STOCKHOLDERS’ EQUITY d.

both income retained by the corporation and

contributions by stockholders.
MULTIPLE CHOICE—Conceptual
28. Stockholders' equity is generally classified into two
21. The residual interest in a corporation belongs to the major categories:
a. management. a. contributed capital and appropriated capital.
b. creditors. b. appropriated capital and retained earnings.
c. common stockholders. c. retained earnings and unappropriated capital.
d. preferred stockholders. d. earned capital and contributed capital.

22. The pre-emptive right of a common stockholder is 29. The accounting problem in a lump sum issuance is
the right to the allocation of proceeds between the classes of
a. share proportionately in corporate assets
upon liquidation. securities. An acceptable method of allocation is
b. share proportionately in any new issues of the
stock of the same class. a. pro forma method.
c. receive cash dividends before they are b. proportional method.
distributed to preferred stockholders. c. incremental method.
d. exclude preferred stockholders from voting d. either the proportional method or the
rights. incremental method.

23. The pre-emptive right enables a stockholder to

a. share proportionately in any new issues of 30. When a corporation issues its capital stock in
stock of the same class. payment for services, the least appropriate basis for
b. receive cash dividends before other classes of recording the transaction is the
stock without the pre-emptive right. a. market value of the services received.
c. sell capital stock back to the corporation at the b. par value of the shares issued.
option of the stockholder. c. market value of the shares issued.
d. receive the same amount of dividends on a d. Any of these provides an appropriate basis for
percentage basis as the preferred recording the transaction.
stockholders.
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24. In a corporate form of business organization, legal 31. Direct costs incurred to sell stock such as
capital is best defined as underwriting costs should be accounted for as
a. the amount of capital the state of incorporation
allows the company to accumulate over its 1. a reduction of additional paid-in
existence. capital.
b. the par value of all capital stock issued. 2. an expense of the period in which
c. the amount of capital the federal government the stock is issued.
allows a corporation to generate.
3. an intangible asset.
d. the total capital raised by a corporation within
a. 1
the limits set by the Securities and Exchange
b. 2
Commission.
c. 3
S d. 1 or 3
25. Stockholders of a business enterprise are said to
be the residual owners. The term residual owner means that
shareholders 32. A "secret reserve" will be created if
a. are entitled to a dividend every year in which a. inadequate depreciation is charged to income.
the business earns a profit. b. a capital expenditure is charged to expense.
b. have the rights to specific assets of the c. liabilities are understated.
business. d. stockholders' equity is overstated.
c. bear the ultimate risks and uncertainties and
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receive the benefits of enterprise ownership. 33. Which of the following represents the total number
d. can negotiate individual contracts on behalf of of shares that a corporation may issue under the
the enterprise. terms of its charter?
a. authorized shares
26. Total stockholders' equity represents b. issued shares
a. a claim to specific assets contributed by the c. unissued shares
owners. d. outstanding shares
b. the maximum amount that can be borrowed by
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the enterprise. 34. Stock that has a fixed per-share amount printed on
c. a claim against a portion of the total assets of each stock certificate is called
an enterprise. a. stated value stock.
d. only the amount of earnings that have been b. fixed value stock.
retained in the business. c. uniform value stock.
d. par value stock.
27. A primary source of stockholders' equity is
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a. income retained by the corporation. 35. Which of the following is not a legal restriction
b. appropriated retained earnings. related to profit distributions by a corporation?
c. contributions by stockholders.
 a. The amount distributed to owners must be in
compliance with the state laws governing
corporations.
b. The amount distributed in any one year can
never exceed the net income reported for that
year.
c. Profit distributions must be formally approved
by the board of directors.
d. Dividends must be in full agreement with the
capital stock contracts as to preferences and
participation.
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36. In January 2007, Castro Corporation, a newly
formed company, issued 10,000 shares of its $10
par common stock for $15 per share. On July 1,
2007, Castro Corporation reacquired 1,000 shares
of its outstanding stock for $12 per share. The
acquisition of these treasury shares
a. decreased total stockholders' equity.
b. increased total stockholders' equity.
c. did not change total stockholders' equity.
d. decreased the number of issued shares.
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37. Treasury shares are
a. shares held as an investment by the treasurer
of the corporation.
b. shares held as an investment of the
corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.
38. When treasury stock is purchased for more than the
par value of the stock and the cost method is used
to account for treasury stock, what account(s)
should be debited?
a. Treasury stock for the par value and paid-in
capital in excess of par for the excess of the
purchase price over the par value.
b. Paid-in capital in excess of par for the
purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained
