34,000, and a fair value of $54,000. The real estate also has a mortgage of $25,000 that was assumed by the partnership. Teng contributed cash of $31,000. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest February 28, 20X4, capital account balance?

All partners have equal capital balances.

Rand

Simp

Teng

Answer 17

Rand…………302154

Question 18

If there is no statement in the partnership agreement concerning profit or loss distribution, all partners ___ ___in both profits and losses.

Answer 18

share equally

Question 19

On January 2, 20X2, Lake Mining Co.’s board of directors declared a cash dividend of $400,000 to stockholders of record on January 18, 20X2, payable on February 10, 20X2. The dividend is permissible under law in Lake’s state of incorporation. Selected data from Lake’s December 31, 20X1, balance sheet are as follows:
Accumulated depletion $100,000
Capital stock 500,000
Additional paid-in capital 150,000
Retained earnings 300,000

The $400,000 dividend includes a liquidating dividend of:

$150,000.

$100,000.

$300,000.

$0.

Answer 19

$100,000.

The liquidating dividend is that portion of the cash dividend that exceeds the balance in retained earnings because other equity accounts must be debited. Thus, for Lake:

Total amt of Jan2, 20X2, cash dividend $400k
Less: Retained earnings balance 300k
Liquidating dividend $100,000

Liquidating dividends are a return of the investment rather than a return on the investment.

Question 20

____occur when the corporation uses paid-in capital, rather than retained earnings, as a basis for dividends.

Liquidating dividends are ____ ___ ____rather than returns ON capital. The appropriate additional paid-in capital account, rather than retained earnings, should be debited when a liquidating dividend is declared.

The liquidating dividend is that portion of the cash dividend that exceeds the balance in ____ ____because other equity accounts must be debited

Answer 20

Liquidating

returns OF capital

retained earnings

Question 21

Posy Corp. acquired treasury shares at an amount greater than their par value, but less than their original issue price. Compared to the cost method of accounting for treasury stock, the par value method reports a greater amount for:

both additional paid-in capital and retained earnings.

additional paid-in capital.

neither additional paid-in capital nor retained earnings.

retained earnings.

Answer 21

neither additional paid-in capital nor retained earnings……….300530

Question 22

Eagle and Falk are partners with capital balances of $45,000 and $25,000, respectively. They agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have a 25% interest in capital and profits, for an investment of $30,000. What amount should be recorded as goodwill to the original partners?

$0

$7,500

$5,000

$20,000

Answer 22

$20,000

When a new partner is admitted by investing into the partnership, the total capital of the partnership changes, and the purchase price (amount of new investment) can be equal to, more than, or less than book value. When the purchase price is equal to book value, no goodwill or bonuses are recorded. When the purchase price is more or less than book value, either goodwill or bonuses must be recorded. The total capital of the resulting new partnership determines whether goodwill or bonuses are recorded. Under the goodwill approach, goodwill is recognized on the basis of the total value of the new partnership implied by the new partner’s investment relative to the partners’ total capital. Under the bonus approach, such implied value is not considered. In this problem, the assets are revalued, suggesting that goodwill is being recorded.

Implied value after new investment: $30,000 represents 25% of total value; therefore, the implied total value is $120,000 ($30,000 ÷ .25).
Implied Value $120,000
Total partner’s capital accounts (100,000) (45,000 + $25,000 + $30,000)
Goodwill to original partners $ 20,000

Question 23

Aldrich Co. distributes cash dividends to its shareholders during the current year. The dividends are declared on March 9 and are payable to shareholders as of the date of record, which is April 15. The dividends are actually paid on May 19. At which of the following dates would the dividends become a liability to Aldrich?

May 19

April 15

March 9

December 31

Answer 23

March 9

The date of declaration (i.e., March 9) is the date the dividend is declared by the board of directors. On that date, a journal entry is recorded to establish the liability by a debit to Retained Earnings and a credit to Dividends Payable.

Question 24

Partnerships

When the purchase price is equal to ____ value, NO goodwill or bonuses are recorded. When the purchase price is more or less than book value, either goodwill or ___must be recorded.

The total capital of the resulting new partnership determines whether goodwill or bonuses are recorded.

Under the ___approach, ___is recognized on the basis of the total value of the new partnership implied by the new partner’s investment relative to the partners’ total capital.

Under the ___approach, such implied value is not considered.

Answer 24

book

bonuses

goodwill , goodwill

bonus

Question 25

The following three dates are important as they relate to dividends:

1. Date of __
2. Date of__
3. Date of __

The date of declaration is the date the dividend is declared by the board of directors and becomes a ___, if other than a stock dividend.

The date of ___is the date on which the stockholders whose names appear on the corporation’s records are entitled to receive the dividend.

