Ch11 Reporting and Analyzing Stockholders Complete Test Bank - Practice Test Bank | Accounting for Decisions 8e by Paul D. Kimmel. DOCX document preview.
CHAPTER 11
REPORTING AND ANALYZING STOCKHOLDERS’ EQUITY
CHAPTER LEARNING OBJECTIVES
1. Discuss the major characteristics of a corporation. The major characteristics of a corporation are separate legal existence, limited liability of stockholders, transferable ownership rights, ability to acquire capital, continuous life, corporation management, government regulations, and additional taxes.
2. Explain how to account for the issuance of common, preferred, and treasury stock. When a company records issuance of common stock for cash, it credits the par value of the shares to Common Stock. It records in a separate paid-in capital account the portion of the proceeds that is above par value. When no-par common stock has a stated value, the entries are similar to those for par value stock. When no-par common stock does not have a stated value, the entire proceeds from the issue are credited to Common Stock.
Companies generally use the cost method in accounting for treasury stock. Under this approach, a company debits Treasury Stock at the price paid to reacquire the shares.
3. Explain how to account for cash dividends, stock dividends, and stock splits. Companies make entries for dividends at the declaration date and the payment date. At the declaration date, the entries for a cash dividend are debit Cash Dividends and credit Dividends Payable.
Preferred stock has contractual provisions that give it priority over common stock in certain areas. Typically, preferred stockholders have a preference as to (1) dividends and (2) assets in the event of liquidation. However, they sometimes do not have voting rights. The effects of stock dividends and splits are as follows. Small stock dividends transfer an amount equal to the fair value of the shares issued from retained earnings to the paid-in capital accounts. Stock splits reduce the par value per share of the common stock while increasing the number of shares so that the balance in the Common Stock account remains the same.
4. Discuss how stockholders’ equity is reported and analyzed. Additions to retained earnings consist of net income. Deductions consist of net loss and cash and stock dividends. In some instances, portions of retained earnings are restricted, making that portion unavailable for the payment of dividends.
In the stockholders’ equity section of the balance sheet, companies report paid-in capital and retained earnings and identify specific sources of paid-in capital. Within paid-in capital, companies show two classifications: capital stock and additional paid-in capital. If a corporation has treasury stock, it deducts the cost of treasury stock from total paid-in capital and retained earnings to determine total stockholders’ equity.
A company’s dividend record can be evaluated by looking at what percentage of net income it chooses to pay out in dividends, as measured by the dividend payout ratio (dividends divided by net income). Earnings performance is measured with the return on common stockholders’ equity (income available to common stockholders divided by average common stockholders’ equity.)
*5. Prepare entries for stock dividends. To record the declaration of a small stock dividend (less than 20%), debit Stock Dividends for an amount equal to the fair value of the shares issued. Record a credit to a temporary stockholders’ equity account—Common Stock Dividends Distributable—for the par value of the shares, and credit the balance to Paid-in Capital in Excess of Par. When the shares are issued, debit Common Stock Dividends Distributable and credit Common Stock.
Difficulties:
Easy: 150
Medium: 120
Hard: 19
Corporate Form of Organization: 5, 56, 57
Characteristics of a Corporation: 231, 232, 267
Separate Legal Existence: 1, 6, 266
Limited Liability of Stockholders: 2, 60, 66, 72
Transferable Ownership Rights: 3, 58, 61
Ability to Acquire Capital: 64, 70
Continuous Life: 51, 69
Corporation Management: 53, 54, 59, 268, 269
Government Regulations: 55, 71
Additional Taxes: 4, 7, 65, 67, 68
Other Forms of Business Organization: 85, 86
Forming a Corporation: 8
Stockholder Rights: 9, 52, 62, 63, 73, 75, 76, 270, 281
Stock Issue Considerations: 246, 247
Authorized Stock: 10, 83, 84
Issuance of Stock: 77, 78
Par and No-Par Value Stocks: 11, 74, 79, 80, 81, 82, 271, 280
Accounting for Common, Preferred, and Treasury Stock: 234, 235, 236, 237, 238, 248
Accounting for Common Stock: 12, 14, 15, 16, 96, 97, 99, 100, 101, 102, 104
Issuing Par Value Common Stock for Cash: 87, 88, 89, 90, 91, 92, 93, 94, 98, 103
Accounting for Preferred Stock: 115, 121, 122, 123, 124, 239
Accounting for Treasury Stock: 18, 19, 20, 21, 23, 95, 105, 106, 107, 111, 116, 117, 118, 119, 120, 232, 272, 282
Purchase of Treasury Stock: 17, 22
Accounting for Dividends and Stock Splits: 27, 125, 249, 255, 256
Cash Dividends: 28, 29, 132, 133, 134, 135, 136, 140, 142, 147, 149, 150, 151, 152, 153, 154, 285, 288
Entries for Cash Dividends: 137, 138, 139, 141, 143, 241
Dividend Preferences: 24, 25, 129, 130, 155, 273
Cumulative Dividend: 26, 126, 127, 128, 131, 156, 157, 160, 161, 162, 163, 164, 195, 199, 283
Stock Dividends: 30, 31, 32, 144, 165, 166, 167, 168, 169, 171, 172
Effects of Stock Dividends: 145, 146, 158, 173, 174, 257, 275, 286
Stock Splits: 33, 159, 170, 175, 176, 177, 178, 284
Presentation and Analysis: 35
Retained Earnings: 34, 36, 37, 180, 182, 187, 189, 190, 277
Retained Earnings Restrictions: 38, 39, 179, 181, 185, 186, 188
Balance Sheet Presentation of Stockholders’ Equity: 40, 41, 185, 191, 192, 193, 194, 196, 197, 198, 200, 201, 202, 203, 204, 205, 206, 207, 240, 242, 244, 250, 251, 252, 253, 259, 260, 261, 262, 278, 289
Analysis of Stockholders’ Equity: 221, 245, 263, 264
Dividend Record: 43, 208, 211, 213, 214, 215, 217, 287
Earnings Performance: 42, 183, 209, 210, 216, 218, 220
Debt versus Equity Decision:
Entries for Stock Dividends: 44, 45, 46, 47, 48, 49, 50, 221, 222, 223, 224, 225, 226, 227, 228, 229, 230, 265
TRUE-FALSE STATEMENTS
1. A corporation is not an entity that is separate and distinct from its owners.
2. The liability of a stockholder is usually limited to the stockholder’s investment in the corporation.
3. The sale of shares in a corporation by one stockholder to another affects the total capital of the corporation.
4. The tax laws can be a significant disadvantage of the corporate form of business.
5. A corporation can be organized for the purpose of making a profit or it may be nonprofit.
6. A corporation acts under its own name rather than in the name of its stockholders.
7. If a corporation pays taxes on its income, then stockholders will not have to pay taxes on the dividends received from that corporation.
8. A corporation must be incorporated in each state in which it does business.
9. A stockholder has the right to vote in the election of the board of directors.
10. As soon as a corporation is authorized to sell stock, an accounting journal entry should be made recording the total value of the shares authorized.
11. When no-par value stock does not have a stated value, the entire proceeds from the issuance of the stock become legal capital.
12. When no-par common stock with a stated value is issued for cash, the Common Stock account is credited for an amount equal to the cash proceeds.
13. The par value of common stock must always be equal to its market value on the date the stock is issued.
14. For accounting purposes, stated value is treated the same way as par value.
15. Paid-in capital is the amount paid into the corporation by stockholders in exchange for shares of ownership.
16. The issuance of common stock affects both paid-in capital and retained earnings.
17. The acquisition of treasury stock by a corporation increases total assets and total stockholders’ equity.
18. Treasury stock should not be classified as a current asset.
19. Treasury stock is reported as an asset on the balance sheet because treasury stock may later be resold.
20. Treasury Stock is a contra stockholders’ equity account.
21. The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders’ equity.
22. The journal entry to record the purchase of treasury stock will cause total stockholders’ equity to decrease by the amount of the cost of the treasury stock.
23. The number of common shares outstanding can never be greater than the number of shares issued.
24. Preferred stock has contractual preference over common stock in certain areas.
25. Preferred stockholders generally do not have the right to vote for the board of directors.
26. When preferred stock is cumulative, preferred dividends not declared in a given period are called dividends in arrears.
27. Dividends may be declared and paid in cash or stock.
28. Cash dividends are not a liability until they are declared by the board of directors.
29. The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.
30. A 10% stock dividend will increase the number of shares outstanding but the par value per share will decrease.
31. A stock dividend does not affect the total amount of stockholders’ equity.
32. A stock split results in a transfer at market value from retained earnings to paid-in capital.
33. A 3-for-1 common stock split will increase total stockholders’ equity but reduce the par or stated value per share of common stock.
34. Retained earnings represents the amount of cash available for dividends.
35. Dividends in arrears are liabilities of the corporation.
36. Net income of a corporation should be closed to retained earnings and net losses should be closed to paid-in capital accounts.
