Test bank with answers for financial accounting 6e by libby chapter 11

A stock split results in the reduction of the par or stated value per share and a proportionate increase in the number of shares outstanding... decrease retained earnings $1.6 million an

True / False Questions

5 Treasury stock is a corporation's own stock that was sold, issued, repurchased, and is still held by the corporation

9 On the date of payment of a cash dividend, the company would debit retained earnings and credit cash

12 A stock split results in the reduction of the par or stated value per share and a

proportionate increase in the number of shares outstanding

13 The most common reason a company would declare a stock split is to reduce the market price of its stock to increase the trading activity

17 When a company reissues treasury stock, it creates cash inflow from an investing activity because treasury stock is an investment asset on the balance sheet

Multiple Choice Questions

21 Advantages of a corporation include all of the following except

A ease of participating in ownership

B stockholders are not liable for a corporation's debts

C the ownership rights of corporations are easily transferred

D stockholders have a mutual agency relationship

B Ease of capital assembly

C Continuity of life for the corporation

D Limited liability for stockholders

AACSB Tag: Relative Thinking

Difficulty: Easy

L.O.: 1

23 Which of the following statements about a corporation is false?

A Corporations are the dominant form of business organization in terms of volume of

operations

B Their owners have limited liability

C Corporations allow even small investors to participate in ownership

D Corporations are separate legal entities from their owners

24 Which of the following is true about the corporate form of business but is not true for a proprietorship or partnership?

A It is a separate economic entity from its owners

B Investment in a corporation's stock is less risky than investing in bonds

C It is easier for individuals to become owners in a corporation by buying small amounts of

stock than it is to own a proprietorship or partnership share

D A corporation is easier to form than a partnership

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 1

25 Which of the following statements is false?

A Most small shareholders do not attend the corporation's annual meeting so they cast their vote by proxy card

B Corporations are created by application to a specific state not the federal government

C Most large corporations are chartered out of Delaware since it has very favorable laws of incorporation

D Corporations have a limited life

27 Which of the following represents the shares currently in the hands of investors?

29 Which of the following about earnings per share is true?

A It indicates the portion of earnings distributed to the owners as an immediate return on their investment

B Many investors like to see earnings per share increase over time indicating improved

30 Which of the following statements about earnings per share is true?

A Increased net income would cause earnings per share to decrease

B Issuance of more common shares would cause earnings per share to increase

C Repurchase of treasury shares would cause earnings per share to decrease

D None of the other answers is true

AACSB Tag: Relative Thinking

Difficulty: Hard

L.O.: 2

31 The par value of common stock is the

A average market price of the stock during the period in which it is sold

B ceiling (maximum) amount above which the stock may not be sold initially

C nominal value per share established in the corporate charter

D selling price of the stock at the date it was issued by the corporation

B preferred stock, voting

C preferred stock, noncumulative

D common stock, nonvoting

33 If Hayes Corporation sells and issues 100 shares of its $1 par value common stock at $15 per share, the entry to record the sale will not include a

A Debit to cash of $1,500

B Credit to capital in excess of par of $1,400

C Credit to common stock of $100

D Credit to retained earnings of $1,500

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 3

34 Choose the correct definition for par value from the following:

A The amount that a corporation must pay when it exercises its right to convert shares of stock

B The equity of one share of outstanding stock in the issuing corporation's net assets as recorded in the corporation's accounts

C An arbitrary value placed on a share of stock at the time the stock is authorized in the

36 Which of the following statements about stock option plans is true?

A Offering stock options to a company's managers reduces the likelihood they will not always act in the best interest of the investors

B Stock option plans are often a major part of an executive's compensation plan

C Stock options usually have a grant price equal to the market price of the stock when the options are first offered to the executives

D All of these are true

AACSB Tag: Relative Thinking

Difficulty: Hard

L.O.: 3

37 Which of the following statements about treasury stock transactions is true?

A The total number of shares issued increases when treasury stock is purchased

B The total number of shares authorized changes when treasury stock is purchased

C Gains and losses on treasury stock transactions are reported on the income statement

D A stockholders' equity account is debited when treasury stock is purchased

39 Which of the following is a "contra" stockholders' equity account?

41 McGuire Company had the following stockholders' equity section:

42 Which of the following entries would be recorded when a company reissues 1,000 shares

of treasury stock for $50 per share when they were repurchased at a cost of $47 per share and have a $1 par value?

