CHAPTER 15 STOCKHOLDERS’ EQUITY TRUE-FALSE—Conceptua T A corporation is incorporated in only one state regardless of the number of states in which it operates F The preemptive right allows stockholders the right to vote for directors of the company T Common stock is the residual corporate interest that bears the ultimate risks of loss F arned capital consists of additional paid!in capital and retained earnings T " True no!par stock should be car ried in the acco unts at issue price w ithout any ad ditional paid!in capital reported F # Companies allocate the proceeds received from a lum p!sum sale of securities based on the securities$ par values T % Companies should record stock issued for services or non cash property at either the fair value of the stock issued or the fair value of the consideration received& whichever is more clearly determinable F ' Treasury stock is a company$s own stock that has been reac(uired and retired F ) The cost method records all transactions in treasury shares at their cost and repo rts the treasury stock as a deduction from capital stock only T 1* +hen a corporation sells tre asury stock below its cost & it usually debits the difference between cost and selling price to ,aid!in Capital from Treasury -tock F 11 ,articipating preferred stock re(uires that if a company fails to pay a dividend in any year& it must make it up in a later year before paying any common dividends T 12 Callable preferred stock permits the corpo ration at its option to redeem the outs tanding preferred shares at specified future dates and at stipulated prices T 13 The laws of some states re(uire that corporations restrict their legal capital from distribution to stockholders F 14 The -C makes it mand atory for comp anies to disc lose their dividend policy in their annual report F 1" All dividends& ecept for li(uidating dividends& reduce the total stoc kholders$ e(uity of a corporation T 1# /ividends payable in assets of the corporation other than cash are called property dividends or dividends in kind Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on 15 - / T 1% +hen a stock dividend is less tha n 2*!2" per cent of the comm on stock outstanding& a company is re(uired to transfer the fair value of the stock issued from retained earnings F 1' -tock splits and large sto ck dividends have the same ef fect on a company$s retained earnings and total stockholders$ e(uity F 1) The rate of retur n on commo n stock e(uity is compu ted by div iding net inco me by the average common stockholders$ e(uity T 2* The payout ratio is determined by dividing cash div idends paid to comm on stockholders by net income available to common stockholders T%ue-Fa!e An!,e%!—Conceptua Ite& An! Ite& An! Ite& An! Ite& An! " T T T # % ' ) 1* T 0 T 11 12 13 14 1" T T 0 1# 1% 1' 1) 2* T T 0 T ULTIPLE CHOICE—Conceptua 21 The residual interest in a corporation belongs to the a management b creditors c common stockholders d preferred stockholders - 22 The pre!emptive right of a common stockholder is the right to a share proportionately in corporate assets upon li(uidation b share proportionately in any new issues of stock of the same class c receive cash dividends before they are distributed to preferred stockholders d eclude preferred stockholders from voting rights 23 The pre!emptive right enables a stockholder to a receive the same amou nt of dividends on a percentage basis as the preferred stockholders b receive cash dividends before other classes of stock without the pre!emptive right c sell capital stock back to the corporation at the option of the stockholder d none of these answers are correct 24 ormally& stock issued by a corporation has certain rights and privileges that can be restricted only by special contracts at the time the shares are issued n the absence of restrictive provisions& each share carries all of the following rights ecept a to share proportionately in profits and losses b to share proportionately in corporate assets upon li(uidation c to share proportionately in any new issue of stocks or bonds by the corporation d to share proportionately in management of the corporation -tockholders$ (uity 15 - 2" Common stockholders of a busin ess enterprise are said to be the re sidual owners The term residual owner means that shareholders a are entitled to a dividend every year in which the business earns a profit b have the rights to specific assets of the business c bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership d can negotiate individual contracts on behalf of the enterprise 2# Total stockholders e(uity represents a a claim to specific assets contributed by the owners b the maimum amount that can be borrowed by a company c a claim against a portion of the total assets of a company d only the amount of earnings that have been retained in the business 2% A primary source of stockholders e(uity is a income retained by the corporation b appropriated retained earnings c contributions by stockholders d both income retained by the corporation and contributions by stockholders 2' -tockholders e(uity is gener ally classified into two ma5or categories a contributed capital and appropriated capital b appropriated capital and ret ained earnings c retained earnings and unap propriated capital d earned capital and contributed capital 2) The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities An acceptable method of allocation is a the pro forma method b the proportional method c the incremental method d either the proportional method or the incremental method 3* +hen a corporation issues its capital stock in payment for services& the least appropriate basis for recording the transaction is the a market value of the services received b par value of the shares issued c market value of the shares issued d Any of these provides an appropriate basis for recording the transaction 31 /irect costs incurred to sell stock such as underwriting costs should be accounted for as a reduction of additional paid!in capital an epense of the period in which the stock is issued an intangible asset a b c d or 15 -  s Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on 32 A 6secret reserve6 will be created if a inade(uate depreciation is charg ed to inc ome b a capital ependiture is charged to epense c liabilities are understated d stockholders e(uity is overstated 33 +hen a corporation sells stock to investors& the transaction will increase Contributed Capital arned Capital A 7es o 7es 7es C o 7es / - o o 34 +hen common stock is sold by a corporation a 5ournal entry is prepared which includes a debit to cash and a credit to the common stock account f the debit to cash is greater than the credit to the common stock account then it can be assumed that a the common stock is worth more than its current market value b a gain on the sale of stock is a part of the transaction c the common stock was sold at a discount d the stated value of the common stock is less than the per share price investors were willing to pay 3" The general rule to be applied when stock is issued for services or property other than cash is that the property or services be recorded at a the fair market value of the stock issued a the fair market value of the noncash consideration received c either the fair market value of the stock issued or the fair market value of the noncash consideration received& whichever is more clearly determinable d a value that clearly reflects the intentions of the parties entering into the transaction and provides a relevant basis for recording - - 3# n 9anuary 2*14& 0inley Corporation& a newly formed company& issued 1*&*** shares of its :1* par common stock for :1" per share ;n 9uly 1& 2*14& 0inley Corporation reac(uired 1&*** shares of its outstanding stock for :12 per share The ac(uisition of these treasury shares a decreased total stockholders e(uity b increased total stockholders e(uity c did not change total stockholders e(uity d decreased the number of issued shares , 3% Treasury shares are shares a held as an investment by the treasurer of the corporation b held as an investment of the corporation c issued and outstanding d issued but not outstanding 3' +hen treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock& what account a Treasury stock for the par value and paid!in capital in ecess of par for the ecess of the purchase price over the par value b ,aid!in capital in ecess of par for the purchase price -tockholders$ (uity 3) 4* 15 - c Treasury stock for the purchase price d Treasury stock for the par value and retained earnings for the ecess of the purchase price over the par value ?