37. A debit balance in the Retained Earnings account is identified as a deficit.
38. Retained earnings that are restricted are unavailable for dividends.
39. Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.
40. A detailed stockholders’ equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.
41. The Common Stock Dividends Distributable account is classified as a current liability.
42. Return on common stockholders’ equity is computed by dividing net income by ending stockholders’ equity.
43. The payout ratio is computed by dividing total cash dividends paid on common stock by retained earnings.
*44. A liability arises when the board of directors declares a stock dividend.
*45. A stock dividend is a pro rata distribution of cash to a corporation’s stockholders.
*46. A stock dividend will cause an increase in total contributed capital at the date the dividend is declared.
*47. Both large and small stock dividends will cause an increase in total stockholders’ equity at the date the dividend is declared.
*48. Large stock dividends will cause a decrease in retained earnings for the par value of the shares issued.
*49. Both large and small stock dividends will cause a decrease in retained earnings for the market value of the shares issued at the date the dividend is declared.
*50. The declaration of a stock dividend increases liabilities and decreases equity.
MULTIPLE CHOICE QUESTIONS
51. Under the corporate form of business organization,
a. a stockholder is personally liable for the debts of the corporation.
b. stockholders’ acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation.
c. the corporation’s life is assumed to be unlimited unless stipulated in the charter.
d. stockholders wishing to sell their corporation shares must get the approval of other stockholders.
52. Stockholders of a corporation directly elect
a. the president of the corporation.
b. the board of directors.
c. the treasurer of the corporation.
d. all of the employees of the corporation.
53. Those most responsible for the major policy decisions of a corporation are the
a. stockholders.
b. board of directors.
c. management.
d. employees.
54. The chief accounting officer in a company is known as the
a. controller.
b. treasurer.
c. vice-president.
d. president.
55. Which one of the following would not be considered an advantage of the corporate form of organization?
a. Limited liability of stockholders
b. Separate legal existence
c. Continuous life
d. Government regulation
56. The two ways that a corporation can be classified by purpose are
a. general and limited.
b. profit and not-for-profit.
c. state and federal.
d. publicly held and privately held.
57. The two ways that a corporation can be classified by ownership are
a. publicly held and privately held.
b. stock and non-stock.
c. inside and outside.
d. majority and minority.
58. Which of the following would not be true of a privately held corporation?
a. It is sometimes called a closely held corporation.
b. Its shares are regularly traded on the New York Stock Exchange.
c. It does not offer its shares for sale to the general public.
d. It is usually smaller than a publicly held company.
59. Which of the following is not true of a corporation?
a. It may buy, own, and sell property.
b. It may sue and be sued.
c. The acts of its owners bind the corporation.
d. It may enter into binding legal contracts in its own name.
60. Ryan Seacrest has invested $600,000 in a privately held family corporation. The corporation does not do well and must declare bankruptcy. What amount does Seacrest stand to lose?
a. Up to his total investment of $600,000
b. Zero
c. The $600,000 plus any personal assets the creditors demand
d. $400,000
61. Which of the following statements reflects the transferability of ownership rights in a corporation?
a. If a stockholder decides to transfer ownership, he must transfer all of his shares.
b. A stockholder may dispose of part or all of his shares.
c. A stockholder must obtain permission from the board of directors before selling shares.
d. A stockholder must obtain permission from at least three other stockholders before selling shares.
62. A corporate board of directors does not generally
a. select officers.
b. formulate operating policies.
c. declare dividends.
d. execute policy.
63. The officer that is generally responsible for maintaining the cash position of the corporation is the
a. controller.
b. treasurer.
c. cashier.
d. internal auditor.
64. The ability of a corporation to obtain capital is
a. enhanced because of limited liability and ease of share transferability.
b. less than a partnership.
c. restricted because of the limited life of the corporation.
d. about the same as a partnership.
65. Which of the following statements concerning taxation is accurate?
a. Partnerships pay state income taxes but not federal income taxes.
b. Corporations pay federal income taxes but not state income taxes.
c. Corporations pay federal and state income taxes.
d. Only the owners must pay taxes on corporate income.
66. Which of the following statements is not considered a disadvantage of the corporate form of organization?
a. Additional taxes.
b. Government regulations.
c. Limited liability of stockholders.
d. Separation of ownership and management.
67. A disadvantage of the corporate form of organization is
a. professional management.
b. tax treatment.
c. ease of transfer of ownership.
d. lack of mutual agency.
68. Which of the following is a disadvantage of the corporate form of business entity?
a. Unlimited liability of stockholders
b. Continuous life
c. Lack of government regulation
d. Additional taxes
69. Which one of the following is considered an advantage of the corporate form of organization?
a. Unlimited liability of stockholders
b. Separation of ownership and management
c. Continuous life
d. Government regulation
70. Which one of the following is an advantage of the corporate form of business?
- Limited life
- Government regulation
- Ownership rights are restricted to the same shareholders
- Ability to acquire capital
71. A disadvantage of the corporate form of business is
a. its status as a separate legal entity.
b. continuous existence.
c. government regulation.
d. ease of transfer of ownership.
72. Which of the following phrases is not descriptive of the corporate form of business?
a. Professional management.
b. Double taxation on distributed earnings.
c. Unlimited liability.
d. Continuous existence.
73. Which one of the following is not an ownership right of a stockholder in a corporation?
a. To vote in the election of directors.
b. To declare dividends on the common stock.
c. To share in assets upon liquidation.
d. To share in corporate earnings.
74. If no-par stock is issued without a stated value, then
a. the par value is automatically $1 per share.
b. the entire proceeds are considered to be legal capital.
c. there is no legal capital.
d. the corporation is automatically in violation of its state charter.
75. If a stockholder cannot attend a stockholders’ meeting, he may delegate his voting rights by means of a(n)
a. absentee ballot.
b. proxy.
c. certified letter.
d. telegram.
76. The term residual claim refers to a stockholders’ right to
a. receive dividends.
b. share in assets upon liquidation.
c. acquire additional shares when offered.
d. exercise a proxy vote.
77. Which of the following factors does not affect the initial market price of a stock?
a. The company’s anticipated future earnings.
b. The par value of the stock.
c. The current state of the economy.
d. The expected dividend rate per share.
78. If an investment firm underwrites a stock issue, the
a. risk of being unable to sell the shares stays with the issuing corporation.
b. corporation obtains cash immediately from the investment firm.
c. investment firm has guaranteed profits on the sale of the stock.
d. issuance of stock is likely to be directly to creditors.
79. The par value of a stock
a. is legally significant.
b. reflects the most recent market price.
c. is selected by the SEC.
d. is indicative of the worth of the stock.
80. Par value
a. represents what a share of stock is worth.
b. represents the original selling price for a share of stock.
c. is established for a share of stock after it is issued.
d. is the value assigned per share in the corporate charter.
81. The term legal capital is a descriptive term for
a. stockholders’ equity.
b. par value.
c. residual equity.
d. market value.
82. A corporation has the following account balances: Common Stock, $1 par value, $80,000; Paid-in Capital in Excess of Par Value, $2,700,000. Based on this information, the
a. legal capital is $2,780,000.
b. number of shares issued is 80,000.
c. number of shares outstanding is 2,780,000.
d. average price per share issued is $3.48.
83. The authorized stock of a corporation
a. only reflects the initial capital needs of the company.
b. is indicated in its by-laws.
c. is indicated in its charter.
d. must be recorded in a formal accounting entry.
84. The amount of stock that may be issued according to the corporation’s charter is referred to as the
a. authorized stock.
b. issued stock.
c. unissued stock.
d. outstanding stock.
85. In addition to the corporate form, other forms of business organization include all of the following except
a. S-Corporations.
b. Limited Liability Proprietorships.
c. Limited Liability Partnerships.
d. Limited Liability Companies.
86. Other forms of business organizations have evolved as hybrids of
a. corporations and partnerships.
b. corporations and sole proprietorships.
c. sole proprietorships and partnerships.
d. corporations, partnerships, and sole proprietorships.
87. If Acme Company issues 6,000 shares of $5 par value common stock for $210,000, the account
a. Common Stock will be credited for $210,000.
b. Paid-in Capital in Excess of Par will be credited for $30,000.
c. Paid-in Capital in Excess of Par will be credited for $180,000.
d. Cash will be debited for $180,000.
88. A1 Corp. issues 5,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to
a. Common Stock $50,000 and Paid-in Capital in Excess of Stated Value $20,000.
b. Common Stock $70,000.
c. Common Stock $50,000 and Paid-in Capital in Excess of Par $20,000.
d. Common Stock $50,000 and Retained Earnings $20,000.
89. If Ace Company issues 10,000 shares of $5 par value common stock for $210,000, the account
a. Common Stock will be credited for $50,000.
b. Paid-in Capital in Excess of Par will be credited for $50,000.
c. Paid-in Capital in Excess of Par will be credited for $210,000.
d. Cash will be debited for $160,000.