The date of payment is the date the dividend is paid or issued. t/f

Answer 25

decloration

record

payment

liability

record

true

Question 26

During 20X2, partners Joth and Lang had partnership profit before interest of $28,000. Throughout the year, the partners maintained average capital balances in their partnership of $140,000 (Joth) and $120,000 (Lang). The partners receive 5% interest on average capital balances, and residual profit or loss is divided equally. By what amount should Joth’s capital account change for the year?

$14,500

$7,500

$13,500

$28,000

Answer 26

$14,500,…..302153

Question 27

On January 15, 20X1, Rico Co. declared its annual cash dividend on common stock for the year ended January 31, 20X1. The dividend was paid on February 9, 20X1, to stockholders of record as of January 28, 20X1. On what date should Rico decrease retained earnings by the amount of the dividend?

February 9, 20X1

January 28, 20X1

January 31, 20X1

January 15, 20X1

Answer 27

January 15, 20X1

At the date of dividend declaration (January 15, 20X1), an entry to reduce retained earnings and record a dividend liability is made. No entry is necessary on the date of record (January 28, 20X1). On the payment date (February 9, 20X1), both cash and the dividend liability are reduced.

Question 28

During the current year, Onal Co. purchased 10,000 shares of its own stock at $7 per share. The stock was originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. The firm uses the cost method to account for treasury stock. What amount should Onal report in its income statement for these transactions?

$10,000 loss

$15,000 gain

$0

$5,000 gain

Answer 28

$0

A corporation does not recognize gain or loss on treasury stock transactions. Additional paid-in capital and retained earnings are affected by treasury stock transactions.

Question 29

When collectibility is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as:

additional paid-in capital when the common stock is issued.

additional paid-in capital when the subscription is collected.

additional paid-in capital when the subscription is recorded.

no par common stock.

Answer 29

additional paid-in capital when the subscription is recorded.

Question 30

Kern and Pate are partners with capital balances of $60,000 and $20,000, respectively. Profits and losses are divided in the ratio of 60:40. Kern and Pate decided to form a new partnership with Grant, who invested land valued at $15,000 for a 20% capital interest in the new partnership. Grant’s cost of the land was $12,000. The partnership elected to use the bonus method to record the admission of Grant into the partnership. Grant’s capital account should be credited for:

$15,000.

$19,000.

$16,000.

$12,000.

Answer 30

$19,000.

In the bonus-to-new-partner method, one needs to compute the total value now for the partnership, whereupon the new partner’s capital account will be based on the new partner’s percentage of the total just computed (even if the new partner’s contribution does not seem to justify the amount).

Total capital of new partnership
($60,000 + $20,000 + $15,000) $95,000
Times capital credit percentage to Grant x .20
Equals capital credit allowed to Grant $19,000

Note: Grant is given a “bonus” equal to $4,000, the excess of his $19,000 capital credit over the $15,000 fair value of land invested.

Question 31

Answer 31

$49

Book value of corporation $2,200,000
Divided by shares of stock outstanding
(50,000 - 5,000)………….. 45,000

Book value per share $ 49 (rounded)

Question 32

_____ is a reorganization or revision of the capital structure, which is permitted in some states. The accumulated deficit is eliminated as if the entity had been legally reorganized, without much of the cost and difficulty of a legal reorganization. Once the accumulated deficit has been eliminated, the entity is allowed to pay dividends again. It involves the following steps.

1. _____: Assets are revalued at net realizable value, but there is no net asset increase. (Any loss on revaluation increases the deficit.)
2. _____: A minimum of the amount of the adjusted deficit must be available in paid-in capital. This might be created by donation of stock from shareholders or reduction of the par value.
3. _____ The deficit is charged against paid-in capital (PIC) and thus is eliminated.

Answer 32

Quasi-reorganization i

Assets revalued

deficit adjusted

deficit elimination

Question 33

Answer 33

$273,000……….300382

Question 34

The stockholders’ equity section of Brown Co.’s December 31, 20X1, balance sheet consisted of the following:

1. Common stock, $30 par, 10,000 shares authorized and outstanding $300,000
2. Additional paid-in capital 150,000
3. Retained earnings (deficit) (210,000)

On January 2, 20X2, Brown put into effect a stockholder-approved quasi-reorganization by reducing the par value of the stock to $5 and eliminating the deficit against additional paid-in capital. Immediately after the quasi-reorganization, what amount should Brown report as additional paid-in capital?

$400,000

$150,000

$(60,000)

$190,000

Answer 34

$190,000

Question 35

Which of the following statements is correct regarding the provision for income taxes in the financial statements of a sole proprietorship?

