Multiple Choice: Chapter Fourteen
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
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
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:
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
6. Dividends omitted on preferred shares that must be paid before common shareholders are entitled to be paid are referred to as:
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?
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)
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).