earnings for the excess of the purchase price
over the par value.
39. “Gains" on sales of treasury stock (using the cost
method) should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.
40. Wilson Corp. purchased its own par value stock on
January 1, 2007 for $20,000 and debited the
treasury stock account for the purchase price. The
stock was subsequently sold for $12,000. The
$8,000 difference between the cost and sales price
should be recorded as a deduction from
a. additional paid-in capital to the extent that
previous net "gains" from sales of the same
class of stock are included therein; otherwise,
from retained earnings.
b. additional paid-in capital without regard as to
whether or not there have been previous net
"gains" from sales of the same class of stock
included therein.
c. retained earnings.
d. net income.
41. How should a "gain" from the sale of treasury
stock be reflected when using the cost method of
recording treasury stock transactions?
a. As ordinary earnings shown on the income
statement.
b. As paid-in capital from treasury stock
transactions.
c. As an increase in the amount shown for
common stock.
d. As an extraordinary item shown on the income
statement.
42. Which of the following best describes a possible
result of treasury stock transactions by a
corporation?
a. May increase but not decrease retained
earnings.
b. May increase net income if the cost method is
used.
c. May decrease but not increase retained
earnings.
d. May decrease but not increase net income.
43. Which of the following features of preferred stock
makes the security more like debt than an equity
instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative
44. The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to
the par value of the preferred stock.
b. requires that dividends not paid in any year
must be made up in a later year before
dividends are distributed to common
shareholders.
c. means that the shareholder can accumulate
preferred stock until it is equal to the par value
of common stock at which time it can be
converted into common stock.
d. enables a preferred stockholder to accumulate
dividends until they equal the par value of the
stock and receive the stock in place of the
cash dividends.
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45. According to the FASB, redeemable preferred stock
should be
a. included with common stock.
b. included as a liability.
c. excluded from the stockholders’ equity
heading.
d. included as a contra item in stockholders'
equity.
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46. Cumulative preferred dividends in arrears should
be shown in a corporation's balance sheet as
a. an increase in current liabilities.
b. an increase in stockholders' equity.
c. a footnote.
d. an increase in current liabilities for the current
portion and long-term liabilities for the long-
term portion.
47. At the date of the financial statements, common
stock shares issued would exceed common stock
shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
 d. payment in full of subscribed stock. 56. The declaration and issuance of a stock dividend
larger than 25% of the shares previously
48. An entry is not made on the outstanding
a. date of declaration. a. increases common stock outstanding and
b. date of record. increases total stockholders' equity.
c. date of payment. b. decreases retained earnings but does not
d. An entry is made on all of these dates. change total stockholders' equity.
c. may increase or decrease paid-in capital in
49. Cash dividends are paid on the basis of the excess of par but does not change total
number of shares stockholders' equity.
a. authorized. d. increases retained earnings and increases
b. issued. total stockholders' equity.
c. outstanding.
d. outstanding less the number of treasury 57. Pryor Corporation issued a 100% stock dividend of
shares. its common stock which had a par value of $10
before and after the dividend. At what amount
50. Which of the following statements about property should retained earnings be capitalized for the
dividends is not true? additional shares issued?
a. A property dividend is usually in the form of a. There should be no capitalization of retained
securities of other companies. earnings.
b. A property dividend is also called a dividend in b. Par value
kind. c. Market value on the declaration date
c. The accounting for a property dividend should d. Market value on the payment date
be based on the carrying value (book value) of
the nonmonetary assets transferred. 58. The issuer of a 5% common stock dividend to
d. All of these statements are true. common stockholders preferably should transfer
from retained earnings to contributed capital an
51. Farmer Corporation owns 4,000,000 shares of amount equal to the
a. market value of the shares issued.
stock in Baha Corporation. On December 31, b. book value of the shares issued.
2007, Farmer distributed these shares of stock as c. minimum legal requirements.
a dividend to its stockholders. This is an example d. par or stated value of the shares issued.
of a
59. At the date of declaration of a small common stock
a. property dividend.
dividend, the entry should not include
b. stock dividend.
a. a credit to Common Stock Dividend Payable.
c. liquidating dividend.
b. a credit to Paid-in Capital in Excess of Par.
d. cash dividend.
c. a debit to Retained Earnings.
d. All of these are acceptable.
52. A dividend which is a return to stockholders of a
portion of their original investments is a 60. The balance in Common Stock Dividend
a. liquidating dividend. Distributable should be reported as a(n)
b. property dividend. a. deduction from common stock issued.
c. liability dividend. b. addition to capital stock.
d. participating dividend. c. current liability.
d. contra current asset.