The provision for income taxes should be based on the proprietor’s total taxable income, allocated to the proprietorship at the percentage that business income bears to the proprietor’s total income.

The provision for income taxes should be based on business income using individual tax rates.

No provision for income taxes is required.

The provision for income taxes should be based on business income using corporate tax rates.

Answer 35

No provision for income taxes is required.

A sole proprietorship business is not a taxable entity. Business income (or loss) is “passed through” to the owner. Therefore, there would be no required provision for income taxes. Instead, the taxes would be paid by the owner on the proprietor’s personal tax return.

Question 36

The cash basis method of accounting is not an allowable method under GAAP unless there is no material difference from the accrual method. t/f

The cash basis is an acceptable method for the preparation of tax returns. t/f

Answer 36

true

true

Question 37

Information pertaining to dividends from Wray Corp.’s common stock investments for the year ending December 31, 20X1, follows:

1. On September 8, 20X1, Wray received a $50,000 cash dividend from Seco, Inc., in which Wray owns a 30% interest. A majority of Wray’s directors are also directors of Seco.
2. On October 15, 20X1, Wray received a $6,000 liquidating dividend from King Co. Wray owns a 5% interest in King Co.
3. Wray owns a 2% interest in Bow Corp., which declared a $200,000 cash dividend on November 27, 20X1, to stockholders of record on December 15, 20X1, payable on January 5, 20X2.

What amount should Wray report as dividend income in its income statement for the year ending December 31, 20X1?

$10,000

$4,000

$60,000

$56,000

Answer 37

$4,000

Dividends are recorded as income (revenue) when the dividend is declared for investments in equity securities not accounted for under the equity method.

Dividend income for 20X1 = Dividends from Bow Corp.
= 0.02 x $200,000
= $4,000

A liquidating dividend is a reduction in the investment regardless of the percentage of the entity owned. With the Seco dividend there is significant influence over the investee, therefore the equity method is used.

The investment in King is a 5% interest which would ordinarily mean the cost method would be used.

However, it states that the dividend is “liquidating” for which you must decrease the investment in the investee.

Question 38

On December 31, 20X4 and 20X5, Getz Corporation had 8,000 shares of $50 par, 4% cumulative preferred stock outstanding. No dividends were in arrears as of December 31, 20X3. Getz declared and paid a cash dividend of $3,750 on its preferred stock during 20X4. During 20X5, Getz paid a cash dividend of $17,750 on its preferred stock. How much in dividends in arrears does Getz have at the end of 20X5?

$32,000

$10,500

$28,250

$14,250

Answer 38

$10,500

Since the preferred stock is cumulative, Getz must pay dividends to preferred shareholders for every year owed before any dividend can be paid to common shareholders. Thus, Getz computes dividends in arrears as follows:

Dividend requirement for 20X4 (8,000 × $50 × .04) $16,000
Dividend requirement for 20X5 (8,000 × $50 × .04) 16,000
Total requirement for 20X4 and 20X5 $32,000
Less dividends paid in 20X4 (3,750)
Less dividends paid in 20X5 (17,750)
Dividends in arrears $10,500

Dividends in arrears are not an accrued liability until actually declared. Thus, the reporting of dividends in arrears is achieved through disclosure either on the face of the balance sheet or in the notes.

Question 39

Wood Co. owns 2,000 shares of Arlo, Inc.’s, 20,000 shares of $100 par, 6% cumulative, nonparticipating preferred stock and 1,000 shares (2%) of Arlo’s common stock. During 20X2, Arlo declared and paid dividends of $240,000 on preferred stock. No dividends had been declared or paid during 20X1. In addition, Wood received a 5% common stock dividend from Arlo when the quoted market price of Arlo’s common stock was $10 per share. What amount should Wood report as dividend income in its 20X2 income statement?

$24,000

$12,500

$12,000

$24,500

Answer 39

$24,000

Annual dividend requirement on preferred = $100 × .06 = $6/share × 20,000 shares = $120,000.

20X1 cumulative dividends $120,000
20X2 regular preferred dividends 120,000
Total dividends paid for 20X2 $240,000*
x 2,000 sh / 20,000 shares, Wood Co. x 0.10
$ 24,000

* The preferred stock dividend pays all required dividends in full.

Note: The 5% common stock dividend is not income. The increased number of shares simply serves to divide the total equity into smaller units.

Question 40

On April 1, 20X1, Ivy began operating a service proprietorship with an initial cash investment of $1,000. The proprietorship provided $3,200 of services in April and received full payment in May. The proprietorship incurred expenses of $1,500 in April which were paid in June. During May, Ivy drew $500 against her capital account.

What was the proprietorship’s income for the two months ending May 31, 20X1, under the following methods of accounting?

