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Financial Accounting, 11^th edition

Test Bank and Video Questions

By Pratt and Peters

Chapter 12: Shareholders' Equity

For Instructor Use Only

Copyright © 2021 John Wiley & Sons, Inc. or the author, all rights reserved.

Table of Contents

Multiple Choice Questions 2

Matching Questions 30

Short Problems 34

Short Essay Questions 46

IFRS Question 52

Data Analytic Questions 53

Video Questions 55

Multiple Choice Questions

1) A corporation issued common stock instead of debt to finance the purchase of non-depreciable property. Which statement is true?

A) Ownership by existing shareholders will be diluted.

B) The company's debt/equity ratio will be higher.

C) Income tax expense will be lower because expenses increase.

D) Net income will be lower.

Diff: Medium

Learning Objective: 12.1; 12.2

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 1 / None

2) Which one of the following is a result of a company issuing common stock instead of debt to finance the purchase of property?

A) Leverage will be more effective.

B) The company will probably experience cash flow problems.

C) It will have a lower capital structure leverage ratio.

D) It will report a lower net income.

Diff: Medium

Learning Objective: 12.1; 12.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 2 / None

3) What is the effect of a corporation appropriating retained earnings for the cost of treasury stock purchased?

A) Contributed capital is overstated.

B) A portion of retained earnings is restricted from the payment of dividends.

C) Owner's equity is reduced by the amount of the appropriation.

D) Income is overstated.

Diff: Medium

Learning Objective: 12.6

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 3 / None

4) Information related to Lamar Co. for the years ending December 31, 2020 and 2019 follows:

12-31-20 12-31-19

Common stock $120,000 $80,000

Retained earnings at year end (after closing) 100,000 70,000

Dividends declared for 2020 totaled $20,000. Compute 2020 net income.

A) $30,000

B) $50,000

C) $10,000

D) $70,000

Explanation: $70,000 + NI - $20,000 = $100,000; NI = $50,000

Diff: Medium

Learning Objective: 12.1; 12.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 4 / None

5) A corporation generated assets by issuing equity securities and through profitable operations and paid no dividends. Which effects likely occurred?

A) Common stock and retained earnings increased.

B) Common stock increased and retained earnings stayed the same.

C) Retained earnings increased, and there was no effect on common stock.

D) Liabilities and common stock increased.

Diff: Medium

Learning Objective: 12.1; 12.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 5 / None

6) Which one of the following is a valid reason for a stock split?

A) To increase ownership percentages of individual shareholders

B) To adjust the market price of the shares to a level where more individuals can afford to invest in the stock

C) To increase reported net income during subsequent accounting periods

D) To increase the book value per share of common stock

Diff: Easy

Learning Objective: 12.6

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 6 / None

7) Which one of the following transactions always causes a decrease to retained earnings?

A) Selling treasury stock

B) Incurring net income for the period

C) Declaring a stock split

D) Declaring a cash dividend

Diff: Medium

Learning Objective: 12.1; 12.2; 12.4; 12.6

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 7 / None

8) On which date would you make no journal entry?

A) Date of declaration of cash dividend

B) Date of record of cash dividend

C) Date of payment of cash dividend

D) Date of repurchasing outstanding stock

Diff: Easy

Learning Objective: 12.6

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 8 / None

9) Cash dividends are paid based on the number of shares which are:

A) authorized.

B) issued.

C) outstanding.

D) outstanding minus the number of treasury shares.

Diff: Easy

Learning Objective: 12.6

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 9 / None

10) Which one of the following represents the economic effects of a stock split?

A) Has no effect on total assets or total shareholders' equity

B) Decreases the debt/equity ratio

C) Decreases total shareholders' equity

D) Increases the current ratio

Diff: Medium

Learning Objective: 12.6

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 10 / None

11) Which one of the following represents the economic effects of issuing a 2-for-1 stock split?

A) No effect on par value per share or retained earnings

B) Decrease par value per share, and no effect on retained earnings

C) No effect on par value per share, and decrease retained earnings

D) Increase par value per share and retained earnings

Diff: Medium

Learning Objective: 12.6

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 11 / None

12) Which one of the following is an effect when a company buys back its own shares of stock?

A) Leverage is not affected.

B) It will pay more dividends.

C) It will have a higher leverage ratios.

D) Fixed assets will decrease.

Diff: Medium

Learning Objective: 12.1; 12.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 12 / None

13) On January 1, 2020, Garner Corp. had 10,000 shares of $1 par value common stock issued and outstanding. The stock was selling at $10 per share. During 2020, Garner declared and issued a cash dividend of $1 per share. The declaration and issue causes:

A) total shareholders' equity to decrease by $10,000.

B) net income to decrease by $10,000.

C) earnings per share to decrease by $10,000.

D) no change in total shareholders' equity.

Diff: Medium

Learning Objective: 12.6

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 13 / None

14) If a corporation uses existing funds to finance the purchase of property instead of issuing equity securities, then:

A) the debt/equity ratio is the same under both options.

B) it will avoid affecting the debt/equity ratio.

C) leverage is being used.

D) a company's earnings per share will decrease.

Diff: Medium

Learning Objective: 12.1; 12.2

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 14 / None

15) If a corporation issues debt instead of common stock to finance the purchase of property, then the corporation has:

A) a disadvantage of higher tax payments because dividends are a bigger deduction than interest.

B) to deal with contractual interest payments over the life of the debt.

C) required dividend payments that are usually double-taxed.

D) a higher earnings per share.

Diff: Medium

Learning Objective: 12.1

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 15 / None

16) Which one of the following is a characteristic of equity as opposed to debt?

A) Voting rights are typically attached.

B) There is a fixed maturity date.

C) There is a legal contract.

D) There is a fixed payment schedule.

Diff: Easy

Learning Objective: 12.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 16 / None

17) Which one of the following serves to differentiate debt from equity?

A) Interest on debt may be deferred, but dividends are a legal liability and must be paid every year.

B) Interest on debt is tax deductible while dividends to equity investors are not.

C) Debt has a maturity date which is much shorter than the maturity period of equity.

D) Debt holders are appointed while the board of directors elects equity holders.

Diff: Easy

Learning Objective: 12.1

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 17 / None

18) Which of the following is an important economic consequence of incentive compensation plans using stock options?

A) Dilution of ownership interests.

B) The current ratio is affected.

C) Earnings tend to be overstated.

D) The negative effect on cash flows.

Diff: Medium

Learning Objective: 12.5

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 18 / None

19) If preferred stock, which can be exchanged for long-term debt in three years, is classified as an equity financial instrument instead of a liability, then:

A) the current ratio declines.

B) earnings per share is less than if the preferred stock was reported as debt.

C) fixed assets and net worth increase.

D) the capital structure leverage ratio is less than if the preferred stock was reported as debt.

Diff: Hard

Learning Objective: 12.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 19 / None

20) Which one of the following often is considered equity but contains many of the characteristics of debt?

A) Long-term debt with a rate of interest that depends upon the current prime rate of interest

B) Preferred stock

C) Notes payable due in ten years

D) Stock options

Diff: Medium

Learning Objective: 12.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 20 / None

21) If preferred stock is cumulative, then:

A) preferred dividends are a percentage of corporate profits.

B) dividends in arrears must be paid before common shareholders receive dividends.

C) dividends are a percentage of the market value of the preferred stock.

D) payment of dividends is legally guaranteed to shareholders each year.

Diff: Medium

Learning Objective: 12.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 21 / None

22) If preferred stock is participating, then:

A) preferred dividends are a percentage of corporate profits.

B) preferred shareholders vote in the election of the members of the board of directors.

C) preferred shareholders share in the remaining amount of dividend with common shareholders.

D) dividends in arrears must be paid before common shareholders receive dividends.

Diff: Medium

Learning Objective: 12.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 22 / None

23) Which one of the following would always restrict a portion of retained earnings?

A) The sale of a plant asset

B) A sale of treasury stock

C) A declaration of cash dividends

D) An appropriation declared by the Board of Directors

Diff: Easy

Learning Objective: 12.6

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 23 / None

24) Simon Corp's $1 par value, common stock was selling for $20 per share. Simon Corp's owners' equity accounts were as follows:

Common stock $800,000

Additional paid-in capital 200,000

Retained earnings 400,000

How many shares of common stock have been issued?