43 Which of the following entries would be recorded when a company reissues 1,000 shares

of treasury stock for $40 per share when they were repurchased at a cost of $44 per share and have a $1 par value?

C date of dividend payment

D last day of the month in which the dividend is declared

45 Shares of stock eligible for dividends are

A the number of shares of authorized

B the number of shares issued

C the number of shares outstanding

D the number of treasury shares

47 Accounting entries associated with a cash dividend usually are made on the

A record date and payment date

B payment date only

C declaration date and record date

D declaration date and payment date

48 On December 15, 2009, the board of directors of Cross Corporation declared a cash dividend, payable on January 8, 2010 of $.80 per share on the 2,000,000 common shares outstanding The accounting period ends December 31 Because of this action, on December

15, 2009, Cross Corporation should

A make no journal entry because the event had no effect on the corporation's financial position until 2010

B decrease retained earnings $1.6 million and increase contributed capital $1.6 million

C decrease retained earnings $1.6 million and increase liabilities by $1.6 million

D decrease cash $1.6 million and decrease retained earnings $1.6 million

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 4

49 The declaration and payment of a cash dividend

A reduces retained earnings and increases liabilities by the amount of the dividend

B reduces retained earnings and increases contributed capital by the same amount

C reduces assets and increases liabilities each by the amount of the dividend

D reduces assets and retained earnings each by the amount of the dividend

A Dividend yield will usually drop when the market price per share drops

B They pay very little in dividends because they reinvest their earnings in expansion of operations

C They provide very little immediate return to their investors

D Dividend yield will usually drop when the market price per share rises

51 When a stock dividend (on par value stock) is declared and issued

A retained earnings is debited and one or more contributed capital accounts are credited

B capital in excess of par value is debited and retained earnings is credited

C the number of shares outstanding increases while the par value of each share decreases

D .the number of shares outstanding decreases while the par value of each share increases

A results in a transfer of retained earnings to contributed capital

B increases the number of shares outstanding and involves a pro rata reduction in the par value per share

C is accounted for in exactly the same manner as a stock split

D results in a transfer of retained earnings to contributed capital and also increases the number of shares outstanding and involves a pro rata reduction in the par value per share

A Par value of $100 per share

B Market value per share on the issue date

C Half of the previous total amount in the common stock account(s)

D None should be transferred

54 Which of the following statements is false?

A Stock splits shuffle amounts between retained earnings and contributed capital accounts

B Both stock splits and stock dividends increase the common shares issued

C Both stock splits and stock dividends increase the common shares outstanding

D Both stock splits and stock dividends have the impact of reducing the market price of the stock

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 6

55 A company has 4 million common shares authorized, 2.5 million shares issued and

100,000 treasury shares Their par value is $1 per share and the market price is $30 when the

company declares a 4/1 stock split Which of the following is true?

A There will be a transfer of $2.4 million from retained earnings to contributed capital

B Only the shares outstanding will quadruple to 4.8 million and the par value will be reduced

to $.25 per share

C The shares authorized, issued, outstanding, and held in treasury will all quadruple while

the par value will be reduced to $.25 per share

D The company will be unable to declare a 4/1 split because they do not have enough

authorized shares to issue the needed 4.8 million shares

56 A company declares a 40% stock dividend when there are 4.0 million common shares outstanding with a $1 par value Their current market price is $20 per share Which of the following will be the effect of the stock dividend?