@ains6 on sales of treasury stock a There should be no capitaliFation of retained earnings b ,ar value c 0air value on the declaration date d 0air value on the payment date "' The issuer of a "H comm on stock dividend to common stockholders should transfer from retained earnings to paid!in capital an amount e(ual to the a fair value of the shares issued b book value of the shares issued c minimum legal re(uirements d par or stated value of the shares issued ") At the date of declaration of a small common stock dividend& the entry should not include a a credit to Common -tock b a credit to ,aid!in Capital in cess of ,ar c a debit to Eetained arnings d All of these are acceptable 15 - Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on #* The balance in Common -tock /ividend /istributable should be reported as a a b c d ,ar Dalue per -hare oeffect ncrease /ecrease /ecrease Eetained arnings oeffect oeffect oeffect /ecrease #3 +hich one of the following disclosures should be made in the e(uity sec tion of the balance sheet& rather than in the notes to the financial statements> a /ividend preferences b Gi(uidation preferences c Call prices d Conversion or eercise prices #4 The rate of return on common stock e(uity is calculated by dividing a net income less preferred dividends by average common stockholders$ e(uity b net income by average common stockholders$ e(uity c net income less preferred dividends by ending common stockholders$ e(uity d net income by ending common stockholders$ e(uity #" The payout ratio can be calculated by dividing a dividends per share by earnings per share b cash dividends by net income less preferred dividends c cash dividends by market price per share d dividends per share by earnings per share and dividing cash dividends by net income less preferred dividends ## 7ounger Company has outstanding both common stock and nonparticipating& non! cumulative preferred stock The li(uidation value of the preferred is e(ual to its par value The book value per share of the common stock is unaffected by a the declaration of a stock dividend on preferred payable in prefe rred stock when the market price of the preferred is e(ual to its par value b the declaration of a stock dividend on common stock payable in common stock when the market price of the common is e(ual to its par value c the payment of a previously declared cash dividend on the common stock d a 2!for!1 split of the common stock -tockholders$ (uity , #% J#' 15 -  Assume common stock is the on ly class of stock outstanding in the anley Corporation Total stockholders e(uity divided by the number of common stock shares outstanding is called a book value per share b par value per share c stated value per share d fair value per share /ividends are not paid on a noncumulative preferred stock b nonparticipating preferred stock c treasury common stock d /ividends are paid on all of these J#) oncumulative preferred dividends in ar rears a are not paid or disclosed b must be paid before any other cash dividends can be distributed c are disclosed as a liability until paid d are paid to preferred stockholders if sufficient funds remain after payment of the current preferred dividend J%* Bow should cumulative preferred dividends in arrears be shown in a corporations statement of financial position> a ote disclosure b ncrease in stockholders e(uity c ncrease in current liabilities d ncrease in current liabilities for the amount epected to be declared within the year or operating cycle& and increase in long!term liabilities for the balance ut(pe C+o(ce An!,e%!—Conceptua Ite& 21 22 23 24 2" 2# 2% 2' An! c b d c c c d d Ite& 2) 3* 31 32 33 34 3" 3# An! d b a b a d c a Ite& 3% 3' 3) 4* 41 42 43 44 An! d c a a b c c b Ite& 4" 4# 4% 4' 4) "* "1 "2 An! b c c b c c a a Ite& "3 "4 "" "# "% "' ") #* An! Ite& An! Ite& An! b b b b b a a b #1 #2 #3 #4 #" ## #% J#' b c b a b c a c J#) J%* a a 15 - 16 Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on ULTIPLE CHOICE—Co&putat(ona Kse the following information for (uestions %1 and %2 ,resented below is information related to Bale Corporation Common-tock&:1par ,aid!in Capital in cess of ,arLCommon -tock ,referred'1M2H-tock&:"*par ,aid!in Capital in cess of ,arL,referred -tock Eetained arnings TreasuryCommon-tock a :1%1&'1' b :131&2"* c :114&"4" d :)"&4"4 %" 8erry Corporation has "*&* ** shares of :1* par comm on stock authoriFed The following transactions took place during 2*14& the first year of the corporation$s eistence -old 1*&*** shares of common stock for :13."* per share shares common echange for a patent valued at :1"*&*** At thessued end of1*&*** the 8erry$s firstofyear& total stock paid!inincapital amounted to a :#*&*** b :13"&*** c :1"*&*** d :2'"&*** -tockholders$ (uity 15 - 1 +hat is the book value per share for Gayne Corporation for the year ended 2*1"> a :11.