53. A mining company declared a liquidating dividend. 61. A feature common to both stock splits and stock
The journal entry to record the declaration must include a dividends is
a. a transfer to earned capital of a corporation.
debit to
b. that there is no effect on total stockholders'
a. Retained Earnings.
equity.
b. a paid-in capital account.
c. an increase in total liabilities of a corporation.
c. Accumulated Depletion.
d. a reduction in the contributed capital of a
d. Accumulated Depreciation.
corporation.

54. If management wishes to "capitalize" part of the 62. What effect does the issuance of a 2-for-1 stock
earnings, it may issue a split have on each of the following?
a. cash dividend. Par Value per Share
b. stock dividend. Retained Earnings
c. property dividend. a. No effect
d. liquidating dividend. No effect
b. Increase
55. Which dividends do not reduce stockholders' No effect
equity? c. Decrease
a. Cash dividends No effect
b. Stock dividends d. Decrease
c. Property dividends Decrease
d. Liquidating dividends
63. Which one of the following disclosures should be *70. How should cumulative preferred dividends in
made in the equity section of the balance sheet, arrears be shown in a corporation's statement of
rather than in the notes to the financial statements? financial position?
a. Dividend preferences a. Note disclosure
b. Liquidation preferences b. Increase in stockholders' equity
c. Call prices c. Increase in current liabilities
d. Conversion or exercise prices d. Increase in current liabilities for the amount
expected to be declared within the year or
64. The rate of return on common stock equity is operating cycle, and increase in long-term
calculated by dividing liabilities for the balance
a. net income less preferred dividends by
average common stockholders’ equity.
b. net income by average common stockholders’
equity. Multiple Choice Answers—Conceptual
c. net income less preferred dividends by ending
common stockholders’ equity.
d. net income by ending common stockholders’ Ite A Ite A Ite A Ite A Ite A Ite A Ite A
equity. m ns m ns m ns m ns m ns m ns m ns
21 c 29 d 37 d 45 b 53 b 61 b *6 a
65. The payout ratio can be calculated by dividing . . . . . . . . . . . . 9. .
a. dividends per share by earnings per share. 22 b 30 b 38 c 46 c 54 b 62 c *7 a
b. cash dividends by net income less preferred . . . . . . 0.
dividends. 23 a 31 a 39 a 47 c 55 b 63 b
c. cash dividends by market price per share. . . . . . .
d. dividends per share by earnings per share and 24 b 32 b 40 a 48 b 56 b 64 a
dividing cash dividends by net income less . . . . . .
preferred dividends. 25 c 33 a 41 b 49 c 57 b 65 b
. . . . . .
66. Windsor Company has outstanding both common 26 c 34 d 42 c 50 c 58 a 66 c
stock and nonparticipating, non-cumulative . . . . . .
preferred stock. The liquidation value of the 27 d 35 b 43 c 51 a 59 a 67 a
preferred is equal to its par value. The book value . . . . . .
per share of the common stock is unaffected by
28 d 36 a 44 b 52 a 60 b *6 c
a. the declaration of a stock dividend on
. . . . . 8.
preferred payable in preferred stock when the
market price of the preferred is equal to its par
value.
b. the declaration of a stock dividend on common
stock payable in common stock when the
market price of the common is equal to its par
value.
c. the payment of a previously declared cash
dividend on the common stock.
d. a 2-for-1 split of the common stock.
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67. Assume common stock is the only class of stock
outstanding in the B-Bar-B Corporation. Total
stockholders' equity divided by the number of
common stock shares outstanding is called
a. book value per share.
b. par value per share.
c. stated value per share.
d. market value per share.