A) 30,000

B) 600,000

C) 800,000

D) Not enough information to determine.

Explanation: $800,000 / $1 = 800,000

Diff: Medium

Learning Objective: 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 24 / None

25) Which one of the following events increases the leverage ratios?

A) Purchase of inventory on account

B) Sale of treasury stock for less than its cost

C) The payment of cash dividends that were accrued when declared

D) Recognition of net income for the year

Diff: Medium

Learning Objective: 12.1; 12.4; 12.6

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 25 / None

26) Treasury stock is:

A) an asset representing a corporate investment in itself.

B) highly-valued stock owned by a corporation.

C) illegal for U.S. corporations.

D) a decrease of shareholders' equity.

Diff: Easy

Learning Objective: 12.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 26 / None

27) If preferred stock is specified as 8% preferred stock, then preferred:

A) dividends are a percentage of the par value of the preferred stock.

B) shareholders vote in the election of the members of the board of directors.

C) dividends are a percentage of corporate profits.

D) dividends in arrears must be paid before common shareholders receive dividends.

Diff: Easy

Learning Objective: 12.3

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 27 / None

28) Dividends in arrears:

A) are preferred dividends that have been declared but not paid.

B) must be legally paid in the future.

C) are dividends that have not been declared on cumulative preferred stock.

D) are reported as a liability on the balance sheet until paid.

Diff: Easy

Learning Objective: 12.3

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 28 / None

29) Preferred stock may be preferred by investors as compared to common stock because:

A) it pays higher dividends than common.

B) it has advantages of special rights to dividends and/or asset claims during liquidation.

C) preferred stock pays dividends and common stock pays interest.

D) dividends are expected to grow exponentially.

Diff: Easy

Learning Objective: 12.3

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 29 / None

30) Dividends in arrears on cumulative preferred stock:

A) increase liabilities.

B) decrease retained earnings.

C) have no effect on the balance sheet but are disclosed in the footnotes.

D) increase the debt/equity ratio.

Diff: Easy

Learning Objective: 12.3

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 30 / None

31) Which one of the following events decreases the current ratio?

A) A stock split

B) Sale of treasury stock for more than its cost

C) Sale of treasury stock for less than its cost

D) Purchase of outstanding stock

Diff: Medium

Learning Objective: 12.4

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 31 / None

32) Dividends are not paid on:

A) noncumulative preferred stock.

B) nonparticipating preferred stock.

C) unretired repurchased common stock.

D) outstanding common shares.

Diff: Easy

Learning Objective: 12.6

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 32 / None

33) If a company sells its treasury stock for more than its cost and records a gain on the income statement, then:

A) income and shareholders' equity are overstated.

B) only income is overstated.

C) only shareholders' equity is overstated.

D) the income statement and balance sheet are properly stated.

Diff: Medium

Learning Objective: 12.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 33 / None

34) What effect will the acquisition of outstanding stock have on shareholders' equity?

A) No effect

B) Increase

C) Depends on whether it cost more or less than the par value of the stock

D) Decrease

Diff: Medium

Learning Objective: 12.4

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 34 / None

35) Which one of the following events increases the debt/equity ratio?

A) Purchase of outstanding common stock

B) Sale of treasury stock for more than its cost

C) Sale of treasury stock for less than its cost

D) Payment of cash dividends that were previously declared

Diff: Medium

Learning Objective: 12.4

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 35 / None

36) A company declared cash dividends in 2019 and paid the dividends in 2020. The payment in 2020:

A) decreases the debt/equity ratio.

B) increases the number of shares of stock outstanding.

C) decreases shareholders' equity.

D) decreases net income.

Diff: Medium

Learning Objective: 12.6

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 36 / None

37) The declaration of cash dividends:

A) increases total expenses.

B) decreases current liabilities.

C) decreases earnings per share.

D) increases the capital structure leverage ratio.

Diff: Medium

Learning Objective: 12.6

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 37 / None

38) The payment of previously declared cash dividends:

A) increases the capital structure leverage ratio.

B) increases current liabilities.

C) increases earnings per share.

D) decreases total liabilities.

Diff: Medium

Learning Objective: 12.6

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 38 / None

39) Dividends payable is recorded at the date of:

A) issue.

B) record.

C) declaration.

D) payment.

Diff: Easy

Learning Objective: 12.6

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 39 / None

40) If dividends paid are recorded as an expense, then:

A) income and retained earnings are understated.

B) only income is understated.

C) only retained earnings is understated.

D) the income statement and balance sheet are correct.

Diff: Medium

Learning Objective: 12.6

Bloom's: Comprehension

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 40 / None

41) A 3-1 stock split:

A) causes no change in retained earnings.

B) decreases assets.

C) increases contributed capital.

D) is reported on the income statement.

Diff: Easy

Learning Objective: 12.6

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 41 / None

42) All of the following statements are true regarding the appropriations of retained earnings except:

A) Appropriations of retained earnings restrict retained earnings from future dividend payments.

B) Appropriations of retained earnings involve the restriction of cash.

C) Appropriations of retained earnings must be decided upon by the board of directors.

D) Appropriations of retained earnings do not change the amount of total stockholders' equity.

Diff: Easy

Learning Objective: 12.6

Bloom's: Knowledge

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 1 min.

Title/Media Ref.: Multiple Choice Question 42 / None

43) Chambers Corporation has total assets of $800,000 as of December 31, 2020 and total liabilities of $400,000. Contributed capital as of December 31, 2019 and December 31, 2020 is $150,000. Chambers Corporation incurred a $50,000 net loss for the year ended December 31, 2020. If Chambers declared and paid $80,000 in dividends in 2020, its retained earnings at the beginning of 2020 would have been:

A) $220,000.

B) $280,000

C) $380,000.

D) $440,000.

Explanation: 2020 ending RE balance = $800,000 - $400,000 - $150,000 = $250,000

2020 beginning balance = X - $50,000 - $80,000 = $250,000; X = $380,000

Diff: Hard

Learning Objective: 12.1; 12.2

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 43 / None

44) Garnett Corporation's balance sheet reflects total assets of $500,000 as of December 31, 2019 and total liabilities of $150,000. Garnett's balance sheet also reflects $50,000 of preferred stock outstanding on December 31, 2019. In the early 1990's, when Garnett was formed, it issued 50,000 shares of no-par common stock, a one-time event that accounted for its entire contributed capital, other than the preferred stock. Garnett had repurchased 15,000 shares of its common stock in 2018 from a retiring shareholder, which is now treasury stock. As of December 31, 2019, the book value of each outstanding share of Garnett's common stock is:

A) $6.00.

B) $8.57.

C) $10.00.

D) $14.29.

Explanation: ($500,000 - $150,000 - $50,000) / (50,000 - 15,000) = $8.57

Diff: Hard

Learning Objective: 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 44 / None

45) Smith Corporation's balance sheet reflects total assets of $3 million as of December 31, 2020 and total liabilities of $1.8 million. Smith has 100,000 shares of common stock outstanding. The market value of the stock is $9 per share. Smith's market to book ratio is:

A) 0.75.

B) 7.50.

C) 12.00.

D) 13.33.

Explanation: $9 / [($3,000,000 - $1,800,000) / 100,000] = .75

Diff: Hard

Learning Objective: 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 45 / None

46) Cavendish Corporation's balance sheet reflects total assets of $250 million as of November 30, 2020 and total liabilities of $200 million. Cavendish issues $100 million of preferred stock, receiving $100 million in cash. After issuing the preferred stock Cavendish's debt to equity ratio is:

A) 0.67.

B) 1.33.

C) 4.00.

D) 6.00.

Explanation: $200 / [($250 - $200) + $100] = 1.33

Diff: Hard

Learning Objective: 12.1; 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 46 / None

47) Choice Corporation had 100,000 shares of common stock outstanding on January 1, 2020. On January 1, 2020, Choice purchased 5,000 shares of its own common stock to fund a stock option plan for its executives. On December 31, 2020, Choice announced a 3 to 1 stock split. Choice's net income for 2020 was $400,000. How much should Choice report as earnings per share for 2020?