90. If Acme Supply Company issues 5,000 shares of $5 par value common stock for $210,000, the account
a. Common Stock will be credited for $185,000.
b. Paid-in Capital in Excess of Par will be credited for $210,000.
c. Paid-in Capital in Excess of Par will be credited for $235,000.
d. Cash will be debited for $210,000.
91. A1 Food Store issued common stock with a par value of $1 per share. What is par value?
a. The anticipated selling price of each share of stock
b. The market value of the shares at the date of issuance.
c. The amount assigned to each share of stock by the board of directors.
d. The amount to be credited to Common Stock for each share of stock issued.
92. If common stock is issued for an amount greater than par value, the excess should be credited to
a. Cash.
b. Retained Earnings.
c. Paid-in Capital in Excess of Par.
d. Legal Capital.
93. Paid-in Capital in Excess of Par
a. is credited when no-par stock does not have a stated value.
b. is reported as part of paid-in capital on the balance sheet.
c. represents the amount of legal capital.
d. normally has a debit balance.
94. The Paid-in Capital in Excess of Par is increased in the accounting records when
a. the number of shares issued exceeds par value.
b. the stated value of capital stock is greater than the par value.
c. the market value of the stock rises above par value.
d. capital stock is issued at an amount greater than par value.
95. Which of the following represents the largest number of common shares?
a. Treasury shares
b. Issued shares
c. Outstanding shares
d. Authorized shares
96. Ace Packaging Corporation began business in 2025 by issuing 50,000 shares of $5 par common stock for $8 per share and 5,000 shares of 6%, $10 par preferred stock for par. At year-end, the common stock had a market value of $10. On its December 31, 2025 balance sheet, Ace Packaging would report
a. Common Stock of $500,000.
b. Common Stock of $250,000.
c. Common Stock of $400,000.
d. Paid-in Capital of $330,000.
97. A1 Supply Corporation began business in 2025 by issuing 90,000 shares of $5 par common stock for $8 per share and 20,000 shares of 6%, $10 par preferred stock for par. At year-end, the common stock had a market value of $10. On its December 31, 2025 balance sheet, A1 Supply would report
a. Common Stock of $900,000.
b. Common Stock of $450,000.
c. Common Stock of $720,000.
d. Paid-In Capital of $675,000.
98. Acme, Inc. issued 10,000 shares of common stock at a stated value of $10 per share. The total issue of stock sold for $15 per share. The journal entry to record this transaction would include a
a. debit to Cash for $100,000.
b. credit to Common Stock for $100,000.
c. credit to Paid-in Capital in Excess of Par for $50,000.
d. credit to Common Stock for $150,000.
99. When stock is issued in exchange for a noncash asset, the value recorded for the shares issued is best determined by
a. the book value of the noncash asset.
b. the market value of the shares.
c. the par value of the shares.
d. the contributed capital of the shares.
100. K. Perry, Attorney at Law performed legal services for I. Corp. Due to a cash shortage, an agreement was reached whereby I. Corp. would compensate K. Perry for a legal fee of approximately $20,000 by issuing 8,000 shares of its common stock (par $1). The stock trades on a daily basis and the market price of the stock on the day the debt was settled is $2.40 per share. Given this information, the best journal entry for I. Corp. to record for this transaction is
a. Legal Expense 19,200
Common Stock 19,200
b. Legal Expense 20,000
Common Stock 20,000
c. Legal Expense 20,000
Common Stock 8,000
Paid-in Capital in Excess of Par - Common 13,000
d. Legal Expense 19,200
Common Stock 8,000
Paid-in Capital in Excess of Par - Common 11,200
101. Which of the following should be used to value noncash assets or services received in exchange for common stock?
a. Market value of the stock
b. Market value of the assets
c. Par value of the stock
d. Either the market value of the stock or the market value of the assets, whichever is more readily determinable
102. A1 Merchandising Company issued 900 shares of no-par common stock for $17,100. Which of the following journal entries would be made if the stock has no stated value?
a. Cash 17,100
Common Stock 17,100
b. Cash 17,100
Common Stock 900
Paid-in Capital in Excess of Par 16,200
c. Cash 17,100
Common Stock 900
Paid-in Capital in Excess of Stated Value 16,200
d. Common Stock 17,100
Cash 17,100
103. Ace Discount Retail Company issued 800 shares of no-par common stock for $7,200. Which of the following journal entries would be made if the stock has stated value of $2 per share?
a. Cash 7,200
Common Stock 7,200
b. Cash 7,200
Common Stock 1,600
Paid-in Capital in Excess of Par 5,600
c. Cash 7,200
Common Stock 1,600
Paid-in Capital in Excess of Stated Value 5,600
d. Common Stock 7,200
Cash 7,200
104. Acme Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If Acme issues 10,000 shares of common stock to pay its recent attorney's bill of $50,000 for legal services on a land access dispute, which of the following would be the best journal entry for Acme to record?
a. Legal Expense 10,000
Common Stock 10,000
b. Legal Expense 50,000
Common Stock 50,000
c. Legal Expense 50,000
Common Stock 10,000
Paid-in Capital in Excess of Stated Value - Common 40,000
d. Legal Expense 50,000
Common Stock 10,000
Paid-in Capital in Excess of Par - Common 40,000
105. Which of the following statements about treasury stock is true?
a. Few corporations have treasury stock.
b. Purchasing treasury stock is a means of eliminating hostile shareholder buyouts.
c. Companies acquire treasury stock to increase the number of shares outstanding.
d. Companies acquire treasury stock to decrease earnings per share.
106. The following data is available for A1 Corporation at December 31, 2025:
Common stock, par $10 (authorized 30,000 shares) $270,000
Treasury stock (at cost $15 per share) $ 1,200
Based on the data, how many shares of common stock are outstanding?
a. 30,000
b. 27,000
c. 29,920
d. 26,920
107. The following data is available for A1 Corporation at December 31, 2025:
Common stock, par $10 (authorized 30,000 shares) $270,000
Treasury stock (at cost $15 per share) $ 1,200
Based on the data, how many shares of common stock are issued?
a. 30,000
b. 27,000
c. 29,920
d. 26,920
108. A1 Storage Products purchased 11,000 shares of its own $0.75 par value common stock at a cost of $8 per share. The stock was originally issued at $7 per share. Which of the following is part of the journal entry to record the purchase?
a. Credit Common Stock for $88,000
b. Debit Treasury Stock for $88,000
c. Credit Common Stock for $8,250
d. Debit Treasury Stock for $8,250
109. Ace Manufacturing Corporation purchased 2,500 shares of its own previously issued $10 par common stock for $62,500. As a result of this event,
a. the Common Stock account decreased $25,000.
b. total stockholders’ equity decreased $62,500.
c. the Paid-in Capital in Excess of Par account decreased $37,500.
110. A1 Manufacturing Corporation purchased 5,000 shares of its own previously issued $10 par common stock for $125,000. As a result of this event,
a. A1’s Common Stock account decreased $50,000.
b. A1’s total stockholders’ equity decreased $125,000.
c. A1’s Paid-in Capital in Excess of Par account decreased $75,000.
111. Treasury stock is
a. stock issued by the U.S. Treasury Department.
b. stock purchased by a corporation and held as an investment in its treasury.
c. corporate stock issued by the treasurer of a company.
d. a corporation’s own stock, which has been reacquired and held for future use.
112. The acquisition of treasury stock by a corporation
a. increases its total assets and total stockholders’ equity.
b. decreases its total assets and total stockholders’ equity.
c. has no effect on total assets and total stockholders’ equity.
d. requires that a gain or loss be recognized on the income statement.
113. A corporation purchases 20,000 shares of its own $20 par common stock for $35 per share, recording it at cost. What will be the effect on total stockholders’ equity?
a. Increase by $700,000
b. Decrease by $400,000
c. Decrease by $700,000
d. Decrease by $300,000
114. A corporation purchases 30,000 shares of its own $10 par common stock for $25 per share, recording it at cost. What will be the effect on total stockholders’ equity?
a. Increase by $300,000.
b. Decrease by $750,000.
c. Increase by $750,000.
d. Decrease by $300,000.
115. All of the following statements about preferred stock are true except
a. preferred stock will have a paid-in capital account that is separate from other stock.
b. preferred stock is presented first on the stockholder's equity section.
c. preferred stock can be either par value or no-par value.
d. there can be only one class of preferred stock.
116. Treasury stock should be reported in the financial statements of a corporation as a(n)
a. investment.
b. liability.
c. deduction from total paid-in capital.
d. deduction from total paid-in capital and retained earnings.
117. A company would not acquire treasury stock
a. in order to reissue shares to officers.
b. as an asset investment.
c. in order to increase trading of the company’s stock.
d. to have additional shares available to use in acquisitions of other companies.
118. Treasury Stock is a(n)
a. contra asset account.
b. retained earnings account.
c. asset account.
d. contra stockholders’ equity account.