*68. Dividends are not paid on

a. noncumulative preferred stock.
b. nonparticipating preferred stock.
c. treasury common stock.
d. Dividends are paid on all of these.

*69. Noncumulative preferred dividends in arrears

a. are not paid or disclosed.
b. must be paid before any other cash dividends
can be distributed.
c. are disclosed as a liability until paid.
d. are paid to preferred stockholders if sufficient
funds remain after payment of the current
preferred dividend.
 a. incremental method.
b. book value method.
DILUTIVE SECURITIES AND c. market value method.
EARNINGS PER SHARE d. par value method.

28. When the cash proceeds from a bond issued with

MULTIPLE CHOICE—Dilutive detachable stock warrants exceed the sum of the
par value of the bonds and the fair market value of
Securities, Conceptual the warrants, the excess should be credited to
a. additional paid-in capital from stock warrants.
21. Convertible bonds b. retained earnings.
a. have priority over other indebtedness. c. a liability account.
b. are usually secured by a first or second d. premium on bonds payable.
mortgage.
c. pay interest only in the event earnings are 29. Proceeds from an issue of debt securities having
sufficient to cover the interest. stock warrants should not be allocated between
d. may be exchanged for equity securities. debt and equity features when
a. the market value of the warrants is not readily
22. The conversion of bonds is most commonly available.
recorded by the b. exercise of the warrants within the next few
a. incremental method. fiscal periods seems remote.
b. proportional method. c. the allocation would result in a discount on the
c. market value method. debt security.
d. book value method. d. the warrants issued with the debt securities
are nondetachable.
23. When a bond issuer offers some form of additional
consideration (a “sweetener”) to induce conversion, 30. Stock warrants outstanding should be classified as
the sweetener is accounted for as a(n) a. liabilities.
a. extraordinary item. b. reductions of capital contributed in excess of
b. expense. par value.
c. loss. c. assets.
d. none of these. d. none of these.
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24. Corporations issue convertible debt for two main 31. A corporation issues bonds with detachable
reasons. One is the desire to raise equity capital warrants. The amount to be recorded as paid-in
that, assuming conversion, will arise when the capital is preferably
original debt is converted. The other is a. zero.
a. the ease with which convertible debt is sold b. calculated by the excess of the proceeds over
even if the company has a poor credit rating. the face amount of the bonds.
b. the fact that equity capital has issue costs that c. equal to the market value of the warrants.
convertible debt does not. d. based on the relative market values of the two
c. that many corporations can obtain financing at securities involved.
lower rates. P
d. that convertible bonds will always sell at a 32. The distribution of stock rights to existing common
premium. stockholders will increase paid-in capital at the
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25. When convertible debt is retired by the issuer, any Date of Issuance Date of Exercise
material difference between the cash acquisition of the Rightsof the Rights
price and the carrying amount of the debt should be a. Yes Yes
a. reflected currently in income, but not as an b. Yes No
extraordinary item. c. No Yes
b. reflected currently in income as an d. No No
extraordinary item.
c. treated as a prior period adjustment. S
33. The major difference between convertible debt and
d. treated as an adjustment of additional paid-in stock warrants is that upon exercise of the warrants
capital. a. the stock is held by the company for a defined
S period of time before they are issued to the
26. The conversion of preferred stock into common warrant holder.
requires that any excess of the par value of the b. the holder has to pay a certain amount of cash
common shares issued over the carrying amount of to obtain the shares.
the preferred being converted should be c. the stock involved is restricted and can only be
a. reflected currently in income, but not as an sold by the recipient after a set period of time.
extraordinary item. d. no paid-in capital in excess of par can be a
b. reflected currently in income as an part of the transaction.
extraordinary item.
c. treated as a prior period adjustment. S
34. Which of the following is not a characteristic of a
d. treated as a direct reduction of retained noncompensatory stock option plan?
earnings. a. Substantially all full-time employees may
participate on an equitable basis.
27. The conversion of preferred stock may be recorded b. The plan offers no substantive option feature.
by the
 c. Unlimited time period permitted for exercise of
an option as long as the holder is still *42. The payment to executives from a performance-
employed by the company. type plan is never based on the
d. Discount from the market price of the stock no
greater than would be reasonable in an offer a. market price of the common stock.
of stock to stockholders or others. b. return on assets (investment).
c. return on common stockholders' equity.
35. The date on which to measure the compensation d. sales.
element in a stock option granted to a corporate
employee ordinarily is the date on which the Multiple Choice Answers—Dilutive Securities,
employee Conceptual
a. is granted the option.
b. has performed all conditions precedent to
exercising the option.
c. may first exercise the option.
d. exercises the option.
Ite An Ite An Ite An Ite An Ite An Ite An
36. Compensation expense resulting from a
m
21. s.
d m
25. s.
a m
29. s.
d m
33. s.
b m
37. s.
a m
*41 s.
b
compensatory stock option plan is generally
a. recognized in the period of exercise. .
22. d 26. d 30. d 34. c 38. d *42 b
b. recognized in the period of the grant.
c. allocated to the periods benefited by the 23. b 27. b 31. d 35. a *39. c
employee's required service.
d. allocated over the periods of the employee's 24. c 28. d 32. c 36. c *40. b
service life to retirement.