Cash basis: $1,700; Accrual basis: $1,700

Cash basis: $1,200; Accrual basis: $1,200

Cash basis: $2,700; Accrual basis: $1,200

Cash basis: $3,200; Accrual basis: $1,700

Answer 40

Question 41

In 20X2, Allred Company acquired 11,000 shares of its $1 par value common stock at $23 per share. During 20X3, Allred issued 7,000 of these shares at $31 per share. Allred uses the cost method to account for its treasury stock transactions. What accounts and amounts should Allred credit in 20X3 to record the issuance of the 7,000 shares?

Treasury stock: $161,000; Common stock: $56,000

Treasury stock: $217,000

Treasury stock: $161,000; Additional paid-in capital: $42,000; Retained earnings: $14,000

Treasury stock: $161,000; Additional paid-in capital: $56,000

Answer 41

Treasury stock: $161,000; Additional paid-in capital: $56,000

Question 42

Asp Co. was organized on January 2, 20X1, with 30,000 authorized shares of $10 par common stock. During 20X1 the corporation had the following capital transactions:

1. January 5: issued 20,000 shares at $15 per share.
2. July 14: purchased 5,000 shares at $17 per share.
3. December 27: reissued the 5,000 shares held in treasury at $20 per share.

Asp used the par value method to record the purchase and re-issuance of the treasury shares. In its December 31, 20X1, balance sheet, what amount should Asp report as additional paid-in capital in excess of par?

$140,000

$100,000

$150,000

$125,000

Answer 42

$125,000…..300509

Question 43

When property other than cash is invested in a partnership, at what amount should the non-cash property be credited to the contributing partner’s capital account?

Fair value at the date of contribution

Contributing partner’s tax basis

Contributing partner’s original cost

Assessed valuation for property tax purposes

Answer 43

Fair value at the date of contribution

Noncash assets invested in a partnership should be recorded at their fair value at time of investment. Failure to record those asset investments at fair value would cause the difference (between recorded value and fair value) to be subject to allocation to all partners in the profit and loss ratio as these assets are used or sold.

Question 44

Red and White formed a partnership in 20X1. The partnership agreement provides for annual salary allowances of $55,000 for Red and $45,000 for White. The partners share profits equally and losses in a 60/40 ratio. The partnership had earnings of $80,000 for 20X1 before any allowance to partners. What amount of these earnings should be credited to each partner’s capital account?

Red: $40,000; White: $40,000

Red: $43,000; White: $37,000

Red: $45,000; White: $35,000

Red: $44,000; White: $36,000

Answer 44

Red: $43,000; White: $37,000………..300379

Question 45

As of December 15, 20X1, Aviator had dividends in arrears of $200,000 on its cumulative preferred stock. Dividends for 20X1 of $100,000 have not yet been declared. The board of directors plans to declare cash dividends on its preferred and common stock on January 16, 20X2. Aviator paid an annual bonus to its CEO based on the company’s annual profits. The bonus for 20X1 was $50,000, and it will be paid on February 10, 20X2. What amount should Aviator report as current liabilities on its balance sheet at December 31, 20X1?

$200,000

$150,000

$50,000

$350,000

Answer 45

$50,000

The bonus payable to the CEO has been earned by the CEO as of December 31, 20X1, and should be reported as a liability in the balance sheet at that date. .

The company does not have a liability for dividends payable until (and unless) the board declares the dividend as anticipated on January 16, 20X2. Prior to that date, the company has no legal obligation to pay the dividend to its stockholders.

Question 46

On December 31, 20X1 and 20X2, Carr Corp. had outstanding 4,000 shares of $100 par value 6% cumulative preferred stock and 20,000 shares of $10 par value common stock. On December 31, 20X1, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in 20X2 totaled $44,000. Of the $44,000, what amounts were payable on each class of stock?

Preferred stock: $24,000; Common stock: $20,000

Preferred stock: $32,000; Common stock: $12,000

Preferred stock: $36,000; Common stock: $8,000

Preferred stock: $44,000; Common stock: $0

Answer 46

Preferred stock: $36,000; Common stock: $8,000……..300526

Question 47

Cross Corp. has outstanding 2,000 shares of 11% preferred stock, $50 par. On August 8, 20X1, Cross redeemed and retired 25% of these shares for $22,500. On that date, Cross’ additional paid-in capital from preferred stock totaled $30,000. To record this transaction, Cross should debit (credit) its capital accounts as follows:

Preferred stock: $25,000; Additional paid-in capital: $(2,500); Retained earnings: $0

Preferred stock: $25,000; Additional paid-in capital: $7,500; Retained earnings: $(10,000)

Preferred stock: $22,500; Additional paid-in capital: $0; Retained earnings: $0

Preferred stock: $25,000; Additional paid-in capital: $0; Retained earnings: $(2,500)

Answer 47

Preferred stock: $25,000; Additional paid-in capital: $(2,500); Retained earnings: $0

Question 48

On April 30, 20X1, Algee, Belger, and Ceda formed a partnership by combining their separate business proprietorships. Algee contributed cash of $50,000. Belger contributed property with a $36,000 carrying amount, a $40,000 original cost, and $80,000 fair value. The partnership accepted responsibility for the $35,000 mortgage attached to the property.