A) $1.33

B) $1.40

C) $4.00

D) $4.21

Explanation: $400,000 / [(100,000 - 5,000) × 3] = $1.40

Diff: Hard

Learning Objective: 12.3; 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 47 / None

48) The following information was taken from the statement of shareholders' equity of Carnival Industries:

The journal entry to record the issuance of preferred stock during 2020 would include:

A) a debit to Preferred Stock for $900.

B) a credit to Preferred Stock for $500.

C) a credit to Additional Paid in Capital for $500.

D) a credit to Cash for $500.

Explanation:

Cash (+A) 500

Preferred Stock (+SE) 500

Diff: Medium

Learning Objective: 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 48 / None

49) The shareholders' equity section of Jason Company as of December 31, 2020 follows:

On January 15, the company repurchased 1,500 shares of its own common stock at $60 to hold as treasury stock. Which of the following would be included in the journal entry recorded on January 15?

A) A credit to Retained Earnings for $90,000

B) A debit to Cash for $90,000

C) A debit to Treasury Stock for $90,000

D) A debit to Common Stock for $90,000

Explanation:

Treasury Stock (-SE) (1,500 × $60) 90,000

Cash (-A) 90,000

Diff: Medium

Learning Objective: 12.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 49 / None

50) The shareholders' equity section of Jason Company as of December 31, 2020 follows:

On January 15, the company repurchased 1,500 shares of its own stock at $60 for treasury stock. On January 16, as part of a compensation package, the company reissued half of the treasury shares to executives who exercised stock options for $20 per share. On January 28, the company reissued the remainder of the treasury stock on the open market for $66 per share. Which of the following would be included in the journal entry recorded on January 16?

A) A debit to Cash for $15,000

B) A debit to Treasury Stock for $45,000

C) A credit to Additional Paid-In Capital for $45,000

D) A credit to Additional Paid-In Capital for $15,000

Explanation:

Cash (+A) [$20 × (1/2 × 1,500)] 15,000

Additional Paid-In Capital (-SE) ($45,000 - $15,000) 30,000

Treasury Stock (+SE) [$60 × (1/2 × 1,500)] 45,000

Diff: Hard

Learning Objective: 12.4; 12.5

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 50 / None

51) The shareholders' equity section of the Jason Company as of December 31, 2020 is as follows:

On January 15, the company repurchased 1,500 shares of its own stock at $60 for treasury stock. On January 16, as part of a compensation package, the company reissued half of the treasury shares to executives who exercised stock options for $20 per share. On January 28, the company reissued the remainder of the treasury stock on the open market for $65 per share. Which of the following would be included in the journal entry recorded on January 28?

A) A credit to Treasury Stock for $48,750

B) A credit to Additional Paid-In Capital, Treasury Stock for $48,750

C) A debit to Cash for $45,000

D) A credit to Additional Paid-In Capital, Treasury Stock for $3,750

Explanation:

Cash (+A) [$65 × (1/2 × 1,500)] 48,750

Treasury Stock (+SE) [$60 × (1/2 × 1,500)] 45,000

Additional Paid-In Capital (+SE) ($48,750 - $45,000) 3,750

Diff: Hard

Learning Objective: 12.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 51 / None

52) The shareholders' equity section of Winters Company contained the following balances as of December 31, 2020:

During 2021, Winters entered into the following transaction: On May 13, the company repurchased 55 shares of its common stock in the open market to hold in treasury at $25 per share. Which of the following would be included in the journal entry for May 13?

A) A debit to Cash for $1,375

B) A credit to Common Stock for $1,375

C) A debit to Common Stock for $1,375

D) A debit to Treasury Stock for $1,375

Explanation:

Treasury Stock (-SE) (55 × $25) 1,375

Cash (-A) 1,375

Diff: Medium

Learning Objective: 12.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 52 / None

53) The shareholders' equity section of Winters Company contained the following balances as of December 31, 2020:

During 2021, Winters entered into the following transaction: On September 26, the company issued 200 shares of its 10 percent preferred stock at $23 per share. Which of the following would be included in the September 26 journal entry?

A) a debit to Preferred Stock for $3,000.

B) a credit to Cash for $4,600.

C) a debit to Cash for $3,000.

D) a credit to Additional Paid-In Capital for $1,600.

Explanation:

Cash (+A) (200 × $23) 4,600

Preferred Stock (10%) (+SE) (200 × $15) 3,000

Additional Paid-In Capital (+SE) ($4,600 - $3,000) 1,600

Diff: Medium

Learning Objective: 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 53 / None

54) The shareholders' equity section of Winters Company contained the following balances as of December 31, 2020:

On September 26, 2021, Winters issued 200 shares of its 10 percent preferred stock at $23 per share. On December 2, the company declared a cash dividend of $1,050, which was paid on December 27. Winters did not declare or pay any dividends during 2020. If Winters uses a separate dividend account for each type of stock, which of the following would be included in the journal entry to record the declaration of the 10% preferred stock dividend?

A) A credit to 10% Preferred Cash Dividend for $600

B) A debit to Dividend Expense for $600

C) A credit to Dividends Payable for $600

D) A debit to Cash for $600

Explanation:

10% Preferred Cash Dividend (-SE) 600a

Dividends Payable (+L) 600

a $600 = Dividends in arrears, $150 + current dividend, $450

= ($1,500 × 10%) + ($4,500* × 10%)

*[$1,500 + (200 × $15)] = $4,500

Diff: Hard

Learning Objective: 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 54 / None

55) The shareholders' equity section of Winters Company contained the following balances as of December 31, 2020:

During 2021, Winters entered into the following transaction: On December 2, the company declared a cash dividend of $1,050, which was paid on December 27. Winters did not declare or pay any dividends during 2020. If Winters uses a separate dividend account for each type of stock, which of the following would be included in the journal entry to record the declaration of the 12% Preferred stock dividend?

A) A debit to 12% Preferred Cash Dividend for $180

B) A debit to Dividend Expense for $180

C) A debit to Dividends Payable for $180

D) A debit to Cash for $180

Explanation:

12% Preferred Cash Dividend (-SE) 180a

Dividends Payable (+L) 180

a $180 = Par value × 12%

= $1,500 × 12%

Diff: Medium

Learning Objective: 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 55 / None

56) The shareholders' equity section of Winters Company contained the following balances as of December 31, 2020:

During 2021, Winters entered into the following transaction: On December 2, the company declared a cash dividend of $1,050, which was paid on December 27. Winters did not declare or pay any dividends during 2020. Based on this information, what amount of dividends should be declared and paid to common shareholders?

A) $350

B) $420

C) $270

D) $385

Explanation: $1,050 - $600* - $180** = $570

*$600 = Dividends in arrears, $150 + current dividend, $450

= ($1,500 × 10%) + ($4,500^ × 10%)

^[$1,500 + (200 × $15)] = $4,500

**$180 = Par value × 12%

= $1,500 × 12%

Diff: Hard

Learning Objective: 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 56 / None

57) The shareholders' equity sections of Samuels Company as reported on the balance

sheets for December 31 were:

2020 2019

Preferred stock (9%, $50 par value) $ 200,000 $ 120,000

Common stock ($10 par value, 750,000 shares

authorized, 54,000 issued and 5,000 held in

treasury) 540,000 396,000

Additional paid-in capital:

Preferred stock 155,000 55,000

Common stock 336,000 300,000

Retained earnings 575,000 495,000

Less: Treasury stock (110,000) 0

Total shareholders' equity $1,696,000 $1,366,000

Based on this information, how many shares of preferred stock were issued in 2020 and what was the average issue price?

A) 4,000 shares and $112.50 per share

B) 160 shares and $88.75 per share

C) 800 shares and $250 per share

D) 1,600 shares and $112.50 per share

Explanation:

Number of Shares Issued = Increase in Par Value ÷ Par Value per Share

= ($200,000 - $120,000) ÷ $50 per Share

= 1,600 Shares

Average Issue Price = Increase in Contributed Capital ÷ Number of Shares

= (Increase in Par Value + Increase in Additional Paid-in Capital)

÷ 1,600 Shares

= [($200,000 - $120,000) + ($155,000 - $55,000)] ÷

1,600 Shares

= $112.50 per Share

Diff: Hard

Learning Objective: 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 57 / None

58) The shareholders' equity section of Samuels Company as reported on the balance sheets for December 31 were:

2020 2019

Preferred stock (9%, $50 par value) $ 200,000 $ 120,000

Common stock ($6 par value, 750,000 shares

authorized, 54,000 issued and 5,000 held in

treasury) 540,000 396,000

Additional paid-in capital:

Preferred stock 155,000 55,000

Common stock 336,000 300,000

Retained earnings 575,000 495,000

Less: Treasury stock (110,000) 0

Total shareholders' equity $1,696,000 $1,366,000

Based on this information, how many shares of common stock were issued in 2020 and what was the average issue price?