119. The number of shares of issued stock equals
a. unissued shares minus outstanding shares.
b. outstanding shares plus treasury shares.
c. authorized shares minus treasury shares.
d. outstanding shares plus authorized shares.
120. Treasury shares plus outstanding shares equal
a. authorized shares.
b. issued shares.
c. unissued shares.
d. distributable shares.
121. Acme Corporation issues 70,000 shares of $50 par value preferred stock for cash at $60 per share. The entry to record the transaction will consist of a debit to Cash for $4,200,000 and a credit or credits to
a. Preferred Stock for $4,200,000.
b. Preferred Stock for $3,500,000 and Paid-in Capital in Excess of Par-Preferred Stock for $700,000.
c. Preferred Stock for $3,500,000 and Retained Earnings for $700,000.
d. Paid-in Capital from Preferred Stock for $4,200,000.
122. A1 Appliance Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If the company issues 7,000 shares of preferred stock for land with an asking price of $875,000 and a market value of $770,000, which of the following journal entries should A1 record?
a. Land 700,000
Preferred Stock 700,000
b. Land 770,000
Preferred Stock 770,000
c. Land 875,000
Preferred Stock 700,000
Paid-in Capital in Excess of Par - Preferred 175,000
d. Land 770,000
Preferred Stock 700,000
Paid-in Capital in Excess of Par - Preferred 70,000
123. Acme Corporation issues 40,000 shares of $50 par value preferred stock for cash at $60 per share. In the stockholders’ equity section, the effects of the transaction above will be reported
a. entirely within the capital stock section.
b. entirely within the additional paid-in capital section.
c. under both the capital stock and additional paid-in capital sections.
d. entirely under the retained earnings section.
124. Ace Marine Corporation issues 40,000 shares of $100 par value preferred stock for cash at $110 per share. The entry to record the transaction will consist of a debit to Cash for $4,400,000 and a credit or credits to
a. Preferred Stock for $4,400,000.
b. Preferred Stock for $4,000,000 and Paid-in Capital in Excess of Par-Preferred Stock for $400,000.
c. Preferred Stock for $4,000,000 and Retained Earnings for $300,000.
d. Paid-in Capital from Preferred Stock for $4,400,000.
125. Which of the following is not a right or preference associated with preferred stock?
a. The right to vote
b. First claim to dividends
c. Preference to corporate assets in case of liquidation
d. To receive dividends in arrears before common stockholders receive dividends
126. Dividends in arrears on cumulative preferred stock
a. never have to be paid, even if common dividends are paid.
b. must be paid before common stockholders can receive a dividend.
c. should be recorded as a current liability until they are paid.
d. enable the preferred stockholders to share equally in corporate earnings with the common stockholders.
127. Dividends in arrears on cumulative preferred stock
a. are considered to be a non-current liability.
b. are considered to be a current liability.
c. only occur when preferred dividends have been declared.
d. should be disclosed in the notes to the financial statements.
128. Dividends in arrears are dividends on
a. cumulative preferred stock that have been declared but have not been paid.
b. non-cumulative preferred stock that have not been declared for a given period of time.
c. cumulative preferred stock that have not been declared for a given period of time.
d. common dividends that have been declared but have not yet been paid.
129. Outstanding stock of the Ace Corporation included 40,000 shares of $5 par common stock and 10,000 shares of 5%, $10 par non-cumulative preferred stock. In 2024, the company’s board of directors declared and paid dividends of $4,000. In 2025, the board of directors declared and paid dividends of $20,000. How much of the 2025 dividend was distributed to preferred shareholders?
a. $9,000.
b. $15,000.
c. $5,000.
130. Outstanding stock of the A1 Service Corporation included 40,000 shares of $5 par common stock and 20,000 shares of 5%, $10 par non-cumulative preferred stock. In 2024, A1’s board of directors declared and paid dividends of $8,000. In 2025, the company’s board of directors declared and paid dividends of $24,000. How much of the 2025 dividend was distributed to preferred shareholders?
a. $14,000.
b. $18,000.
c. $10,000.
131. Ace Discount Retail Company has $20,000 of dividends in arrears. Based on this information, which of the following statements is false?
a. Dividends in arrears are not considered to be liabilities.
b. An obligation for dividends in arrears exists only after the board of directors declares payment.
c. The investment community looks favorably on companies with dividends in arrears since the money is redirected toward more important growth opportunities.
d. The amount of dividends in arrears should be disclosed in the notes to the financial statements.
132. Which one of the following is not necessary in order for a corporation to pay a cash dividend?
a. Adequate cash.
b. Approval of stockholders.
c. Declared dividends.
d. Retained earnings.
133. The date on which a cash dividend becomes a binding legal obligation is on the
a. declaration date.
b. date of record.
c. payment date.
d. last day of the fiscal year-end.
134. The cumulative effect of the declaration and payment of a cash dividend on a company’s financial statements is to
a. decrease total liabilities and stockholders’ equity.
b. increase total expenses and total liabilities.
c. increase total assets and stockholders’ equity.
d. decrease total assets and stockholders’ equity.
135. Suppose that the board of directors of Target declared a cash dividend on November 15, 2025 to be paid on December 15, 2025 to stockholders owning the stock on November 30, 2025. Given these facts, the date of November 30, 2025 is referred to as the
a. declaration date.
b. record date.
c. payment date.
d. ex-dividend date.
136. The effect of the declaration of a cash dividend by the board of directors is to
Increase Decrease
a. Stockholders’ equity Assets
b. Assets Liabilities
c. Liabilities Stockholders’ equity
d. Liabilities Assets
137. Which of the following is the appropriate general journal entry to record the declaration of cash dividends?
a. Cash Dividends
Cash
b. Dividends Payable
Cash
c. Paid-in Capital
Dividends Payable
d. Cash Dividends
Dividends Payable
138. Suppose that the board of directors of Old Navy declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2025. The dividend is to be paid on August 15, 2025 to stockholders of record on July 31, 2025. The journal entry to record the declaration of the dividends on July 15, 2025 will include a
a. debit to Dividends Payable.
b. debit to Cash Dividends.
c. credit to Cash.
d. credit to Cash Dividends.
139. Suppose that the board of directors of Old Navy declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2025. The dividend is to be paid on August 15, 2025 to stockholders of record on July 31, 2025. The effects of the journal entry to record the declaration of the dividend on July 15, 2025 are to
a. decrease stockholders’ equity and increase liabilities.
b. decrease stockholders’ equity and decrease assets.
c. increase stockholders’ equity and increase liabilities.
d. increase stockholders’ equity and decrease assets.
140. The net effects of the declaration and payment of a cash dividend are to
a. decrease liabilities and decrease stockholders’ equity.
b. increase stockholders’ equity and decrease liabilities.
c. decrease assets and decrease stockholders’ equity.
d. increase assets and increase stockholders’ equity.
141. The board of directors of Ace Supply Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2025. The dividend is to be paid on August 15, 2025 to stockholders of record on July 31, 2025. The journal entry to be recorded on August 15, 2025 will include a
a. debit to Cash Dividends.
b. credit to Cash Dividends.
c. credit to Dividends Payable.
d. debit to Dividends Payable.
142. The board of directors of Ace Supply Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2025. The dividend is to be paid on August 15, 2025, to stockholders of record on July 31, 2025. The effects of the journal entry to record the payment of the dividend on August 15, 2025 are to
a. decrease stockholders’ equity and decrease liabilities.
b. decrease liabilities and decrease assets.
c. increase stockholders’ equity and increase liabilities.
d. increase stockholders’ equity and decrease assets.
143. A corporation records a dividend-related liability
a. on the record date.
b. on the payment date.
c. when dividends are in arrears.
d. on the declaration date.
144. Common Stock Dividends Distributable is classified as a(n)
a. asset account.
b. stockholders’ equity account.
c. expense account.
d. liability account.
145. The effect of a stock dividend is to
a. decrease total assets and stockholders’ equity.
b. change the composition of stockholders’ equity.
c. decrease total assets and total liabilities.
d. increase the book value per share of common stock.
146. Stock dividends and stock splits have the following effects on retained earnings:
Stock Splits Stock Dividends
a. Increase No change
b. No change Decrease
c. Decrease Decrease
d. No change No change
147. Dividends are predominantly paid in
a. scrip.
b. property.
c. cash.
d. stock.
148. Of the four dividend types, the two most common types in practice are
a. cash and scrip.
b. cash and property.
c. cash and stock.
d. property and stock.
149. Regular dividends are declared out of
a. paid-in capital in excess of par.
b. treasury stock.
c. common stock.
d. retained earnings.
150. Which of the following is not a significant date with respect to dividends?
a. The declaration date.
b. The incorporation date.
c. The record date.
d. The payment date.
151. On the dividend record date,
a. a dividend becomes a current obligation.
b. no entry is required.
c. an entry may be required if it is a stock dividend.
d. Dividends Payable is debited.
152. Which of the following statements regarding the date of a cash dividend declaration is not accurate?
a. The dividend can be rescinded once it has been declared.
b. The corporation is committed to a legal, binding obligation.
c. The board of directors formally authorizes the cash dividend.
d. A liability account must be increased.
153. Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections:
Total Assets Total Liabilities Total Stockholders’ Equity
a. Increase Decrease No change
b. No change Increase Decrease
c. Decrease Increase Decrease
d. Decrease No change Increase
154. Which of the following statements about dividends is not accurate?
a. Dividends are generally reported quarterly as a dollar amount per share.
b. Low dividends may mean high stock returns.
c. The board of directors is obligated to declare dividends.
d. Payment of dividends from legal capital is illegal in many states.
155. Ace Inc. has 10,000 shares of 4%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2025. What is the annual dividend on the preferred stock?
a. $40 per share
b. $40,000 in total
c. $4,000 in total
d. $0.40 per share
156. A1 Transport Company has the following stock outstanding at December 31, 2024:
5% Cumulative preferred stock, $12 Par $39,600
Common stock, $0.10 Par 12,000
A1 paid no dividends during 2023. During 2024, it declares $13,000 of dividends. How much of the $13,000 will preferred stockholders receive?
a. $1,980
b. $3,960
c. $1,083
157. Acme Marine Supply Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2025. What is the annual dividend on the preferred stock?
a. $50 per share.
b. $5,000 in total.
c. $500 in total.
d. $0.50 per share.
158. What are the effects on total stockholders’ equity of a stock dividend and a stock split, respectively?
Stock Dividend Stock Split
a. Increase No effect
b. No effect No effect
c. Decrease No effect
d. Decrease Decrease
159. Which of the following statements is not true about a 2-for-1 split?
a. Par value per share is reduced to half of what it was before the split.
b. Total contributed capital increases.
c. The market price probably will decrease.
d. A stockholder with ten shares before the split owns twenty shares after the split.
160. Acme Transport Inc. has 10,000 shares of 4%, $100 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2025. If the board of directors declares a $25,000 dividend, the
a. preferred stockholders will receive 1/10th of what the common stockholders will receive.
b. preferred stockholders will receive the entire $25,000.
c. $25,000 will be held as restricted retained earnings and paid out at some future date.
d. preferred stockholders will receive $12,500 and the common stockholders will receive $12,500.
161. A1 Service Corp. has 10,000 shares of 5%, $100 par value, non-cumulative preferred stock and 40,000 shares of $1 par value common stock outstanding at December 31, 2025. There were no dividends declared in 2024. The board of directors declares and pays a $120,000 dividend in 2025. What is the amount of dividends received by the common stockholders in 2025?
a. $0.
b. $50,000.
c. $120,000.
d. $70,000.
162. Ace Appliance Company has 5,000 shares of 6%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2025, and December 31, 2024. The board of directors declared and paid a $12,000 dividend in 2024. In 2025, a total of $60,000 in dividends are declared and paid. What are the dividends received by the preferred stockholders in 2025?
a. $42,000.
b. $30,000.
c. $18,000.
d. $15,000.
163. A1 Restaurant Supply Company has 10,000 shares of 5%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2023, December 31, 2024 and December 31, 2025. There were no dividends declared in 2023. The board of directors declares and pays a $90,000 dividend in 2024 and in 2025. What is the amount of dividends received by the common stockholders in 2025?
a. $30,000.
b. $40,000.
c. $50,000.
d. $0.
164. Ace Legal Services has 6,000 shares of 6%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2024, and December 31, 2025. The board of directors declared and paid a $12,000 dividend in 2024. In 2025, $72,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2025?
a. $48,000.
b. $42,000.
c. $54,000.
d. $18,000.
Reporting
165. The board of directors must assign a per share value to a stock dividend declared that is
a. greater than the par or stated value.
b. less than the par or stated value.
c. equal to the par or stated value.
d. at least equal to the par or stated value.
166. One reason corporations issue stock dividends is to
a. increase the market price per share.
b. exceed stockholders’ dividend expectations.
c. increase the marketability of the stock.
d. decrease the amount of capital in the corporation.
167. A stockholder who receives a stock dividend would
a. expect the market price per share to increase.
b. own more shares of stock.
c. expect retained earnings to increase.
d. expect the par value of the stock to change.
168. When stock dividends are distributed,
a. Common Stock Dividends Distributable is decreased.
b. Retained earnings is decreased.
c. Paid-in Capital in Excess of Par is debited if it is a small stock dividend.
d. No entry is necessary if it is a large stock dividend.
169. A small stock dividend is defined as
a. less than 30% but greater than 25% of the corporation’s outstanding stock.
b. between 50% and 100% of the corporation’s outstanding stock.
c. more than 30% of the corporation’s outstanding stock.
d. less than 20-25% of the corporation’s outstanding stock.
170. What effect occurs when a stock split is declared?
a. Total assets and total stockholders' equity increase.
b. Part of retained earnings is transferred to paid-in capital.
c. The par value decreases and the number of shares increase.
d. Ownership interests of each stockholder are increased.
171. The per share amount normally assigned to a large stock dividend is
a. the market value of the stock on the date of declaration.
b. the average price paid by stockholders on outstanding shares.
c. the par or stated value of the stock.
d. zero.
172. The per share amount normally assigned to a small stock dividend is
a. the market value of the stock on the date of declaration.
b. the average price paid by stockholders on outstanding shares.
c. the par or stated value of the stock.
d. zero.
173. Identify the effect the declaration of a stock dividend has on the par value per share and book value per share.
Par Value per Share Total Paid-in-Capital
a. Increase Decrease
b. No effect Decrease
c. Decrease Decrease
d. No effect Increase
174. Which of the following shows the proper effects of a stock split and a stock dividend?
Item Stock Split Stock Dividend
a. Total paid-in capital Increase Increase
b. Total retained earnings Decrease Decrease
c. Total par value (common) Decrease Increase
d. Par value per share Decrease No change
175. A stock split will
a. have no effect on retained earnings.
b. increase total paid-in capital.
c. increase the total par value of the stock.
d. have no effect on the par value per share of stock.
176. Which of the following statements is not true about a 2-for-1 stock split?
a. The market value of the stock will probably decrease.
b. A stockholder with 5 shares before the split owns 10 shares after the split.
c. Par value per share is reduced to half of what it was before the split.
d. Total paid-in capital increases.
177. A1 Transport Co. had 200,000 shares of common stock outstanding before a stock split occurred and 600,000 shares outstanding after the stock split. The stock split was
a. 2-for-6.
b. 6-for-1.
c. 1-for-6.
d. 3-for-1.
178. Which one of the following events would not require a journal entry on a corporation’s books?
a. 2-for-1 stock split
b. 100% stock dividend
c. 2% stock dividend
d. $1 per share cash dividend
179. If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant expansion, the effect of this action is to
a. decrease total assets and total stockholders’ equity.
b. increase stockholders’ equity and to decrease total liabilities.
c. decrease total retained earnings and increase total liabilities.
d. reduce the amount of retained earnings available for dividend declarations.
180. A net loss
a. occurs if operating expenses exceed cost of goods sold.
b. is not closed to Retained Earnings if it would result in a debit balance.
c. is closed to Retained Earnings even if it would result in a debit balance.
d. is closed to the Paid-in Capital account of the stockholders’ equity section of the balance sheet.
181. Retained earnings are occasionally restricted
a. to set aside cash for dividends.
b. to keep the legal capital associated with paid-in capital intact.
c. due to contractual loan restrictions.
d. if preferred dividends are in arrears.
182. What occurs to stockholders’ equity when a company incurs a net loss for the current period?
a. Total retained earnings is reduced before reporting the ending balance on the balance sheet.
b. Paid-in capital is reduced with a debit amount.
c. A deficit is reported for retained earnings on the balance sheet.
d. Total retained earnings becomes restricted and dividends may not be distributed.
183. How may a company increase its return on common stockholders’ equity?
- Increase its reliance on debt
- Reduce its return on assets
- Reduce net income
- Issue more stock
184. Which of the following is a correct statement concerning the reporting of stockholders’ equity on the balance sheet?
- Three classifications are reported in paid-in capital: capital stock, additional paid-in capital, and treasury stock.
- Additional paid-in capital represents the total amounts received from the issuance of stock since the company began.
- The paid-in capital section includes capital stock and additional paid-in capital.
- Common stock is presented before preferred stock.
185. When retained earnings are restricted, total retained earnings
a. are unaffected.
b. increase.
c. decrease.
d. may increase or decrease.
186. Placing a restriction on retained earnings will
a. assure that a company has sufficient cash for a specific purpose.
b. increase total stockholders’ equity.
c. communicate to readers a portion of retained earnings is unavailable for dividends.
d. decrease total stockholders’ equity.
187. The following selected amounts are available for A1 Company.
Retained earnings (beginning) $3,500
Net loss 200
Cash dividends declared 200
Stock dividends declared 200
What is its ending Retained Earnings balance?
a. $3,200.
b. $3,300.
c. $2,900.
d. $3,100.