Ceda contributed equipment with a $30,000 carrying amount, a $75,000 original cost, and $55,000 fair value. The partnership agreement specifies that profits and losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest April 30, 20X1, capital account balance?

Algee

Ceda

All capital account balances are equal.

Belger

Answer 48

Ceda

Question 49

An entity authorized 500,000 shares of common stock. At January 1, Year 2, the entity had 110,000 shares of common stock issued and 100,000 shares of common stock outstanding. The entity had the following transactions in Year 2:

1. March 1 Issued 15,000 shares of common stock
2. June 1 Resold 2,500 shares of treasury stock
3. September 1 Completed a 2-for-1 common stock split

What is the total number of shares of common stock that the entity has outstanding at the end of Year 2?

235,000

117,500

230,000

250,000

Answer 49

235,000

At the beginning of the year, the number of shares outstanding was 100,000:

• 15,000 new shares were issued, giving a new total of 115,000 outstanding
• 2,500 of the 10,000 treasury shares were reissued; adding them to the 115,000 gives a new total of 117,500.
• A 2-for-1 split doubles the shares outstanding at that point, for a new total of 235,000 (117,500 × 2).

Question 50

A company issued rights to its existing shareholders without consideration. The rights allowed the recipients to purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the following accounts will be increased?

Both common stock and additional paid-in capital

Additional paid-in capital

Common stock

Neither common stock nor additional paid-in capital

Answer 50

Neither common stock nor additional paid-in capital

he issuance of rights was “without consideration” so no asset can be debited. This issuance should be recorded as a memo entry only. If, and when, the recipients exercise their rights at a later date, cash would be increased as well as common stock and additional paid-in capita

. For now, however, none of the accounts would be increased.

Question 51

Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock on December 31, 20X1. During 20X2, transactions involving Nest’s common stock were as follows:

1. May 3: 1,000 shares of treasury stock were sold.
2. August 6: 10,000 shares of previously unissued stock were sold.
3. November 18: a 2-for-1 stock split took effect.

Laws in Nest’s state of incorporation protect treasury stock from dilution. On December 31, 20X2, how many shares on Nest’s common stock were issued and outstanding?

220,000 shares issued and 212,000 shares outstanding

220,000 shares issued and 216,000 shares outstanding

222,000 shares issued and 218,000 shares outstanding

222,000 shares issued and 214,000 shares outstanding

Answer 51

220,000 shares issued and 212,000 shares outstanding

Question 52

On May 18, 20X1, Sol Corp.’s board of directors declared a 10% dividend. The market price of Sol’s 3,000 outstanding shares of $2 par value common stock was $9 per share on that date. The stock dividend was distributed on July 21, 20X1, when the stock’s market price was $10 per share. What amount should Sol credit to additional paid-in capital for this stock dividend?

$2,100

$3,000

$2,700

$2,400

Answer 52

$2,100

The issuance of a stock dividend less than 20-25% (a “small” stock dividend) requires that the fair value of the stock (on the date of declaration) be transferred from retained earnings, and a dividend greater than 20-25% (a “large” stock dividend) requires that the par value of the stock be transferred from retained earnings.

Thus, a 10% stock dividend is considered to be a “small” stock dividend and should be transferred from retained earnings at the FV on the date of declaration

Question 53

On January 2, 20X1, Smith purchased the net assets of Jones’s Cleaning, a sole proprietorship, for $350,000, and commenced operations of Spiffy Cleaning, a sole proprietorship. The assets had a carrying amount of $375,000 and a market value of $360,000. In Spiffy’s cash-basis financial statements for the year ending December 31, 20X1, Spiffy reported revenues in excess of expenses of $60,000. Smith’s drawings during 20X1 were $20,000. In Spiffy’s financial statements, what amount should be reported as Capital-Smith?

$410,000

$390,000

$400,000

$415,000

Answer 53

$390,000

Question 54

Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year. Murphy reacquired 30,000 of those shares at a cost of $15 per share, and recorded the transaction using the cost method on April 15. Murphy reissued the 30,000 shares at $20 per share, and recognized a $50,000 gain on its income statement on May 20. Which of the following statements is correct?