37. The date on which total compensation expense is

computed in a stock option plan is the date
a. of grant.
b. of exercise.
c. that the market price coincides with the option
price.
c. that the market price exceeds the option price.

38. Which of the following is not a characteristic of a

noncompensatory stock purchase plan?
a. It is open to almost all full-time employees.
b. The discount from market price is small.
c. The plan offers no substantive option feature.
d. All of these are characteristics.

*39. Under the intrinsic value method, compensation

expense resulting from an incentive stock option is
generally
a. not recognized because no excess of market
price over the option price exists at the date of
grant.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the
employee's required service.
d. recognized in the period of exercise.

*40. An executive compensation plan in which the

executive may receive compensation in cash,
shares of stock, or a combination of both, is known
as ______________ plan.
a. a nonqualified stock option
b. a performance-type
c. a stock appreciation rights
d. both a performance-type and a stock
appreciation rights

*41. A corporation should record no compensation

expense for which of the following types of
executive compensation plans?
a. Stock appreciation rights
b. Nonqualified stock option plans
c. Incentive stock option plans
d. Compensation expense should be recorded
for all of these.
 MULTIPLE CHOICE—Earnings Per c. assumed converted only if they are
antidilutive.
Share—Conceptual d. assumed converted only if they are dilutive.

81. Dilutive convertible securities must be used in the

74. With respect to the computation of earnings per
computation of
share, which of the following would be most
a. basic earnings per share only.
indicative of a simple capital structure?
b. diluted earnings per share only.
a. Common stock, preferred stock, and
c. diluted and basic earnings per share.
convertible securities outstanding in lots of
d. none of these.
even thousands
b. Earnings derived from one primary line of
business 82. In computing earnings per share, the equivalent
c. Ownership interest consisting solely of number of shares of convertible preferred stock are
common stock added as an adjustment to the denominator
d. None of these
(number of shares outstanding). If the preferred
75. In computing earnings per share for a simple capital stock is cumulative, which amount should then be
structure, if the preferred stock is cumulative, the added as an adjustment to the numerator (net
amount that should be deducted as an adjustment earnings)?
to the numerator (earnings) is the a. Annual preferred dividend
a. preferred dividends in arrears. b. Annual preferred dividend times (one minus
b. preferred dividends in arrears times (one the income tax rate)
minus the income tax rate). c. Annual preferred dividend times the income
c. annual preferred dividend times (one minus tax rate
the income tax rate). d. Annual preferred dividend divided by the
d. none of these. income tax rate
76. In computations of weighted average of shares
outstanding, when a stock dividend or stock split 83. In the diluted earnings per share computation, the
occurs, the additional shares are treasury stock method is used for options and
a. weighted by the number of days outstanding. warrants to reflect assumed reacquisition of