188. Ace Supply Company had retained earnings of $18,000 on the balance sheet but disclosed in the footnotes that $2,000 of retained earnings was restricted for plant expansion and $1,000 was restricted for bond repayments. Cash of $2,000 had been set aside for the plant expansion. How much of retained earnings is available for dividends?
a. $15,000.
b. $16,000.
c. $18,000.
d. $13,000.
189. Which of the following transactions affects the Retained Earnings account?
a. Declare a cash dividend
b. Acquire treasury stock
c. Pay a cash dividend
d. Declare a stock split
190. All of the following statements regarding retained earnings are true except
a. retained earnings represents a claim on cash.
b. a debit balance in Retained Earnings indicates a deficit.
c. some companies may restrict the availability of retained earnings for dividends.
d. retained earnings is net income that a company retains in a business.
191. What is total stockholders’ equity based on the following account balances?
Common Stock $2,300,000
Paid-In Capital in Excess of Par 120,000
Retained Earnings 570,000
Treasury Stock 60,000
a. $2,690,000.
b. $2,930,000.
c. $3,050,000.
d. $2,180,000.
192. What is total stockholders’ equity based on the following account balances?
Common Stock $950,000
Paid-In Capital in Excess of Par 50,000
Retained Earnings 175,000
Treasury Stock 25,000
a. $1,000,000.
b. $975,000.
c. $1,150,000.
d. $800,000.
193. What is total stockholders’ equity based on the following account balances?
Common Stock $1,800,000
Paid-In Capital in Excess of Par 100,000
Retained Earnings 360,000
Treasury Stock 60,000
a. $1,900,000.
b. $2,320,000.
c. $2,260,000.
d. $2,200,000.
194. Acme Corporation’s December 31, 2025 balance sheet reported the following:
6% preferred stock, $20 par value, cumulative,
30,000 shares authorized; 20,000 shares issued $ 400,000
Common stock, $10 par value, 3,000,000 shares authorized;
1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000
Paid-in capital in excess of par – preferred stock 60,000
Paid-in capital in excess of par – common stock 28,000,000
Retained earnings 9,650,000
Treasury stock (30,000 shares) 630,000
Acme’s total paid-in capital was
a. $47,960,000.
b. $48,590,000.
c. $47,330,000.
d. $28,060,000.
195. Acme Corporation’s December 31, 2025 balance sheet reported the following:
6% preferred stock, $20 par value, cumulative,
30,000 shares authorized; 20,000 shares issued $ 400,000
Common stock, $10 par value, 3,000,000 shares authorized;
1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000
Paid-in capital in excess of par – preferred stock 60,000
Paid-in capital in excess of par – common stock 28,000,000
Retained earnings 9,650,000
Treasury stock (30,000 shares) 630,000
Acme declared and paid a $85,000 cash dividend on December 15, 2025. If the company’s dividends in arrears prior to that date were $24,000, Acme’s common stockholders received
a. $61,000.
b. $48,000.
c. $37,000.
d. no dividend.
196. Acme Corporation’s December 31, 2025 balance sheet reported the following:
6% preferred stock, $20 par value, cumulative,
30,000 shares authorized; 20,000 shares issued $ 400,000
Common stock, $10 par value, 3,000,000 shares authorized;
1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000
Paid-in capital in excess of par – preferred stock 60,000
Paid-in capital in excess of par – common stock 28,000,000
Retained earnings 9,650,000
Treasury stock (30,000 shares) 630,000
Acme’s total stockholders’ equity was
a. $58,240,000.
b. $47,330,000.
c. $57,610,000.
d. $56,980,000.
197. Ace Supply Corporation began business by issuing 200,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $40,000. The year-end balance sheet would report
a. Common Stock of $1,000,000.
b. Common Stock of $4,800,000.
c. total paid-in capital of $4,760,000.
d. total paid-in capital of $3,800,000.
198. Acme Corporation’s December 31, 2025 balance sheet reported the following:
6% preferred stock, $20 par value, cumulative,
40,000 shares authorized; 25,000 shares issued $ 500,000
Common stock, $10 par value, 4,000,000 shares authorized;
2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000
Paid-in capital in excess of par – preferred stock 80,000
Paid-in capital in excess of par – common stock 37,000,000
Retained earnings 12,200,000
Treasury stock (40,000 shares) 840,000
Acme’s total paid-in capital was
a. $63,580,000.
b. $64,420,000.
c. $62,740,000.
d. $36,080,000.
199. Acme Corporation’s December 31, 2025 balance sheet reported the following:
6% preferred stock, $20 par value, cumulative,
40,000 shares authorized; 25,000 shares issued $ 500,000
Common stock, $10 par value, 4,000,000 shares authorized;
2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000
Paid-in capital in excess of par – preferred stock 80,000
Paid-in capital in excess of par – common stock 37,000,000
Retained earnings 12,200,000
Treasury stock (40,000 shares) 840,000
Acme declared and paid a $100,000 cash dividend on December 15, 2025. If the company’s dividends in arrears prior to that date were $30,000, Acme’s common stockholders received
a. $70,000.
b. $60,000.
c. $40,000.
d. no dividend.
200. Acme Corporation’s December 31, 2025 balance sheet reported the following:
6% preferred stock, $20 par value, cumulative,
40,000 shares authorized; 25,000 shares issued $ 500,000
Common stock, $10 par value, 4,000,000 shares authorized;
2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000
Paid-in capital in excess of par – preferred stock 80,000
Paid-in capital in excess of par – common stock 37,000,000
Retained earnings 12,200,000
Treasury stock (40,000 shares) 840,000
Acme’s total stockholders’ equity was
a. $76,620,000.
b. $63,580,000.
c. $75,780,000.
d. $74,940,000.
201. A1 Corporation began business by issuing 300,000 shares of $5 par value common stock for $24 per share. During its first year, the corporation sustained a net loss of $50,000. The year-end balance sheet would report
a. Common Stock of $1,500,000.
b. Common Stock of $7,200,000.
c. total paid-in capital of $7,140,000.
d. total paid-in capital of $5,700,000.
202. In the stockholders’ equity section of the balance sheet,
a. Common Stock Dividends Distributable is classified as part of additional paid-in capital.
b. Common Stock Dividends Distributable is reported in its own subsection of the stockholders’ equity.
c. Paid-in Capital in Excess of Par is reported in the sub-section for paid-in capital.
d. Dividends in Arrears is reported as a restriction of retained earnings.
203. Paid-in capital in excess of stated value would be reported on a balance sheet under the category
a. capital stock.
b. retained earnings.
c. paid-in capital.
d. contra to stockholders’ equity.
204. Two classifications reported in the paid-in capital section of the balance sheet are
a. preferred stock and common stock.
b. paid-in capital and retained earnings.
c. capital stock and additional paid-in capital.
d. capital stock and treasury stock.
205. All of the following are normally reported in a corporation’s stockholders’ equity section except
a. dividends in arrears.
b. common stock.
c. paid-in capital.
d. retained earnings.
206. Information that is not generally reported for each class of stock on the balance sheet is
a. the market value.
b. the par value.
c. shares authorized.
d. shares issued.
207. In published annual reports,
a. subclassifications within the stockholders’ equity section are routinely reported in detail.
b. capital surplus is used in place of retained earnings.
c. the individual sources of paid-in capital in excess of par are often combined.
d. retained earnings is often not reported separately.
208. The payout ratio is computed by dividing
a. total cash dividends paid to common stockholders by retained earnings.
b. dividends paid per share by net income.
c. total cash dividends paid to common stockholders by net income.
d. dividends paid per share by year-end stock price.
209. The return on common stockholders’ equity is computed by dividing net income
a. by ending common stockholders’ equity.
b. by average common stockholders’ equity.
c. less preferred dividends by ending common stockholders’ equity.
d. less preferred dividends by average common stockholders’ equity.
210. A1 Service Corporation had net income of $140,000 and paid dividends of $40,000 to common stockholders and $20,000 to preferred stockholders in 2025. A1’s common stockholders’ equity at the beginning and end of 2025 was $870,000 and $1,130,000, respectively. The company’s return on common stockholders’ equity was
a. 14%.
b. 12%.
c. 9%.
d. 8%.
211. A1 Service Corporation had net income of $140,000 and paid dividends of $40,000 to common stockholders and $20,000 to preferred stockholders in 2025. A1’s common stockholders’ equity at the beginning and end of 2025 was $870,000 and $1,130,000, respectively. The company’s payout ratio for 2025 was
a. 4.0%.
b. 42.9%.
c. 28.6%.
d. 14.3%.
212. Ace Corporation had net income of $100,000 and paid dividends of $25,000 to common stockholders and $20,000 to preferred stockholders in 2025. Ace Corporation’s common stockholders’ equity at the beginning and end of 2025 was $450,000 and $550,000, respectively. Ace Corporation’s return on common stockholders’ equity is
a. 20.0%.
b. 16.0%.
c. 15.0%.
d. 11.0%.