Murphy’s net income for the current year is understated.

Murphy should have recognized a $50,000 loss on its income statement for the current year.

Murphy’s net income for the current year is overstated.

Murphy’s comprehensive income for the current year is correctly stated.

Answer 54

Murphy’s net income for the current year is overstated.

Gains and losses do not result from buying and selling your own equity shares. Therefore, no gain should have been reported on the resale of the treasury stock. Net income was overstated as a result.

Question 55

An entity with preferred stock that has a preference in involuntary liquidation “considerably” in excess of par shall:

disclose the liquidation preference in the equity section of the statement of financial position.

disclose the liquidation preference in its SEC-filed documents.

not be required to disclose the liquidation preference.

disclose the liquidation preference in the event of a qualified audit opinion

Answer 55

disclose the liquidation preference in the equity section of the statement of financial position

Liquidation preferences must be disclosed. When a company has preferred stock outstanding, certain items such as cumulative dividends in arrears must be disclosed.

Question 56

Gottfredsen and Sibbett are partners with capital balances of $120,000 and $80,000, respectively. Profits and losses are divided in the ratio of 60:40. Gottfredsen and Sibbett decided to form a new partnership with Tolman, who invested land valued at $40,000 for a 25% capital interest in the new partnership. Tolman’s cost of the land was $34,000. The partnership elected to use the bonus method to record the admission of Tolman into the partnership. Tolman’s capital account should be credited for:

$60,000.

$34,000.

$50,000.

$40,000.

Answer 56

$60,000.

Question 57

In September 20X1, Cal Corp. made a dividend distribution of one right for each of its 240,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of Cal’s $50 variable rate preferred stock at an exercise price of $80 per share. On March 20, 20X6, none of the rights had been exercised, and Cal redeemed them by paying each stockholder $0.10 per right. As a result of this redemption, Cal’s stockholders’ equity was reduced by:

$24,000.

$72,000.

$240.

$4,800.

Answer 57

$24,000.

Since the warrants were not exercised, equity was not increased, and because the rights were paid for, assets and equity decreased.

Reduction in stockholders’ equity = $0.10 x 240,000 rights
= $24,000

Question 58

At its date of incorporation, Glean, Inc., issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Glean acquired 30,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?

No effect on retained earnings and a decrease in additional paid-in capital

A decrease in both retained earnings and additional paid-in capital

A decrease in retained earnings and no effect on additional paid-in capital

No effect on retained earnings or additional paid-in capital

Answer 58

A decrease in retained earnings and no effect on additional paid-in capital

Question 59

Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total stockholders’ equity and the book value per common share?

Decrease in total stockholders’ equity and increase in book value per share

Decrease in both total stockholders’ equity and book value per share

Increase in total stockholders’ equity and decrease in book value per share

Increase in both total stockholders’ equity and book value per share

Answer 59

Decrease in total stockholders’ equity and increase in book value per share

Treasury stock is a deduction from total stockholders’ equity; therefore total stockholders’ equity decreases. Since the price paid for the reacquired shares is less than their book value, the book value per share of the remaining outstanding shares must increase. Before the reacquisition of the shares, the book value per share is the same for all shares (i.e., those that will be reacquired and those that will not be).

Question 60

Book value per share = ???

Answer 60

$7.00.

Bv /s = (Total Equity - Liquidation value to preferred) / Shares of Common Stock Outstanding

Question 61

On February 1, 20X1, Tory began a service proprietorship with an initial cash investment of $2,000. The proprietorship provided $5,000 of services in February and received full payment in March. The proprietorship incurred expenses of $3,000 in February, which were paid in April. During March, Tory drew $1,000 against the capital account. In the proprietorship’s financial statements for the two months ending March 31, 20X1, prepared under the cash basis method of accounting, what amount should be reported as capital?

$1,000

$7,000

$3,000

$6,000

Answer 61

$6,000

Question 62

Of the 125,000 shares of common stock issued by Vey Corp., 25,000 were held as treasury stock on December 31, 20X1. During 20X2, transactions involving Vey’s common stock were as follows:

1. January 1 through October 31: 13,000 treasury shares were distributed to officers as part of a stock compensation plan.
2. November 1: A 3-for-1 stock split took effect.
3. December 1: Vey purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were not retired.

On December 31, 20X2, how many shares of Vey’s common stock were issued and outstanding?