** b :).)2 c :).)4 d :'.') 1*" At the beginning of 2*1"& Bamilton Company had retained earnings of :2"*&*** /uring the year Bamilton reported net income of :%"&***& sold treasury stock at a ?gainO of :2%&***& declared a cash dividend of :4"&***& and declared and issued a small stock dividend of 1&"** shares a 11."H b 1".*H c 23.1H d 34.#H not 15 - // Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on 114 Turner Corporation had the following information in its financial statements for the year ended 2*14 and 2*1" Cashdividendsfortheyear2*1" etincomefortheyearended2*1" arketpriceofstock&12M31M1" Common stockholders$ e(uity& 12M31M14 Common stockholders$ e(uity& 12M31M1" ;utstandingshares&12M31M1" ,referred dividends for the year ended 2*1" : 1"&*** 13*&*** 24 2&2**&*** 2&4**&*** 1"*&*** 3*&*** +hat is the book value per share for Turner Corporation for the year ended 2*1"> a :1".'* b :1#.** c :14.#% d :1".%* J11" +ritten& nc has outstanding #**&*** shares of :2 par common stock and 12*&*** shares of no!par 'H preferred stock with a stated value of :" The preferred stock is cumulative and nonparticipating /ividends have been paid in every year ecept the past two years and the current year Assuming that :3**&*** will be distributed as a dividend in the current year& how much will the common stockholders receive> a Qero b :1"#&*** c :2*4&*** d :2"2&*** J11# +ritten& nc has outstanding #**&*** shares of :2 par common stock and 12*&*** shares of no!par 'H preferred stock with a stated value of :" The preferred stock is cumulative and nonparticipating /ividends have been paid in every year ecept the past two years and the current year Assuming that :12#&*** will be distributed as a dividend in the current year& how much will the preferred stockholders receive> a :42&*** b :4'&*** c :)#&*** d :12#&*** J11% +ritten& nc has outstanding #**&*** shares of :2 par common stock and 12*&*** shares of no!par 'H preferred stock with a stated value of :" The preferred stock is cumulative and participating /ividends have been paid in every year ecept the past two years and the current year Assuming that :3##&*** will be distributed& and the preferred stock is how much will the common stockholders receive> a :222&*** b :1'*&*** c :1'#&*** d : )#&*** also participating& -tockholders$ (uity 15 - /0 J11' 7oder& nc has 1"*&*** shares of :1* par value common stock and %"&*** shares of :1* par value& #H& cumulative& participating preferred stock outstanding /ividends on the preferred stock are one year in arrears Assuming that 7oder wishes to distribute :4*"&*** as dividends& the common stockholders will receive a : )*&*** b :1#"&*** c :24*&*** d :31"&*** J11) ann Co has outstanding '*&*** shares of 'H preferred stock with a :1* par value and 1"*&*** shares of :3 par value common stock /ividends have been paid every year ecept last year and the current year f the preferred stock is cumulative and nonparticipating and :4**&*** is distributed& the common stockholders will receive a :* b :2%2&*** c :33#&*** d :4**&*** .ut(pe C+o(ce An!,e%!—Co&putat(ona Ite& An! Ite& An! An! Ite& An! %1 %2 %3 %4 %" An! a b b c d Ite& %' %) '* '1 '2 An! d d b c c Ite& '" '# '% '' ') An! a c c a a Ite& )2 )3 )4 )" )# b d d a c )) 1** 1*1 1*2 1*3 b b a a c Ite& 1*# 1*% 1*' 1*) 11* d c c a b 113 114 J11" J11# J11% b b b d b %# %% b c '3 '4 d c )* )1 c d )% )' a b 1*4 1*" a d 111 112 c a J11' J11) c b ULTIPLE CHOICE—CPA A'apte' 12* A corporation was orga niFed in 9anu ary 2*14 wit h authoriFed capi tal of :1* par value common stock ;n 0ebruary 1& 2*14& shares were issued at par for cash ;n arch 1& 2*14& the corporations attorney accepted %&*** shares of common stock in settlement for legal services with a fair value of :)*&*** Additional paid!in capital would increase on 0ebruary 1& 2*14 arch 1& 2*14 a 7es o b 7es 7es c o o d o 7es 15 - / Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on 121 ;n 9uly 1& 2*14& all Co issued 2&"** shares of its :1* par co mmon stock and "&*** shares of its :1* par convertible preferred stock for a lump sum of :13*&*** At this date alls common stock was selling for :24 per share and the convertible preferred stock for :1' per share The amount of the proceeds allocated to alls preferred stock should be a :#"&*** b :%'&*** c :)*&*** d :%1&"** 122 Borton Co was organiFed on 9anuary 2& 2*14& with "**&*** authoriFed shares of :1* par value common stock /uring 2*14& Borton had the following capital transactions 