A) 21,000 shares and $7.82 per share

B) 30,000 share and $6.00 per share

C) 85,000 shares and $9.73 per share

D) 24,000 shares and $7.50 per share

Explanation:

Number of Shares Issued = ($540,000 - $396,000) ÷ $6 per Share

= 24,000 Shares

Average Issue Price = [($540,000 - $396,000) + ($336,000 - $300,000)] ÷ 24,000 Shares

= $7.50 per Share

Diff: Hard

Learning Objective: 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 2 min.

Title/Media Ref.: Multiple Choice Question 58 / None

Matching Questions

59) Management wishes to obtain financing. For each attribute/characteristic listed in 1 through 5, determine which type of financing it describes from management's perspective by placing a D in the space if it applies to debt financing, or E if it applies to equity financing.

_______ 1. No tax savings

_______ 2. Credit rating effects

_______ 3. Contractual restrictions

_______ 4. Contractual future payments

_______ 5. Cash payments are discretionary

1. E

2. D

3. D

4. D

5. E

Diff: Medium

Learning Objective: 12.1; 12.2

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Matching Question 1 / None

60) Identify the effect of the accounting equation (a through k) of each transaction in 1 through 9 below. You may use each letter more than once or not at all.

Accounting Effects

a. - A and - L

b. + A and + SE (Contributed Capital)

c. + A and + SE (Retained Earnings)

d. + A and - A

e. + A and + L

f. - A and - SE (Contributed Capital)

g. - A and - SE (Retained Earnings)

h. + L and -SE (Retained Earnings)

i. - L and + SE (Retained Earnings)

j. + SE (Contributed Capital) and - SE (Retained Earnings)

k. No journal entry or effect

_______ 1. Issued debt to finance the purchase of property

_______ 2. Issued common stock to finance the purchase of property

_______ 3. Used cash to finance the purchase of property

_______ 4. Declared cash dividends to shareholders

_______ 5. Paid the previously declared dividends

_______ 6. Skipped dividends on cumulative preferred stock

_______ 7. Purchased outstanding common stock

_______ 8. Declared a 3:1 stock split

_______ 9. The market value of common stock doubled during the year

1. e

2. b

3. d

4. h

5. a

6. k

7. f

8. k

9. k

Diff: Medium

Learning Objective: 12.3; 12.6

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 5 min.

Title/Media Ref.: Matching Question 2 / None

61) Select the effect (a, b, or c) that each transaction listed in 1 through 9 would most likely cause on the debt/equity and capital structure leverage ratios.

Effects

a. Decrease ratios

b. Increase ratios

c. Does not change ratios

_______ 1. Issued debt to finance the purchase of property

_______ 2. Issued common stock to finance the purchase of property

_______ 3. Used cash to finance the purchase of property

_______ 4. Declared dividends to shareholders

_______ 5. Paid the previously declared dividends

_______ 6. Skipped dividends on cumulative preferred stock

_______ 7. Recognized stock option compensation

_______ 8. Purchase outstanding shares of common stock

_______ 9. Distributed a two-for-one stock split

1. b

2. a

3. c

4. b

5. a

6. c

7. c

8. b

9. c

Diff: Medium

Learning Objective: 12.1; 12.3; 12.6

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 5 min.

Title/Media Ref.: Matching Question 3 / None

62) Indicate the effect of each of the following transactions (1 through 6) on total shareholders' equity by selecting the letter of the effect (a, b, and c) and placing it in the space provided.

Accounting Effects

a. Decrease in total shareholders' equity

b. Increase in total shareholders' equity

c. Does not change total shareholders' equity

_______ 1. Treasury stock is resold at more than cost

_______ 2. Operating loss for the period

_______ 3. Declaration of a stock split

_______ 4. Acquisition of machinery for common stock

_______ 5. Declaration of cash dividend

_______ 6. Recognized stock option compensation

1. b

2. a

3. c

4. b

5. a

6. c

Diff: Medium

Learning Objective: 12.2; 12.3; 12.4; 12.6

Bloom's: Application

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Matching Question 4 / None

Short Problems

63) Total dividends of $7,000 are declared when one year of dividends are in arrears on 1,000 shares of $8 cumulative preferred stock. How much of the $7,000 of dividends goes to the common shareholders?

Allocation to common = $0

Diff: Medium

Learning Objective: 12.3; 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 1 / None

64) The following information from St. Paul Supply, Inc.is provided for 2020 and 2019:

12/31/20 12/31/19

12% Cumulative preferred stock, $20 par $200,000 $200,000

Common stock, $5 par 40,000 28,000

Additional paid-in capital - common 80,000 50,000

Retained earnings 500,000 500,000

Net income 60,000 40,000

Additional information:

No preferred dividends are in arrears. The market price of the common stock was $25 at December 31, 2020. Calculate the book value per share of common stock at December 31, 2020.

Diff: Medium

Learning Objective: 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 2 / None

65) Total dividends of $40,000 are declared when one year of dividends is in arrears on 5,000 shares of $3 cumulative preferred stock. Calculate dividends on common stock.

Diff: Medium

Learning Objective: 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 3 / None

66) Total dividends of $13,000 are declared when two years of dividends are in arrears on 1,000 shares of par $50, 10%, cumulative preferred stock. Calculate the dividends that were paid to the common stockholders.

Arrears, $10,000 + [current year for preferred limited to, $3,000] = $13,000

$0 (current year is limited by total dividends declared)

Diff: Medium

Learning Objective: 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 4 / None

67) The board of directors desires to pay $40,000 of dividends to its common shareholders when two years of dividends are in arrears on 1,000 shares of $20 par, 10% cumulative preferred stock. How much total dividends must be declared?

$6,000 + $40,000 = $46,000

Diff: Medium

Learning Objective: 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 5 / None

68) On January 23, Borders Corporation purchased 1,000 shares of its own common stock for $30 a share. On March 31, it sold 600 of those shares for $42 a share. How much is the gain reported on the income statement resulting from the sale of treasury stock?

Diff: Medium

Learning Objective: 12.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Problem 6 / None

69) Canton Corporation shareholders' equity section of its balance sheet as of December 31, 2019 is as follows:

Common stock, $5 par value; 40,000 shares authorized $ 50,000

Additional paid-in capital 100,000

Retained earnings 180,000

Total $330,000

The following events occurred during 2020:

• March 3 - 5,000 shares of authorized common stock were issued for $22 per share.

• March 16 - Declared a cash dividend of $3 per share payable May 15 to holders of record on May 5.

A. At March 31, 2020, how many more shares of stock can be issued?

B. At March 31, 2020, how many shares are issued and outstanding?

A. Authorized but not issued: 40,000 - (10,000 + 5,000) = 25,000 shares

B. 10,000 + 5,000 = 15,000

Diff: Medium

Learning Objective: 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 7 / None

70) If an investor owns 8% of a corporation (8,000 shares of 100,000 shares) prior to a 2-for-1 stock split, how many shares and what percentage of the corporation does the investor own after receiving the new shares issued for the stock split?

Diff: Medium

Learning Objective: 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 8 / None

71) The shareholders' equity section of Campbell Co.'s balance sheet follows:

Common stock, $2 par $ 80,000

Additional paid-in capital - common 50,000

Additional paid-in capital–treasury stock 600

Retained earnings 25,400

Treasury stock (2,000)

Total shareholders' equity $154,000

A. Assume all of the treasury stock was sold for $4,800. Calculate the following amounts:

1. Additional paid-in capital–treasury stock

2. Retained earnings

3. Total shareholders' equity

B. Assume all of the treasury stock was sold for $850. Calculate the following amounts:

1. Additional paid-in capital–treasury stock

2. Retained earnings

3. Total shareholders' equity

A.