334,000 shares issued and 334,000 shares outstanding

324,000 shares issued and 324,000 shares outstanding

375,000 shares issued and 324,000 shares outstanding

375,000 shares issued and 334,000 shares outstanding

Answer 62

375,000 shares issued and 334,000 shares outstanding

300518

Question 63

An entity authorized 2,000,000 shares of common stock. At January 1, Year 9, the entity had 842,000 shares of common stock issued and 746,000 shares of common stock outstanding. The entity had the following transactions in Year 9:

1. April 19 Issued 75,000 shares of common stock
2. July 21 Resold 18,000 shares of treasury stock
3. November 7 Completed a 1-for-2 reverse common stock split

What is the total number of shares of common stock that the entity has outstanding at the end of Year 9?

764,000

410,500

839,000

419,500

Answer 63

419,500

At the beginning of the year, the number of shares outstanding was 746,000 (given):

• 75,000 new shares were issued, giving a new total of 821,000 outstanding
• 18,000 treasury shares were reissued; adding them to the 821,000 gives a new total of 839,000.
• A 1-for-2 reverse stock split reduces the shares outstanding at that point by half, for a new total of 419,500 (839,000 ÷ 2).

Question 64

Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The par value of the stock is $1 per share. During January of the current year, Porter bought back 500 shares at $6 per share, which were reported by Porter as treasury stock. The treasury stock shares were reissued later in the current year at $10 per share. Porter used the cost method to account for its equity transactions. What amount should Porter report as paid-in capital related to its treasury stock transactions on its balance sheet for the current year?

$2,000

$20,000

$4,500

$1,500

Answer 64

$2,000

Under the cost method, the shares bought back are recorded in the treasury stock account at cost. When reissued at more than this cost, the difference is recorded as paid-in capital from treasury stock transactions. Therefore, the paid-in capital from treasury stock transactions is ($10 - $6) × 500 shares, or $2,000.

Question 65

During 20X1, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110 per share. One share of preferred stock can be converted into three shares of Brad’s $25 par common stock at the option of the preferred shareholder. On December 31, 20X2, when the market value of the common stock was $40 per share, all of the preferred stock was converted. What amount should Brad credit to common stock and to additional paid-in capital common stock as a result of the conversion?

Common stock: $375,000; Additional paid-in capital: $225,000

Common stock: $600,000; Additional paid-in capital: $0

Common stock: $500,000; Additional paid-in capital: $50,000

Common stock: $375,000; Additional paid-in capital: $175,000

Answer 65

Common stock: $375,000; Additional paid-in capital: $175,000//////////300515

Question 66

On August 18, 20X8, Gilles Inc.’s board of directors declared a 15% stock dividend. The market price of Gilles’ 50,000 outstanding shares of $3 par value common stock was $12 per share on that date. The stock dividend was distributed on October 4, 20X8, when the stock’s market price was $14 per share. What amount should Gilles credit to additional paid-in capital for this stock dividend?

$90,000

$67,500

$50,000

$22,500

Answer 66

$67,500//////302157

Question 67

Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31, 20X1, Cyan’s retained earnings were $300,000. In March 20X2, Cyan reacquired 5,000 shares of its common stock at $20 per share. In June 20X2, Cyan sold 1,000 of these shares to its corporate officers for $25 per share. Cyan uses the cost method to record treasury stock. Net income for the year ending December 31, 20X2, was $60,000. On December 31, 20X2, what amount should Cyan report as retained earnings?

$365,000

$360,000

$380,000

$375,000

Answer 67

$360,000

Retained earnings on Dec. 31, 20X1 $300,000
Add: 20X2 net income 60,000
Retained earnings on Dec. 31, 20X2 $360,000

Note: The re-issuance of the 5,000 shares of treasury stock at $5 more per share than acquisition cost resulted in a credit to additional paid-in capital. Retained earnings were not affected.

Question 68

Baker Co. issued 100,000 shares of common stock in the current year. On October 1, Baker repurchased 20,000 shares of its common stock on the open market for $50 per share. At that date, the stock’s par value was $1 and the average issue price was $40 per share. Baker uses the cost method for treasury stock transactions. On December 1, Baker reissued the stock for $60 per share. What amount should Baker report as treasury stock gain at December 31?

$0

$400,000

$200,000

$980,000

Answer 68

$0

Treasury stock transactions are equity transactions and result in no gain or loss. Treasury stock transactions affect additional paid-in capital accounts and retained earnings.

Question 69

Answer 69

$145,000

Total capital prior to admission of Capp = $348,000 + $232,000 = $580,000.

Since Capp is contributing an amount exactly equal to 20% of final capital, the $580,000 represents 80% of final capital.

Final capital = $580,000 / .80 = $725,000
Less Alfa and Beda capital 580,000
Contribution to be made by Capp $145,000

Question 70

The admission or retirement of a partner results in the dissolution of the former partnership and the formation of a new partnership. t/f

Answer 70

true

Question 71

Cor-Eng Partnership was formed on January 2, 20X1. Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2, 20X1, while Eng contributed $20,000 in cash. Drawings by the partners during 20X1 totaled $3,000 by Cor and $9,000 by Eng. Cor-Eng’s net income was $25,000.