b. weighted by the number of months
common stock at the average market price during
outstanding.
c. considered outstanding at the beginning of the the period. If the exercise price of the options or
year. warrants exceeds the average market price, the
d. considered outstanding at the beginning of the computation would
earliest year reported. a. fairly present diluted earnings per share on a
prospective basis.
77. What effect will the acquisition of treasury stock b. fairly present the maximum potential dilution of
have on stockholders' equity and earnings per diluted earnings per share on a prospective
share, respectively? basis.
a. Decrease and no effect c. reflect the excess of the number of shares
b. Increase and no effect assumed issued over the number of shares
c. Decrease and increase assumed reacquired as the potential dilution
d. Increase and decrease of earnings per share.
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d. be antidilutive.
78. Due to the importance of earnings per share
information, it is required to be reported by all
84. In applying the treasury stock method to determine
Public Companies Nonpublic Companies
the dilutive effect of stock options and warrants, the
a. Yes Yes
proceeds assumed to be received upon exercise of
b. Yes No
the options and warrants
c. No No
a. are used to calculate the number of common
d. No Yes
shares repurchased at the average market
price, when computing diluted earnings per
79.A convertible bond issue should be included in the diluted
share.
earnings per share computation as if the bonds had been
b. are added, net of tax, to the numerator of the
converted into common stock, if the effect of its inclusion is
calculation for diluted earnings per share.
DilutiveAntidilutive c. are disregarded in the computation of
a. YesYes earnings per share if the exercise price of the
b. YesNo options and warrants is less than the ending
c. NoYes market price of common stock.
d. NoNo d. none of these.

80. When computing diluted earnings per share, 85. When applying the treasury stock method for
convertible bonds are diluted earnings per share, the market price of the
a. ignored. common stock used for the repurchase is the
b. assumed converted whether they are dilutive a. price at the end of the year.
or antidilutive. b. average market price.
c. price at the beginning of the year.
 d. none of these.

86. Antidilutive securities

a. should be included in the computation of
diluted earnings per share but not basic
earnings per share.
b. are those whose inclusion in earnings per
share computations would cause basic
earnings per share to exceed diluted earnings
per share.
c. include stock options and warrants whose
exercise price is less than the average market
price of common stock.
d. should be ignored in all earnings per share
calculations.

*87. Assume there are two dilutive convertible

securities. The one that should be used first to
recalculate earnings per share is the security with
the
a. greater earnings adjustment.
b. greater earnings per share adjustment.
c. smaller earnings adjustment.
d. smaller earnings per share adjustment.

Multiple Choice Answers—Earnings Per Share—

Conceptual

Ite A Ite A Ite A Ite A Ite A Ite A Ite A

m
74 ns
c m
76 ns
d m
78 ns
b m
80 ns
d m
82 ns
a m
84 ns
a m
86 ns
d
. . . . . . . . . . . . . .
75 d 77 c 79 b 81 b 83 d 85 b *8 d
. . . . . . 7.