Additional paid-in capital–treasury stock [$600 + ($4,800 - $2,000)] $ 3,400

Retained earnings (no change) 25,400

Total shareholders' equity ($80,000 + $50,000 + $3,400 + $25,400) 158,800

B.

Additional paid-in capital - Treasury stock ($600 - $600) $ 0

Retained earnings ($25,400 - $550*); $550* = total of ($1,150 - $600) 24,850

Total shareholders' equity ($80,000 + $50,000 + $0 + $24,850) 154,850

Diff: Hard

Learning Objective: 12.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 5 min.

Title/Media Ref.: Short Problem 9 / None

72) Immediately before Cavecreek Corporation purchased 4,000 shares of its own common stock for $25 a share, it had total liabilities of $200,000 and total shareholders' equity of $520,000. Calculate Cavecreek's debt/equity ratio before and immediately subsequent to the purchase of the treasury stock. How did the ratio change, why and what does the change mean?

After: 4,000 × $25 = $100,000

Debt/equity ratio: $200,000/[$520,000 − $100,000] = 0.48

The debt/equity ratio increased because shareholders' equity was reduced, which means that the company is now relying more heavily on debt financing.

Diff: Medium

Learning Objective: 12.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 10 / None

73) Immediately before Zorro Corporation sold 4,000 shares of its own common stock for $30 a share, it had total liabilities of $200,000 and total shareholders' equity of $520,000. Determine Zorro's debt/equity ratio before and immediately subsequent to the stock issue. How did the ratio change, why and what does it mean?

After: 4,000 × $30 = $120,000

Debt/equity ratio: $200,000/[$520,000 + $120,000] = 0.31

The ratio decreased because shareholders' equity was increased, which means that the company is now relying less heavily on debt financing.

Diff: Medium

Learning Objective: 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 11 / None

74) Immediately before Cayman Corporation issued 2,000 shares of its common stock for $15 a share, it had total liabilities of $150,000 and total shareholders' equity of $300,000. Cayman had 10,000 shares of common stock outstanding prior to the new issuance. Calculate Cayman's debt/equity ratio immediately after the new issuance.

Debt/equity ratio: $150,000/[$300,000 + $30,000] = 0.45

Diff: Medium

Learning Objective: 12.3

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 12 / None

75) On January 23, Bennington Corporation, for the first time in its short history, purchased 200 shares of its own common stock for $40 a share. On March 31, it sold 100 of those shares for $45 a share. Prepare the journal entry recording the March 31st transaction.

Cash (100 × $45) 4,500

Treasury Stock (100 × $40) 4,000

Additional Paid-in Capital 500

Diff: Medium

Learning Objective: 12.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 13 / None

76) On January 23, Oakley Co., for the first time in its short history, purchased 200 shares of its own common stock for $40 a share and immediately retired it. The $1 par value stock was originally issued for $30 per share. Prepare the journal entry to record the retirement.

Common stock ($1 × 200 sh) 200

Additional paid-in capital [($30 - $1) × 200] 5,800

Retained earnings (plug) 2,000

Cash ($40 × 200 sh) 8,000

Diff: Medium

Learning Objective: 12.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 14 / None

77) On January 23, Bayshore Corporation, for the first time in its short history, purchased 200 shares of its own common stock for $40 a share. On March 31, it sold 100 of those shares for $45 a share and properly recorded $500 as additional paid-in capital. On April 15, it sold the remaining 100 shares for $30 a share. Prepare the journal entry to record the April 15th transaction.

Cash (100 × $30) 3,000

Additional Paid-in Capital [($4,000 - $3,000) - $500] 500

Retained Earnings 500

Treasury Stock (100 × $40) 4,000

Diff: Medium

Learning Objective: 12.4

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Problem 15 / None

78) The shareholders' equity section of Maven Corporation's balance sheet as of December 31, 2019 is as follows:

Common stock, $1 par; authorized, 6,000 shares; 2,000 shares issued $ 2,000

Additional paid-in capital 60,000

Retained earnings 58,000

Total shareholders' equity $120,000

The following events occurred during 2020:

• February 1 - 400 shares of authorized and unissued common stock were sold for $4 per share.

• October 11 - A three-for-one split was carried out. Market value was $21 per share.

• November 4 - A cash dividend of $4.20 per share was declared, payable January 12 to shareholders of record on November 30.

How many shares of common stock are outstanding at December 31, 2020? Determine the balance in the common stock account at December 31, 2020.

Common stock: 7,200/3 = $2,400

Diff: Medium

Learning Objective: 12.3; 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 5 min.

Title/Media Ref.: Short Problem 16 / None

79) Cullen Distribution Corporation's contributed capital section of its balance sheet follows:

Preferred stock: $10 par, 4% $650,000

Common stock: $8 par 400,000

During the last two years, Cullen Distribution Corporation did not declare any dividends to its shareholders. This year, Cullen declares and pays total dividends of $100,000. Calculate separately the dividends paid to preferred and common shareholders if the preferred stock is cumulative.

Common dividends = $100,000 - $78,000 = $22,000

Diff: Medium

Learning Objective: 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 17 / None

80) A sequence of events affecting the shareholders' equity section of Malabar Corporation follows:

A. On January 21, 8,000 shares of $10 par value common stock were issued for $160,000.

B. On May 16, a 3-for-1 stock split was distributed.

C. On December 23, $8,000 of cash dividends on outstanding common stock were declared. The dividends will be paid in 30 days.

For each entry, state how the event changed assets, liabilities, and shareholders' equity.

A. Assets and shareholders' equity increased by $160,000

B. No change in assets, liabilities, or total shareholders' equity

C. Liabilities increased and shareholders' equity decreased by $8,000

Diff: Medium

Learning Objective: 12.3; 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 5 min.

Title/Media Ref.: Short Problem 18 / None

81) Immediately before a 3-for-1 stock split was declared and distributed on 20,000 shares of par $80 stock, Mikah Company has total liabilities of $260,000 and total shareholders' equity of $320,000. Calculate Mikah Company's debt/equity ratio and its capital structure leverage ratio immediately before and after the stock split.

Capital structure leverage = $580,000/$320,000 = 1.81

After: Debt/equity ratio = $260,000/$320,000 = 0.81

Capital structure leverage = $580,000/$320,000 = 1.81

Diff: Medium

Learning Objective: 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 19 / None

82) Immediately before a $4,000 cash dividend was declared on 20,000 shares of par $80 stock, Sea Breeze Corporation has total liabilities of $220,000 and total shareholders' equity of $180,000. Calculate Sea Breeze's debt/equity ratio before and after the declaration of the cash dividend and indicate the effect the declaration had on this ratio.

Liabilities: $220,000 + $4,000 = $224,000; OE: $180,000 − $4,000 = $176,000

After: Debt/equity ratio = $224,000/$176,000 = 1.27

The debt/equity ratio increases because additional liabilities were incurred and stockholders' equity decreased.

Diff: Hard

Learning Objective: 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Problem 20 / None

83) Tropical Corporation has the following amounts as other revenue and expenses on its income statement.

Other revenue and expenses:

Gain from sale of treasury stock $21,000

Interest revenue 4,200

Gain from sale of land 18,000

Appropriated retained earnings for self-insurance (1,000)

Preferred dividends (11,000)

Common dividends (6,000)

Total $25,200

List the items that do not belong on the income statement and indicate where each should be reported.

Report as Additional Paid-in Capital–Treasury Stock as an addition in shareholders' equity on the balance sheet

Appropriated retained earnings for self-insurance: $1,000

Report in shareholders' equity on the balance sheet immediately above unappropriated retained earnings

Preferred dividends: $11,000

Report as a deduction on the statement of shareholders' equity

Common dividends: $6,000

Report as a deduction on the statement of shareholders' equity

Diff: Hard

Learning Objective: 12.4; 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting

TOT: 5 min.

Title/Media Ref.: Short Problem 21 / None

84) If a corporation distributes a 4-for-3 stock split on its $5 common stock, how much is the par value after the split?