213. Ace Corporation had net income of $100,000 and paid dividends of $25,000 to common stockholders and $20,000 to preferred stockholders in 2025. Ace Corporation’s common stockholders’ equity at the beginning and end of 2025 was $450,000 and $550,000, respectively. Ace Corporation’s payout ratio for 2025 is
a. 45%.
b. 25%.
c. 20%.
d. 5%.
214. From the information below, compute the payout ratio for Ace’s Trailers.
Net Income $250
Cash Dividends (common) 40
Retained Earnings 500
Stock Dividends (common) 10
a. 20%
b. 16%
c. 8%
d. 4%
215. The following information pertains to Acme Service Company. Assume that all balance sheet amounts represent average balance figures.
Total assets $300,000
Stockholders’ equity—common 150,000
Total stockholders’ equity 200,000
Sales revenue 100,000
Net income 25,000
Number of shares of common stock 6,000
Common dividends 5,000
Preferred dividends 7,000
What is the payout ratio for Acme Service?
a. 48%
b. 20%
c. 28%
d. 5%
216. The following information pertains to Acme Service Company. Assume that all balance sheet amounts represent average balance figures.
Total assets $300,000
Stockholders’ equity—common 150,000
Total stockholders’ equity 200,000
Sales revenue 100,000
Net income 25,000
Number of shares of common stock 6,000
Common dividends 5,000
Preferred dividends 7,000
What is the return on common stockholders’ equity for Acme Service?
a. 16.7%
b. 12.0%
c. 13.3%
d. 9.0%
217. The following information pertains to A1 Supply Company. Assume that all balance sheet amounts represent average balance figures.
Total asset $400,000
Stockholders’ equity—common 200,000
Total stockholders’ equity 280,000
Sales revenue 120,000
Net income 30,000
Number of shares of common stock 8,000
Common dividends 6,000
Preferred dividends 4,000
What is A1 Supply’s payout ratio?
a. 33.3%.
b. 20.0%.
c. 13.3%.
d. 5.0%.
218. The following information pertains to A1 Supply Company. Assume that all balance sheet amounts represent average balance figures.
Total asset $400,000
Stockholders’ equity—common 200,000
Total stockholders’ equity 280,000
Sales 120,000
Net income 30,000
Number of shares of common stock 8,000
Common dividends 6,000
Preferred dividends 4,000
What is A1 Supply’s return on common stockholders’ equity?
a. 15%.
b. 13.0%.
c. 10.0%.
d. 9.3%.
219. Which of the following statements is true regarding corporate performance ratios?
a. A high payout ratio may indicate that a company is retaining earnings for future growth investments.
b. As a company grows larger, it is easy to sustain a high return on common stockholders’ equity.
c. Return on common stockholders’ equity is often higher under bond financing rather than common stock financing.
d. Low growth rates are characterized by low payout ratios.
220. Which of the following would not affect the balance of the Retained Earnings account?
a. Net income
b. Stock dividend
c. Stock split
d. Gains and losses of a company
*221. A1 Restaurant Supply Company has 20,000 shares of $100 par value common stock. Assuming that the proper journal entry was made to record a 5% common stock dividend on the declaration date when the market value of the stock was $135, which of the following accounts would be debited when the stock dividend is distributed?
a. Retained Earnings
b. Dividends Payable
c. Common Stock Dividends Distributable
d. Paid-in Capital in Excess of Par
*222. On January 1, Ace Beauty Supply Corporation had 120,000 shares of $10 par value common stock outstanding. On March 17, the company declared a 10% stock dividend to stockholders of record on March 20. The market value of the stock was $13 on March 17. The entry to record the transaction of March 17 would include a
a. credit to Stock Dividends for $36,000.
b. credit to Cash for $156,000.
c. credit to Common Stock Dividends Distributable for $120,000.
d. debit to Common Stock Dividends Distributable for $120,000.
1. Separate legal entity
2. Taxable entity resulting in additional taxes
3. Continuous life
4. Unlimited liability of owners
5. Government regulation
6. Separation of ownership and management
7. Ability to acquire capital
8. Ease of transfer of ownership
Ex. 246
The corporate charter of Ace Corporation allows the issuance of a maximum of 4,000,000 shares of $1 par value common stock. During its first three years of operation, Ace issued 2,080,000 shares at $15 per share. It later acquired 80,000 of these shares as treasury stock for $25 per share.
Instructions
(a) How many shares were authorized?
(b) How many shares were issued?
(c) How many shares are outstanding?
(d) What is the balance of the Common Stock account?
(e) What is the balance of the Treasury Stock account?
Ex. 247
The following items were shown on the balance sheet of A1 Pet Supply Corporation on 12/31/2025:
Stockholders’ Equity
Paid-In Capital
Capital Stock
Common stock, $5 par value, 750,000 shares
authorized; ______ shares issued and ______ outstanding $3,000,000
Additional paid-in capital
In excess of par 180,000
Total paid-in capital 3,180,000
Retained Earnings 500,000
Total paid-in capital and retained earnings 3,680,000
Less: Treasury stock (20,000 shares) 280,000
Total stockholders’ equity $3,400,000
Ex. 247 (Cont.)
Instructions
Complete the following statements and show your computations.
(a) The number of shares of common stock issued was _______________.
(b) The number of shares of common stock outstanding was ____________.
(c) The total sales price of the common stock when issued was $____________.
(d) How much did the treasury stock cost per share? $_______________
(e) What was the average issue price of the common stock? $______________
Ex. 248
Ace Co. had these transactions during the current period.
June 12 Issued 50,000 shares of $3 stated value common stock for cash of $250,000.
July 11 Issued 2,000 shares of $100 par value preferred stock for cash at $108 per share.
Nov. 28 Purchased 2,000 shares of treasury stock for $10,000.
Instructions
Prepare the journal entries for the preceding transactions.
Ex. 249
On January 1, 2025, Acme Corporation had 75,000 shares of $1 par value common stock issued and outstanding. During the year, the following transactions occurred:
Mar. 1 Issued 90,000 shares of common stock for $675,000.
June 1 Declared a cash dividend of $2.00 per share to stockholders of record on June 15.
June 30 Paid the $2.00 cash dividend.
Dec. 1 Purchased 5,000 shares of common stock for the treasury for $18 per share.
Dec. 15 Declared a cash dividend on outstanding shares of $2.50 per share to stockholders of record on December 31.
Net income for 2025 totaled $951,000.
Instructions
Prepare journal entries to record the above transactions.
Ex. 250
The stockholders’ equity section of A1 Corporation’s balance sheet at December 31, 2024, appears below:
Stockholders’ equity
Paid-in capital
Common stock, $10 par value, 400,000 shares authorized;
300,000 issued and outstanding $3,000,000
Paid-in capital in excess of par 1,200,000
Total paid-in capital 4,200,000
Retained earnings 900,000
Total stockholders’ equity $5,100,000
During 2025, the following stock transactions occurred:
Jan. 18 Issued 80,000 shares of common stock at $23 per share.
Aug. 20 Purchased 20,000 shares of A1 Corporation’s common stock at $25 per share to be held in the treasury.
Instructions
(a) Prepare the journal entries to record the above stock transactions (omit explanations).
(b) Prepare the stockholders’ equity section of the balance sheet for A1 Corporation at December 31, 2025. Assume that net income for the year was $150,000 and that no dividends were declared.
Ex. 251
The stockholders' equity section of Ace Corporation's balance sheet at December 31 is presented here:
ACE CORPORATION
Balance Sheet (partial)
Stockholders' equity
Paid-in capital
Preferred stock, cumulative, 10,000 shares authorized,
6,000 shares issued and outstanding $ 600,000
Common stock, no par, 750,000 shares authorized,
600,000 shares issued 6,000,000
Total paid-in capital 6,600,000
Retained earnings 1,358,000
Total paid-in capital and retained earnings 7,958,000
Less: Treasury stock (4,000 common shares) 32,000
Total stockholders' equity $7,926,000
Instructions
(a) How many shares of common stock are outstanding?
(b) Assuming there is a stated value, what is the stated value of the common stock?
(c) What is the par value of the preferred stock?
(d) If the annual dividend on the preferred stock is $30,000, what is the dividend rate on preferred stock?
(e) If dividends of $60,000 were in arrears on preferred stock, what would be the balance reported for retained earnings?
Ex. 252
Acme Resource Corporation has the following capital stock outstanding at December 31, 2025:
9% Preferred stock, $100 par value, cumulative
12,000 shares issued and outstanding $1,200,000
Common stock, no par, $10 stated value, 500,000 shares authorized,
300,000 shares issued and outstanding 3,000,000
The preferred stock was issued at $125 per share. The common stock was issued at an average per share price of $14.
Instructions
Prepare the paid-in capital section of the balance sheet at December 31, 2025.