A Retained earnings will decrease by $1.6 million and contributed capital will increase by

A Retained earnings will decrease and common stock will increase by $3 million

B Retained earnings will decrease and common stock will increase by $2.85 million

C Retained earnings will decrease and common stock will increase by $35.625 million

D Retained earnings will decrease and common stock will increase by $36.0 million

AACSB Tag: Relative Thinking

Difficulty: Hard

L.O.: 6

58 With respect to preferred stock, select the statement that is correct

A It must have a par value

B It cannot exist unless there also is common stock

C It is never issued without voting privileges

D It always provides for a fixed payment to be made to the stockholders even for years when

no dividends have been declared

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 7

59 The conversion feature on convertible preferred stock enables the stockholder to convert it

61 Which is false about preferred stock?

A Preferred stock has a higher priority status relative to common stock

B The same capital accounts are used to record the issuance of preferred stock and common

stock

C It usually does not carry voting rights

D Preferred stockholders receive dividends in arrears only if the shares are cumulative

AACSB Tag: Relative Thinking

Difficulty: Easy

L.O.: 7

62 Which of the following statements is true?

A Common stock has a dividend rate fixed by the stock contract

B Preferred stock has a volatile market value; therefore, it is a more risky investment than common stock

C As a company's profits and cash flow increases, the board of directors may choose to

increase the dividends received by common stockholders

D All other answers are false

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 7

63 Assume the following shares outstanding:

Preferred stock, 6%, $50 par value, cumulative, 1,000 shares with dividends in arrears 3 years, for 2006, 2007, and 2008

Common stock, $100 par value, 2,000 shares

Total dividends declared in 2009 were $50,000 The total amount of dividends to which common stockholders are entitled is

64 Slickers, Inc had the following shares outstanding during 2008:

Preferred stock, 7%, $50 par value, cumulative, 1,000 shares with dividends in arrears for

2006 and 2007

Common stock, $100 par value, 2,000 shares

The total dividends declared for the current year were $50,000 The total amount of dividends

to which the preferred stockholders are entitled is

65 At January 1, 2009, Grabowski Corporation had outstanding capital stock as shown

below On December 31, 2009, it declared and paid cash dividends of $48,000 to the preferred stockholders

Common stock—1,000,000 shares outstanding, $1 par value

Preferred stock—2,000 shares outstanding, $75 par, 8%, cumulative The stock was issued at

a price of $15 per share

At December 31, 2009, how many years were the preferred dividends in arrears?

66 What is the difference between cumulative and noncumulative preferred stock?

A They both receive dividends in arrears

B Cumulative stock's undeclared dividends accumulate each year until paid, while

noncumulative stock's right to receive dividends is forfeited in any year that dividends are not declared

C Cumulative does not receive dividends but noncumulative does

D Cumulative preferred stock's right to receive dividends is forfeited in any year that

dividends are not declared However, noncumulative stock's undeclared dividends accumulate each year until paid

A Net income would be reduced by the annual interest and by the preferred stock dividends

B Net income would be reduced by the interest but not by the preferred stock dividends

C Net income would not be reduced by the annual interest nor by the preferred stock

68 The Candle Barn has the following classes of stock:

Preferred stock, 8%, $100 par, 100,000 shares issued and outstanding, cumulative

Common stock, par $5, 100,000 shares issued 50,000 shares outstanding

It paid no dividends in its first year of existence In 2010, its second year of existence, the board of directors of The Candle Barn declared a total dividend of $1,800,000 that was paid to the holders of preferred and common stock What was the amount of the dividend paid in

2010 on each share of preferred stock?

B has a debit balance for a successful corporation

C represents the future dividend liability of the company

D represents the income that has been earned by the company, less any dividends declared

since the first day of operations

70 CBA Company reported total stockholders' equity of $85,000 on its balance sheet dated December 31, 2008 During the year ended December 31, 2009, it reported a net income of

$10,000, declared and paid a cash dividend of $2,000, and issued additional capital stock of

$20,000 Therefore, total stockholders' equity at December 31, 2010, was