Diff: Easy

Learning Objective: 12.6

Bloom's: Analysis

AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Problem 22 / None

85) Gomer Paper Corporation has the following balance sheet accounts immediately preceding an investing and financing decision:

Current assets $67,000

Long-lived assets 73,500

Current liabilities 28,500

Long-term liabilities 22,000

Contributed capital 60,000

Retained earnings 30,000

A long-term debt covenant specifies that Gomer Paper's capital structure leverage ratio cannot be greater than 2.0 and its current ratio must be at least 2.0.

Gomer Paper is going to invest $70,000 in new equipment. It is considering two methods of financing the investment. It can use $10,000 of its own money and obtain $60,000 from the issue of long-term debt. Alternatively, Gomer Paper can use $15,000 of its own money and obtain the remaining financing from the issue of stock.

A. Recalculate the balance sheet amounts given above for each of the two financing alternatives immediately after financing is achieved and the investment is undertaken.

B. Use numerical calculations to determine if the debt covenants are respected under each of the two financing alternatives. If the covenants are broken for each alternative, suggest financing options that Gomer Paper might use to finance the $70,000 investment in equipment.

A.

Debt Issue Stock Issue

Current assets $ 57,000 $ 52,000

Long-lived assets 143,500 143,500

Current liabilities 28,500 28,500

Long-term liabilities 82,000 22,000

Contributed capital 60,000 115,000

Retained earnings 30,000 30,000

Capital structure leverage ratio

($143,500 + $57,000)/($60,000 + $30,000) 2.23

($52,000 + $143,500)/($115,000 + $30,000) 1.35

Current ratio

$57,000/$28,500 2.00

$52,000/$28,500 1.82

B:

The capital structure leverage ratio exceeds that allowed (2.0) by the debt covenant if debt is used to finance investment in equipment. The current ratio is less than that allowed (2.0) if the investment is financed by a stock issue.

The maximum cash that Gomer Paper can use for investment is $10,000 and the most debt it can issue without issuing stock is $39,500. Therefore, Gomer Paper must issue more stock and use less of its own money or issue stock and debt using less of its own money.

Diff: Hard

Learning Objective: 12.1; 12.2

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting

TOT: 8 min.

Title/Media Ref.: Short Problem 23 / None

Short Essay Questions

86) Seneca Corporation has the following balance sheet accounts immediately preceding an investing and financing decision:

Current assets $ 430,000

Long-lived assets 1,070,000

Current liabilities 120,000

Long-term liabilities 630,000

Contributed capital 100,000

Retained earnings 650,000

A long-term debt covenant specifies that Seneca's debt/equity ratio cannot be greater than 1.0 and current ratio cannot be less than 2.0.

Seneca is going to invest $600,000 in a new machine that will keep Seneca Corporation in an excellent competitive position in a very competitive industry. To finance this investment, Seneca will use its cash, issue long-term debt, and issue common stock. However, besides having to adhere to the debt covenants, Mr. Seneca, the sole owner of Seneca Corporation, will not issue more than $100,000 of common stock so that he can retain at least a 50% ownership in his corporation.

Can Seneca Corporation finance the $600,000 investment and still adhere to the debt covenants and allow Seneca to retain at least 50% ownership? If Seneca cannot finance the machine within the parameters given, suggest possible means for Seneca to finance the needed acquisition of the machine.

There are not many options for Mr. Seneca. He might try to renegotiate the debt covenants, exhibiting to the creditors that their future money is more secure with a competitive company than one that adheres to the covenants. Alternatively, Mr. Seneca might have to lose control of his company. This might be quite costly to Mr. Seneca, personally, for frequently in these situations, the new corporation "retires" the old entrepreneur.

There are several other financing possibilities not considered in the problem. First, if the purchase can be delayed for one year in which there are no dividends and there is a profit of at least $210,000 with good cash flows, then the $210,000 could be obtained from cash flow generated from operations and additional debt could be secured within the debt/equity ratio ceiling. Second, Seneca might try to secure the machine under an operating lease (either short-term, or not capitalized until the new lease standard takes effect). Thus, he would have use of the machine without the liability on the balance sheet. Third, nonvoting preferred stock might be issued. If this market is available, Mr. Seneca can increase shareholders' equity without diluting his ownership of the corporation. Finally, Seneca might be able to secure personal debt and use that money to buy stock in his company. If he could obtain $105,000 at what may likely be a high interest rate, and invest it in Seneca Corporation's common stock, then he could retain control and issue $105,000 more corporate debt. However, there are a lot of "ifs" in these possibilities.

An algebraic "trick" would help Mr. Seneca use the money from retained earnings and still meet the current ratio minimum. Seneca Corporation now has current assets of $430,000 and current liabilities of $120,000. This releases $190,000 to use for the investment and still maintain a 2.0 current ratio. If $100,000 of current liabilities are paid, then Seneca would have $330,000 of current assets and $20,000 of current liabilities. This releases $290,000 for use in investment (assuming the current assets are very liquid). Also, by reducing current liabilities by $100,000, $100,000 more long-term debt can be issued and still have the debt/equity ratio be less than or equal to one. However, this is "operating on the edge" and any downturn in sales and cash provided by operations would result in financial disaster. A combination of all the above might be appropriate.

Diff: Hard

Learning Objective: 12.1

Bloom's: Analysis

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Measurement

TOT: 9 min.

Title/Media Ref.: Short Essay Question 1 / None

87) For what reasons might a company purchase treasury stock?

Diff: Medium

Learning Objective: 12.4

Bloom's: Application

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 2 / None

88) What rights do preferred shareholders have that common shareholders do not?

Diff: Medium

Learning Objective: 12.3

Bloom's: Knowledge

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 3 / None

89) Identify the two components of shareholders' equity. How do they differ?

Diff: Easy

Learning Objective: 12.2

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 4 / None

90) Explain par value.

Diff: Easy

Learning Objective: 12.3

Bloom's: Knowledge

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Essay Question 5 / None

91) Which characteristics make equity financing more advantageous than debt financing?

Diff: Medium

Learning Objective: 12.1; 12.2

Bloom's: Knowledge

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Short Essay Question 6 / None

92) What factors influence corporate dividend strategies?

Diff: Medium

Learning Objective: 12.6

Bloom's: Knowledge

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Essay Question 7 / None

93) How does the behavior of stock prices relate to the riskiness of equity securities?

Diff: Medium

Learning Objective: 12.1

Bloom's: Knowledge

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 8 / None

94) Why is debt financing considered less expensive than equity financing?

Diff: Medium

Learning Objective: 12.1; 12.2

Bloom's: Knowledge

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Essay Question 9 / None

95) How do the book value and market value of stock compare?

Diff: Medium

Learning Objective: 12.3

Bloom's: Knowledge

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Measurement

TOT: 4 min.

Title/Media Ref.: Short Essay Question 10 / None

96) How is the excess of cash receipts over the original cost of treasury stock accounted for and reported in financial statements?

Diff: Medium

Learning Objective: 12.4

Bloom's: Knowledge

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 11 / None

97) What makes preferred stock difficult to classify on the balance sheet?

Diff: Medium

Learning Objective: 12.3

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 12 / None

98) What is the purpose of the date of record?

Diff: Easy

Learning Objective: 12.6

Bloom's: Knowledge

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting

TOT: 3 min.

Title/Media Ref.: Short Essay Question 13 / None

99) How does an appropriation of retained earnings affect the income statement and assets of a company?

Diff: Medium

Learning Objective: 12.6

Bloom's: Comprehension

AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting

TOT: 4 min.

Title/Media Ref.: Short Essay Question 14 / None

IFRS Question

100) Under US GAAP, companies must provide a description of the changes in comprehensive income as either a separate statement or as a part of the statement of changes in stockholders' equity. Under IFRS, companies must also provide a description of the changes in comprehensive income in a:

A) Statement of Recognized Income and Expense.

B) Statement of Unrecognized Income and Expense.

C) Statement of Retained Earnings.

D) Income Statement.

Diff: Easy

Learning Objective: 12.1

Bloom's: Comprehension

AACSB/AICPA: Diversity / BB: Global; FC: Reporting

TOT: 1 min.