Ex. 253
Suppose that Verizon had the following transactions and events:
1. Issued par value preferred stock for cash at par value.
2. Issued par value common stock for cash at an amount greater than par value.
3. Completed a 2-for-1 stock split in which the $10 par value common stock was changed to $5 par value stock.
*4. Declared a small stock dividend when the market value was greater than the par value.
5. Declared a cash dividend.
*6. Issued the shares of common stock required by the stock dividend declaration in 4. above.
7. Issued par value common stock for cash at par value.
8. Paid the cash dividend.
Instructions
Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders’ equity. Present your answers in tabular form with the following columns. Use (I) for increase, (D) for decrease, and (NE) for no effect.
Paid-in Capital
Capital Additional Retained
Item Stock Paid-in Capital Earnings
*Ex. 254
On January 1, 2025, A1 Supply Corporation had $2,000,000 of $10 par value common stock outstanding that was issued at par and Retained Earnings of $1,000,000. The company issued 140,000 shares of common stock at $15 per share on July 1. On December 15, the board of directors declared a 10% stock dividend to stockholders of record on December 31, 2025, payable on January 15, 2026. The market value of A1 Supply Corporation stock was $17 per share on December 15 and $16 per share on December 31. Net income for 2025 was $500,000.
Instructions
(1) Journalize the issuance of stock on July 1 and the declaration of the stock dividend on December 15.
(2) Prepare the stockholders’ equity section of the balance sheet for A1 Supply Corporation at December 31, 2025.
Ex. 255
The stockholders’ equity section of Ace Supply Corporation at December 31, 2024, included the following:
4% preferred stock, $100 par value, cumulative,
15,000 shares authorized, 10,000 shares issued and outstanding $1,000,000
Common stock, $10 par value, 250,000 shares authorized,
200,000 shares issued and outstanding $2,000,000
Dividends were not declared on the preferred stock in 2024 and are in arrears.
On September 15, 2025, the board of directors of Ace Supply Corporation declared dividends on the preferred stock to stockholders of record on October 1, 2025, payable on October 15, 2025.
On November 1, 2025, the board of directors declared a $1 per share dividend on the common stock, payable November 30, 2025, to stockholders of record on November 15, 2025.
Instructions
Prepare the journal entries that should be made by Ace Supply Corporation on the dates indicated below:
September 15, 2025 November 1, 2025
October 1, 2025 November 15, 2025
October 15, 2025 November 30, 2025
Ex. 256
On January 1, A1 Corporation had 60,000 shares of no-par common stock issued and outstanding. The stock has a stated value of $5 per share. During the year, the following transactions occurred:
Apr. 1 Issued 10,000 additional shares of common stock for $10 per share.
June 15 Declared a cash dividend of $1.00 per share to stockholders of record on June 30.
July 10 Paid the $1.00 cash dividend.
Dec. 1 Issued 4,000 additional shares of common stock for $12 per share.
15 Declared a cash dividend on outstanding shares of $1.00 per share to stockholders of record on December 31.
Instructions
(a) Prepare the entries, if any, on each of the three dates that involved dividends.
(b) How are dividends and dividends payable reported in the financial statements prepared at December 31?
Ex. 257
On October 31, the stockholders' equity section of Acme Company's balance sheet consists of common stock $600,000 and retained earnings $400,000. Eaton is considering the following two courses of action: (1) declaring and distributing a 10% stock dividend on the 60,000 $10 par value shares outstanding or (2) affecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $15 per share.
Instructions
Prepare a tabular summary of the effects of the alternative actions on the company's stockholders' equity and outstanding shares. Use these column headings: Before Action, After Stock Dividend, and After Stock Split.
After | After | ||
Before | Stock | Stock | |
Action | Dividend | Split | |
Stockholders' equity | |||
Paid-in capital | |||
Common stock | $ 600,000 | $ 660,000 | $ 600,000 |
In excess of par | 0 | 30,000 | 0 |
Total paid-in capital | 600,000 | 690,000 | 600,000 |
Retained earnings | 400,000 | 310,000 | 400,000 |
Total stockholders' | |||
equity | $1,000,000 | $1,000,000 | $1,000,000 |
Outstanding shares | 60,000 | 66,000 | 120,000 |
Book value per share | $16.67 | $15.15* | $8.33 |
Ex. 258
Acme Corporation’s stockholders’ equity section at December 31, 2024 appears below:
Stockholders’ equity
Paid-in capital
Common stock, $10 par, 60,000 outstanding $600,000
Paid-in capital in excess of par 162,500
Total paid-in capital $762,500
Retained earnings 150,000
Total stockholders’ equity $912,500
On June 30, 2025, the board of directors of Acme declared a 15% stock dividend, distributable on July 31, 2025, to stockholders of record on July 15, 2025. The fair value of the company’s stock on June 30, 2025 was $16.
On December 1, 2025, the board of directors declared a 2 for 1 stock split effective December 15, 2025. Acme Corporation’s stock was selling for $18 on December 1, 2025, before the stock split was declared. Par value of the stock was adjusted. Net income for 2025 was $230,000 and there were no cash dividends declared.
Ex. 258 (Cont.)
Instructions
(a) Prepare the journal entries on the appropriate dates to record the stock dividend and the stock split.
(b) Fill in the amount that would appear in the stockholders’ equity section for Acme Corporation at December 31, 2025 for the following items:
1. Common stock $____________
2. Number of shares outstanding _____________
3. Par value per share $____________
4. Paid-in capital in excess of par $____________
5. Retained earnings $____________
6. Total stockholders’ equity $____________
Ex. 259
On January 1, 2025, Ace Corporation had Retained Earnings of $625,000. During the year, Mather had the following selected transactions:
1. Declared stock dividends of $40,000.
2. Declared cash dividends of $50,000.
3. A 2-for-1 stock split involving the issue of 200,000 shares of $5 par value common stock for 100,000 shares of $10 par value common stock.
4. Suffered a net loss of $80,000.
Instructions
Prepare a Retained Earnings Statement for the year.
Ex. 260
The following accounts appear in the ledger of Acme Discount Retail, Inc. after the books are closed at December 31, 2025.
Common Stock, $1 par value, 800,000 shares authorized, 550,000 shares
issued $550,000
Common Stock Dividends Distributable 80,000
Paid-in Capital in Excess of Par—Common Stock 950,000
Preferred Stock, $100 par value, 8%, 10,000 shares authorized; 4,000 shares
issued 400,000
Retained Earnings 680,000
Treasury Stock (10,000 common shares) 40,000
Paid-in Capital in Excess of Par—Preferred Stock 75,000
Instructions
Prepare the stockholders’ equity section at December 31, 2025, assuming that part of retained earnings is restricted for plant expansion in the amount of $200,000.
Ex. 261
The following are selected accounts and balances from the records of A1 Service Corporation on June 30, 2025 after the books are closed:
Common Stock, $10 par value, 75,000 shares authorized, 54,000 shares
issued $540,000
Paid-in Capital in Excess of Par—Common Stock 150,000
Preferred Stock, $100 par value, 8%, 3,000 shares authorized and
issued 300,000
Retained Earnings 280,000
Treasury Stock (10,000 common shares) 150,000
Paid-in Capital in Excess of Par—Preferred Stock 30,000
Instructions
Prepare in proper form the stockholders’ equity section of the balance sheet.
Ex. 262
The following stockholders' equity accounts, arranged alphabetically, are in the ledger of Ace Office Supply Corporation at December 31, 2025 after the books are closed:
Common Stock ($5 stated value) $2,800,000
Paid-in Capital in Excess of Par—Preferred Stock 45,000
Paid-in Capital in Excess of Stated Value—Common Stock 1,050,000
Preferred Stock (8%, $100 par, noncumulative) 1,000,000
Retained Earnings 1,684,000
Treasury Stock (10,000 shares) 98,000
Instructions
Prepare the stockholders’ equity section of the balance sheet at December 31, 2025.
Ex. 263
A1 Corporation decided to issue common stock and used the $120,000 proceeds to retire all of its outstanding bonds on January 1, 2025. The following information is available for the company for 2024 and 2025:
2025 | 2024 | |||
Net income | $ 120,000 | $ 100,000 | ||
Average common stockholders' equity | 1,000,000 | 800,000 | ||
Total assets | 1,200,000 | 1,200,000 | ||
Current liabilities | 100,000 | 100,000 | ||
Total liabilities | 360,000 | 480,000 | ||
Instructions
(a) Compute the return on common stockholders' equity for both years.
(b) Explain how it is possible that net income increased, but the return on common stockholders' equity decreased.
(c) Compute the debt to assets ratio for both years, and comment on the implications of this change in the company's solvency.
Ex. 264
On January 1, 2025, Acme Pet Supply Corporation had $1,000,000 of common stock outstanding that was issued at par and retained earnings of $750,000. The company issued 60,000 shares of common stock at par on July 1 and earned net income of $400,000 for the year.
Instructions
Journalize the declaration of a 15% stock dividend on December 10, 2025, for the following two independent assumptions.
(a) Par value is $10 and market value is $16.
(b) Par value is $5 and market value is $8.
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