Eng’s initial capital balance in Cor-Eng is:

$20,000.

$60,000.

$40,000.

$25,000.

Answer 71

$60,000.

Question 72

Lem Co., which accounts for treasury stock under the par value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what amount would Lem’s additional paid-in capital from common stock decrease as a result of the acquisition?

$0

$300

$400

$100

Answer 72

$100……….300541

$136,000

Question 73

Answer 73

385-450 = 65k Loss.

65k * .6 = 39k

195k-39k=156k

156k-20k(Loan)=136k

Question 74

When Mill retired from the partnership of Mill, Yale, and Lear, the final settlement of Mill’s interest exceeded Mill’s capital balance. Under the bonus method, the excess:

reduced the capital balances of Yale and Lear.

was recorded as an expense.

had no effect on the capital balances of Yale and Lear.

was recorded as goodwill.

Answer 74

reduced the capital balances of Yale and Lear.

Question 75

On March 1, 20X1, Rya Corp. issued 1,000 shares of its $20 par value common stock and 2,000 shares of its $20 par value convertible preferred stock for a total of $80,000. At this date, Rya’s common stock was selling for $36 per share, and the convertible preferred stock was selling for $27 per share. What amount of the proceeds should be allocated to Rya’s convertible preferred stock?

$48,000

$44,000

$60,000

$54,000

Answer 75

$48,000 /// 300520

Question 76

On December 31, 20X3 and 20X4, Oliver Corporation had outstanding 12,000 shares of $50 par value 3% cumulative preferred stock. Oliver also had 45,000 shares of $8 par value common stock outstanding on that same date. On December 31, 20X3, dividends in arrears on the preferred stock were $8,200. Cash dividends declared in 20X4 totaled $41,400. Of the $41,400, what amounts were payable on each class of stock?

Preferred stock: $41,400; Common stock: $0

Preferred stock: $18,000; Common stock: $23,400

Preferred stock: $8,200; Common stock: $33,400

Preferred stock: $26,200; Common stock: $15,200

Answer 76

Preferred stock: $26,200; Common stock: $15,200

Question 77

In September 20X1, West Corp. made a dividend distribution of one right for each of its 120,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West’s $50 variable rate preferred stock at an exercise price of $80 per share. On March 20, 20X5, none of the rights had been exercised, and West redeemed them by paying each stockholder $0.10 per right. As a result of this redemption, West’s stockholders’ equity was reduced by:

$36,000.

$2,400.

$120.

$12,000.

Answer 77

$12,000.

Question 78

On November 2, 20X1, Finsbury, Inc., issued warrants to its stockholders giving them the right to purchase additional $20 par value common shares at a price of $30. The stockholders exercised all warrants on March 1, 20X2. The shares had market prices of $33, $35, and $40 on November 2, 20X1, December 31, 20X1, and March 1, 20X2, respectively. What were the effects of the warrants on Finsbury’s additional paid-in-capital and net income?

Additional paid-in capital increased in 20X1; no effect on net income.

Additional paid-in capital increased in 20X2; net income decreased in 20X1 and 20X2.

Additional paid-in capital increased in 20X1; net income decreased in 20X1 and 20X2.

Additional paid-in capital increased in 20X2; no effect on net income.

Answer 78

Additional paid-in capital increased in 20X2; no effect on net income.

Question 79

During 20X1, Young and Zinc maintained average capital balances in their partnership of $160,000 and $100,000, respectively. The partners receive 10% interest on average capital balances, and residual profit or loss is divided equally. Partnership profit before interest was $4,000. What amount should Zinc’s capital account change for the year?

$11,000 decrease

$1,000 decrease

$12,000 increase

$2,000 increase

Answer 79

$1,000 decrease // 300373

Question 80

On April 1, 20X1, Hyde Corp., a newly formed company, had the following stock issued and outstanding:

1. Common stock, no par, $1 stated value, 20,000 shares originally issued for $30 per share
2. Preferred stock, $10 par value, 6,000 shares originally issued for $50 per share

Hyde’s April 1, 20X1, statement of stockholders’ equity should report:

1. $600,000 common stock, $300,000 preferred stock, and $0 additional paid-in capital.
2. $600,000 common stock, $60,000 preferred stock, and $240,000 additional paid-in capital.
3. $20,000 common stock, $60,000 preferred stock, and $820,000 additional paid-in capital.
4. $20,000 common stock, $300,000 preferred stock, and $580,000 additional paid-in capital.

Answer 80

$20,000 common stock, $60,000 preferred stock, and $820,000 additional paid-in capital.