Title/Media Ref.: IFRS Question 1 / None

Data Analytic Questions

Important Note to Instructor: All of the real world data included in the data analytic test bank questions was taken from the company information data base used for the data analytic concept practice exercises in the text located at www.wiley.com/go/pratt/financialaccounting11e. These questions can be used in at least two different ways to test two levels of data analytic skills. To test only the basic analysis required simply provide the student with the financial information followed by the questions just as they are illustrated in the test bank. Alternatively, to test both their ability to access and navigate the data base as well as their analysis skills, you can provide for the students only the questions and require them to access and navigate the data base, organize the data, and perform the analysis.

Key ratios for major pharmaceutical, Merck, for 2017, 2018 and 2019, organized into the ROE framework, are provided below. Review the ratios and answer the questions that follow.

Key: ROE = Return on equity; ROA = Return on assets; CSL = Capital structure leverage; PM = Profit margin; AT = Asset turnover; LTD/TA = Long-term debt/total assets; COGS/S = COGS/sales; A/R Turn = Accounts receivable turnover; CR = Current ratio; OpEx/S = Operating expenses/sales; Inv Turn = Inventory turnover; QR = Quick ratio; Int/S = Interest expense/sales; LTA Turn = Long-term asset turnover; Int Cov = Interest coverage; Tax/S = Federal income tax expense/sales; A/P Turn = Accounts payable turnover; UG/NI = Unusual gains/net income; UL/NI = Unusual losses/net income

101) The change in ROE from 2018 to 2019 was driven by:

A) the change in both leverage and ROA.

B) the change in leverage but not the change in ROA.

C) the change in ROA but not the change in leverage.

D) the change in neither ROA nor leverage.

Diff: Hard

Learning Objective: 12.8

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 1 / None

102) Least important to the change in ROA was:

A) the change in profit margin.

B) the change in asset turnover.

C) the change in inventory turnover.

D) the change in the ability to control cost of goods sold relative to sales.

Diff: Hard

Learning Objective: 12.8

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 2 / None

103) Choose the best answer.

A) Merck's ability to control its total expenses improved over the 3-year period.

B) The productivity of Merck's assets declined over the 3-year period.

C) Merck's suppliers likely became increasingly satisfied with Merck's payment practices across the 3-year period.

D) Merck's asset turnover ratios generally slowed across the 3-year period.

Diff: Hard

Learning Objective: 12.8

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 3 / None

104) Which of the following statements is false?

A) Merck is relying more heavily on debt financing in 2019 than in 2018.

B) The combination of the trends from 2018 to 2019 in Merck's cash collection from customers and its payments to suppliers is hurting its operating cash flows.

C) Merck is better able to cover its debt payments with operating funds in 2019 compared to 2018.

D) Merck's ability to convert its assets to sales improved across the 3-year period.

Diff: Hard

Learning Objective: 12.8

Bloom's: Application

AACSB/AICPA: Analytic / BB: None; FC: Measurement

TOT: 3 min.

Title/Media Ref.: Data Analytic Question 4 / None

Video Questions

105) When common stock is issued for cash, which of the following statements is not true?

A) The transaction is accounted for by increasing the cash account and increasing a contributed capital account.

B) The transaction affects the balance sheet, the statement of cash flows, and the statement of shareholders' equity, but not the income statement.

C) The transaction affects the basic accounting equation by increasing assets, increasing shareholders' equity, and having to no effect on liabilities.

D) The transaction increases a company's reliance on debt as a source of financing its assets.

Diff: Medium

Learning Objective: 12.4

Bloom's: Application

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Treasury stock Video: Question 1 / Video: Treasury stock. www.wiley.com/go/pratt/financialaccounting11e

106) When a company uses cash to buy back previously issued stock from its shareholders, which of the following statements is not true?

A) The transaction is accounted for by decreasing the cash account and increasing a contra equity account, called treasury stock.

B) The transaction affects all four of the financial statements.

C) The transaction affects the basic accounting equation by decreasing assets, decreasing shareholders' equity and having no effect on liabilities.

D) The transaction transfers cash to the shareholders.

Diff: Medium

Learning Objective: 12.4

Bloom's: Application

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Treasury stock Video: Question 2 / Video: Treasury stock. www.wiley.com/go/pratt/financialaccounting11e

107) Which of the following statements accurately interprets this disclosure, which one might find in the shareholders' equity section of the balance sheet?

Common stock $100,000

Retain earnings 20,000

Less: Treasury stock (8,000)

Shareholders' equity $112,000

A) Because the treasury stock account is treated like an asset account in that it is increased on the left side and decreased on the right side, treasury stock should be disclosed on the asset side of the balance sheet.

B) Buying treasury stock is very similar to buying stock in another company and, therefore, should be treated in the financial statements like an investment.

C) The treasury stock account is a contra equity account because it represents a reduction of shareholders' equity and is appropriately disclosed in the shareholders' equity section of the balance sheet as a negative number.

D) This disclosure shows that treasury stock must have been repurchased at a lower price than the price at which the stock was originally issued.

Diff: Medium

Learning Objective: 12.4

Bloom's: Application

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Treasury stock Video: Question 3 / Video: Treasury stock. www.wiley.com/go/pratt/financialaccounting11e

108) Which of the following statements does not accurately interpret this disclosure, which represents a statement of shareholders' equity?

Common Retained Treasury

stock earnings stock Total

Beginning balance $10,000 $7,000 ($2,000) $15,000

Increase 2,000 800 (400) 2,400

Decrease 0 (300) 0 (300)

Ending balance $12,000 $7,500 ($2,400) $17,100

A) The company declared $300 in dividends during the year.

B) $2,400 worth of treasury stock was purchased during the year.

C) During the year more cash was collected from the issuance of stock than was paid to repurchase previously-issued stock.

D) If 200 shares of treasury stock were purchased during the year, the average purchase price per share was $2.

Diff: Medium

Learning Objective: 12.4

Bloom's: Application

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Treasury stock Video: Question 4 / Video: Treasury stock. www.wiley.com/go/pratt/financialaccounting11e

109) When treasury stock is purchased with cash, which of the following would not be the result?

A) If the company uses any debt to finance its assets, the purchase of treasury stock would increase the company's reliance on debt financing relative to equity financing.

B) Earnings per share is a financial ratio computed by dividing net income by the number of shares outstanding. The purchase of treasury stock would tend to increase earnings per share.

C) The purchase of treasury stock would involve a cash payment that on the statement of cash flows would be considered an investing activity.

D) The purchase of treasury would affect the balance sheet, the statement of cash flows, and the statement of shareholders' equity, but not the income statement.

Diff: Medium

Learning Objective: 12.4

Bloom's: Application

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Treasury stock Video: Question 5 / Video: Treasury stock. www.wiley.com/go/pratt/financialaccounting11e

110) Which of the four statements below describes the statement of shareholders' equity?

A) This statement provides a measure of the operating performance of a company during the year.

B) This statement provides a measure of the financial condition of a company at a given point in time.

C) This statement summarizes the effects of the operating, investing and financing activities of a company during a year.

D) This statement tracks the investments made by the shareholders' during a year.

Diff: Easy

Learning Objective: 12.7

Bloom's: Knowledge

AACSB/AICPA: Knowledge / None

Title/Media Ref.: A complete statement of shareholders' equity Video: Question 1 / Video: A complete statement of shareholders' equity. www.wiley.com/go/pratt/financialaccounting11e

111) Review the statement of shareholders' equity below. What was the change in contributed capital during the year?

Common Retained Treasury

stock earnings stock Total

Beginning balance $40,000 $60,000 ($15,000) $85,000

Stock insurance 5,000 5,000

Net income $10,000 $10,000

Dividends (3,000) (3,000)

Stock repurchases (2,000) (2,000)

Ending balance $45,000 $67,000 ($17,000) $95,000

A) Increase of $5,000

B) Decrease of $2,000

C) Increase of $3,000

D) Zero

Diff: Medium

Learning Objective: 12.7

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: A complete statement of shareholders' equity Video: Question 2 / Video: A complete statement of shareholders' equity. www.wiley.com/go/pratt/financialaccounting11e

112) Review the statement of shareholders' equity below. If 1,000 shares of stock were issued during the year for cash, which of the following statements is not true?