9anuary "Lissued 3%"&*** shares at :14 per share 9uly 2%Lpurchased 2"&*** shares at :11 per share ovember 2"Lsold 1'&*** shares of treasury stock at :13 per share Borton used the cost method to record the purchase of the treasury shares +hat would be the balance in the ,aid!in Capital from Treasury -tock account at /ecember 31& 2*14> a :* b :1'&*** c :3#&*** d :"4&*** 123 n 2*14& Bobbs Corp ac(uired 12&*** shares of its own :1 par v alue common stock at :1' per share n 2*1"& Bobbs issued '&*** of these shares at :2" per share Bobbs uses the cost method to account for its treasury stock transactions +hat accounts and what amounts should Bobbs credit in 2*1" to record the issuance of the #&*** shares> Treasury Additional -tock ,aid!in Capital a b c d 124 :144&*** :144&*** :"#&*** :1)2&*** :13#&*** Eetained arnings Common -tock :14*&*** :"#&*** :'&*** :'&*** At its date of incorporation& -auder& nc issued 1**&*** shares of its : 1* par common stock at :11 per share /uring the current year& -auder ac(uired 2*&*** shares of its common stock at a price of :1# per share and accounted for them by the cost method -ubse(uently& these shares were reissued at a price of :12 per share There have been no other issuances or ac(uisitions of its own common stock +hat effect does the reissuance of the stock have on the following accounts> a b c d Eetained arnings /ecrease oeffect /ecrease oeffect Additional ,aid!in Capital /ecrease /ecrease oeffect oeffect -tockholders$ (uity 15 - /5 12" 0armer Corp owned 2*&*** shares of aton Corp purchased in 2*11 for :4"*&*** ;n /ecember 1"& 2*14& 0armer declared a property dividend of all of its aton Corp shares on the basis of one share of aton for every 1* shares of 0armer common stock held by its stockholders The property dividend was distributed on 9anuary 1"& 2*1" ;n the declaration date& the aggregate market price of the aton shares held by 0armer was :%"*&*** The entry to record the declaration of the dividend would include a debit to Eetained arnings of a :* b :3**&*** c :4"*&*** d :%"*&*** 12# A corporation decl ared a dividend& a portion of whi ch was li(u idating Bow woul d this distribution affect each of the following> a b c d 12% Additional ,aid!in Capital /ecrease /ecrease oeffect oeffect Eetained arnings oeffect /ecrease /ecrease oeffect ;n ay 1& 2*14& Qiek Corp declared and issued a 1*H com mon stock dividend ,rior to this dividend& Qiek had 2**&* ** shares of :1 par value commo n stock issued and outstanding The fair value of Qiek s common stock was :2* per share on ay 1& 2*14 As a result of this stock dividend& Qieks total stockholders e(uity a increased by :4**&*** b decreased by :4**&*** c decreased by :2*&*** d did not change 12' Bow would the declaration and subse(uent iss uance of a 1*H stock dividend by the issuer affect each of the following when the fair value of the shares eceeds the par value of the stock> Additional Common -tock ,aid!in Capital a oeffect oeffect b oeffect ncrease c ncrease oeffect d ncrease ncrease 12) ;n /ecember 31& 2*14& the stockholders e(uity section of Arndt& nc.& was as follows Common stock& par value :1* authoriFed 3*&*** shares issuedandoutstanding)&***shares Additional paid!in capital Eetained earnings :) *&*** 11#&*** 1'4&*** Totalstockholderse(uity :3)*&*** 15 - /2 Te!t "an# $o% Inte%&e'(ate Account(n)* F($teent+ E'(t(on ;n arch 31& 2*1"& Arndt declared a 1*H stock dividend& and accordingly )** additional shares were issued& when the fair value of the stock was :1' per share 0or the three months ended arch 31& 2*1"& Arndt sustained a net loss of :32&*** The balance of Arndt$s retained earnings as of arch 31& 2*1"& should be a :13"&'** b :143&*** c :144&'** d :1"2&*** J13* At /ecember 31& 2*14 and 2*1"& ,lank Corp had outstanding 4&*** shares of :1** par value 'H cumulative preferred stock and 2*&*** shares of :1* par value common stock At /ecember 31& 2*14& dividends in arrears on the preferred stock were :1#&*** Cash dividends declared in 2*1" totaled :#*&*** +hat amounts were payable on each class of stock> ,referred -tock :32&*** :44&*** :4'&*** :#*&*** a b c d Common -tock :2'&*** :1#&*** :12&*** :* ut(pe C+o(ce An!,e%!—CPA A'apte' Ite& An! Ite& An! Ite& An! Ite& An! Ite& An! Ite& An! 12* 121 d b 122 123 c b 124 12" c d 12# 12% b d 12' 12) d a J13* c DERI7ATIO8S — Co&putat(ona 8o An!,e% De%(9at(on %1 a :4&"**&*** R :4**&*** R :""*&*** R :2&***&*** R :1&"**&*** S :1"*&***  :'&'**&*** %2 b :4&"**&*** R :""*&***  :"&*"*&*** %3 b