1. Which of the following characteristics is considered to be an advantage of the corporate form of organization?

a. Avoidance of double taxation

b. Limited liability of stockholders

c. Low level of regulation

d. The absence of a perpetual existence

Answerb. Stockholders are only held liable for the amount of their investment. Double taxation and high regulation are considered to be disadvantages. Corporations have a perpetual existence.

 

2. Of the following characteristics, which is not generally regarded as a right of common shareholders?

a. Preemptive right

b. Voting rights

c. Preference in liquidation

d. Transferability of shares

Answerc. Common shareholders are entitled only to the residual interest in a liquidation; creditors and preferred shareholders have the preference. In the absence of modification, common shares hold a preemptive right, have voting privileges, and are readily transferable.

 

3. The appropriate journal entry to record the issue of 1,000 shares of $1 par-value common stock, which is issued for $4 per share would be:

a.	Cash			4,000
		Common Stock				4,000
b.	Cash			4,000
		Common Stock				1,000
		Paid-in Capital in Excess of Par				3,000
c.	Cash			4,000
		Common Stock				1,000
		Retained Earnings				3,000
d.	Cash			1,000
	Paid-in Capital in Excess of Par			3,000
		Common Stock				4,000

Answer

 

4. If 1,000 shares of $10 par-value common stock are issued in exchange for land with a fair market value of $25,000, the land and common stock (along with any additional paid-in capital) should be recorded at:

a. $0

b. $1,000

c. $10,000

d. $25,000

Answerd. $25,000. Stock issued for assets should be recorded at the fair value of the stock or assets, whichever is more clearly determinable.

 

5. Jackson Corporation has 500,000 shares of common stock outstanding. On April 10, the board of directors declared a $0.60 per share cash dividend, to be paid to stockholders of record on April 25. The dividend was distributed on June 6. The proper journal entry to record on June 6 is:

a.	Dividends Expense			300,000
		Cash				300,000
b.	Dividends Payable			300,000
		Cash				300,000
c.	Retained Earnings			300,000
		Cash				300,000
d.	Dividends Payable			300,000
		Retained Earnings				300,000

Answerb. Dividends Payable and Cash are reduced on the payment date. The Dividends Payable account would have been established on the date of declaration.

 

6. Dividends omitted on preferred shares that must be paid before common shareholders are entitled to be paid are referred to as:

a. Participating

b. Callable

c. Cumulative

d. In arrears

Answer d. Dividends omitted on cumulative preferred stock are called dividends in arrears. Participating preferred stock shares in excess earnings of the firm, and callable allows the corporation the option to reacquire its shares at a set price.

 

7. Magic Corporation paid $100,000 in dividends. The corporation had 10,000 shares of common stock outstanding and 5,000 shares of $100 par value 5% preferred stock. The preferred stock was two years in arrears prior to the current year. How much was paid to the common stockholders?

a. $0

b. $25,000

c. $50,000

d. $75,000

Answerb. $25,000. Of the $100,000 total dividend distribution, $75,000 is for preferred stockholders. The $75,000 consists of $25,000 for the current year ($100 X 0.05 X 5,000 shares), and $50,000 for the two years of dividends in arrears.

 

8. In reviewing corporate equity on a balance sheet, what would be included in the description "Total Capital Stock"?

a. Par value of preferred

b. Par value of common

c. Paid-in capital in excess of par value

d. Both (a) and (b)

Answerd. Total capital stock consists of the par value of common and preferred shares. Total paid-in capital would include total capital stock and paid-in capital in excess of par value.

 

9. Which of the following statements about treasury stock is false?

a. Gains are not recorded on treasury stock transactions, but losses are.

b. Acquiring treasury stock causes stockholders' equity to decrease.

c. Treasury stock is reported as a deduction from stockholders' equity.

d. The excess of the sales price of treasury stock over its cost should be credited to Paid-in Capital from Treasury Stock.

Answera. Treasury stock transactions are capital transactions, not income activities; therefore, neither gains nor losses are recognized. Acquiring treasury stock decreases stockholders' equity by the purchase price. Further, treasury stock is subtracted from stockholders' equity, and Paid-in Capital from Treasury Stock is credited for the sales price in excess of cost.

 

10. Elmer Company has 500,000 shares of common stock authorized. The stock has a par value of $1.50 per share, and 150,000 shares are outstanding. The company declared a 5% stock dividend at a time when the market value was $7 per share. What entry, if any, should Elmer record for the declaration?

a.	No entry
b.	Retained Earnings			11,250
		Common Stock				11,250
c.	Retained Earnings			52,500
		Stock Dividend Distributable				11,250
		Paid-in Capital in Excess of Par				41,250
d.	Stock Dividends Payable			11,250
	Retained Earning			41,250
		Common Stock				52,500

Answer c. For small stock dividends (less than 20%), Retained Earnings is debited for the fair value of the declaration (150,000 shares X 5% = 7,500 shares; 7,500 shares X $7 = $52,500). Stock Dividend Distributable is credited for the par value of the shares to be issued (7,500 shares X $1.50 = $11,250). Paid-in Capital in Excess of Par Value is credited for the difference ($41,250).