Common Retained Treasury

stock earnings stock Total

Beginning balance $40,000 $60,000 ($15,000) $85,000

Stock insurance 5,000 5,000

Net income $10,000 $10,000

Dividends (3,000) (3,000)

Stock repurchases (2,000) (2,000)

Ending balance $45,000 $67,000 ($17,000) $95,000

A) A $5,000 cash increase was reported in the financing section of the statement of cash flows.

B) The shares were issued, on average, for $5 per share.

C) The stock issuance increased the investment in the company made by the shareholders.

D) Treasury stock purchases exceeded the common stock issuances during the year.

Diff: Medium

Learning Objective: 12.7

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: A complete statement of shareholders' equity Video: Question 3 / Video: A complete statement of shareholders' equity. www.wiley.com/go/pratt/financialaccounting11e

113) Review the statement of shareholders' equity below. If the repurchases of the outstanding stock were made at a price, on average, of $4 per share, which of the following statements is not true?

Common Retained Treasury

stock earnings stock Total

Beginning balance $40,000 $60,000 ($15,000) $85,000

Stock insurance 5,000 5,000

Net income $10,000 $10,000

Dividends (3,000) (3,000)

Stock repurchases (2,000) (2,000)

Ending balance $45,000 $67,000 ($17,000) $95,000

A) A $2,000 cash decrease was reported in the investing section of the statement of cash flows.

B) The stock repurchase helped to boost the company's earnings per share ratio.

C) The stock repurchase increased the relative importance of the company's debt as a source of financing in its capital structure.

D) The stock repurchase reduced the company's contributed capital.

Diff: Medium

Learning Objective: 12.7

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: A complete statement of shareholders' equity Video: Question 4 / Video: A complete statement of shareholders' equity. www.wiley.com/go/pratt/financialaccounting11e

114) Review the statement of shareholders' equity below. What was the overall change in the shareholders' investment in the company during the year?

Common Retained Treasury

stock earnings stock Total

Beginning balance $40,000 $60,000 ($15,000) $85,000

Stock insurance 5,000 5,000

Net income $10,000 $10,000

Dividends (3,000) (3,000)

Stock repurchases (2,000) (2,000)

Ending balance $45,000 $67,000 ($17,000) $95,000

A) Increase $5,000

B) Increase $7,000

C) Increase $10,000

D) Decrease $2,000

Diff: Medium

Learning Objective: 12.7

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: A complete statement of shareholders' equity Video: Question 5 / Video: A complete statement of shareholders' equity. www.wiley.com/go/pratt/financialaccounting11e

115) Which of the following statements does not accurately describe shareholders' equity?

A) It is often referred to as the "net assets" of the company.

B) It represents the investment made by the shareholders in the company.

C) Exchanges between a company and its shareholders often lead to gains and losses recognized on the income statement.

D) Shareholders' equity is comprised of contributed capital and earned capital.

Diff: Medium

Learning Objective: 12.2; 12.3; 12.4; 12.5; 12.6; 12.7

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Shareholders' equity - Panera Bread Company Video: Question 1 / Video: Shareholders' equity - Panera Bread Company. www.wiley.com/go/pratt/financialaccounting11e

116) Which of the following is an accurate statement?

A) Investing in debt securities is normally riskier than investing in equity securities.

B) Borrowing is normally considered less expensive than issuing equity.

C) Dividends are tax deductible in the computation of taxable income.

D) Issuing debt dilutes the ownership of the shareholders.

Diff: Medium

Learning Objective: 12.2; 12.3; 12.4; 12.5; 12.6; 12.7

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Shareholders' equity - Panera Bread Company Video: Question 2 / Video: Shareholders' equity - Panera Bread Company. www.wiley.com/go/pratt/financialaccounting11e

117) Preferred stock:

A) offers largely the same rights as common stock.

B) does not normally pay dividends.

C) issuances normally dilute the ownership of the common shareholders.

D) issuances often share many of the characteristics of debt and for that reason is frequently referred to as a hybrid security.

Diff: Medium

Learning Objective: 12.2; 12.3; 12.4; 12.5; 12.6; 12.7

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Shareholders' equity - Panera Bread Company Video: Question 3 / Video: Shareholders' equity - Panera Bread Company. www.wiley.com/go/pratt/financialaccounting11e

118) When common stock is issued for cash:

A) both the statement of cash flows and the statement of shareholders' equity are affected.

B) the income statement is affected.

C) the operating section of the statement of cash flows is affected.

D) the company's leverage position increases.

Diff: Medium

Learning Objective: 12.2; 12.3; 12.4; 12.5; 12.6; 12.7

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Shareholders' equity - Panera Bread Company Video: Question 4 / Video: Shareholders' equity - Panera Bread Company. www.wiley.com/go/pratt/financialaccounting11e

119) Which of the following is not a reason that companies purchase their own shares?

A) to increase the relative reliance on debt in their capital structure.

B) to boost net income.

C) to place cash in the hands of shareholders who desire more liquidity.

D) to boost the earnings per share ratio.

Diff: Medium

Learning Objective: 12.2; 12.3; 12.4; 12.5; 12.6; 12.7

Bloom's: Comprehension

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Shareholders' equity - Panera Bread Company Video: Question 5 / Video: Shareholders' equity - Panera Bread Company. www.wiley.com/go/pratt/financialaccounting11e

120) When treasury stock is reissued for a dollar amount greater than its cost:

A) the difference increase liabilities.

B) the difference represents a gain recorded on the income statement.

C) the difference increases earned capital.

D) the difference increases contributed capital.

Diff: Medium

Learning Objective: 12.2; 12.3; 12.4; 12.5; 12.6; 12.7

Bloom's: Analysis

AACSB/AICPA: Knowledge / None

Title/Media Ref.: Shareholders' equity - Panera Bread Company Video: Question 6 / Video: Shareholders' equity - Panera Bread Company. www.wiley.com/go/pratt/financialaccounting11e

121) Stock option compensation expense:

A) reduces additional paid-in capital.

B) is added back to net income in the operating section of the statement of cash flows in the computation of net cash from operations.

C) is recognized when employees exercise their stock options.

D) is part of accumulated other comprehensive income (AOCI).

Diff: Medium

Learning Objective: 12.2; 12.3; 12.4; 12.5; 12.6; 12.7

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Shareholders' equity - Panera Bread Company Video: Question 7 / Video: Shareholders' equity - Panera Bread Company. www.wiley.com/go/pratt/financialaccounting11e

122) Stock dividends and stock splits:

A) result in the issuance of additional shares, but do not represent exchanges of value between the company and the shareholders.

B) are accounted for in a manner very similar to accounting for cash dividends.

C) tend to reduce net income.

D) tend to increase net income.

Diff: Medium

Learning Objective: 12.2; 12.3; 12.4; 12.5; 12.6

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Shareholders' equity - Panera Bread Company Video: Question 8 / Video: Shareholders' equity - Panera Bread Company. www.wiley.com/go/pratt/financialaccounting11e

123) Unrealized gains and losses on securities classified as available-for-sale:

A) are included in the calculation of net income.

B) are reflected in contributed capital on the balance sheet.

C) are part of accumulated other comprehensive income (loss) on the balance sheet.

D) do not involve economically meaningful events, so they are not reflected on the financial statements.

Diff: Medium

Learning Objective: 12.2; 12.3; 12.4; 12.5; 12.6; 12.7

Bloom's: Application

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Shareholders' equity - Panera Bread Company Video: Question 9 / Video: Shareholders' equity - Panera Bread Company. www.wiley.com/go/pratt/financialaccounting11e

124) Which of the following statements is accurate concerning the par value of common stock?

A) When common stocks are issued for cash, par value determines the allocation of the dollar amount between the common stock account and the paid-in capital account.

B) Par value is a requirement for all common and preferred stock issuances.

C) Par value is set equal to the market value of the stock at the end of each year.

D) Companies structure their financing strategies to increase par value.

Diff: Medium

Learning Objective: 12.2; 12.3; 12.4; 12.5; 12.6; 12.7

Bloom's: Comprehension

AACSB/AICPA: None / FC: Measurement

Title/Media Ref.: Shareholders' equity - Panera Bread Company Video: Question 10 / Video: Shareholders' equity - Panera Bread Company. www.wiley.com/go/pratt/financialaccounting11e

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