Homework Week 7

Plack Co. purchased 10,000 shares (2% ownership) of Ty Corp. on February 14, Year 1.
Plack received a stock

dividend of 2,000 shares on April 30, Year 1, when the market value per share was $35. Ty paid a cash dividend
of $2 per share on December 15, Year 1. In its Year 1 income statement, what amount should Plack report as
dividend income?
a. $90,000
b
$20,000
.
c. $24,000
d. $94,000
Explanation
Choice "c" is correct.
Dividend Income = No. of shares × dividend per

share
= 12,000 × $2
= $24,000
On January 15, Year 1, Rico Co. declared its annual cash dividend on common stock for the year ended January
31, Year 1. The dividend was paid on February 9, Year 1, to stockholders of record as of January 28, Year 1. On
what date should Rico decrease retained earnings by the amount of the dividend?
a. January 15, Year 1
b
January 28, Year 1
.
c. February 9, Year 1
d. January 31, Year 1

Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31, Year 1, Cyan's
retained earnings were $300,000. In March, Year 2, Cyan reacquired 5,000 shares of its common stock at $20
per share. In June, Year 2, Cyan sold 1,000 of these shares to its corporate officers for $25 per share. Cyan uses
the cost method to record treasury stock. Net income for the year ended December 31, Year 2, was $60,000. At
December 31, Year 2, what amount should Cyan report as retained earnings?
a. $380,000
b
$375,000
.
c. $360,000
d. $365,000
Explanation
Choice "c" is correct. $360,000 retained earnings at 12/31/Year 2 ($300 + $60). Because all treasury stock
transactions were recorded under the "cost method," and the resale of treasury stock was at a price that exceeded
its acquisition price, none of the treasury stock transactions affected retained earnings.
Selected information from the accounts of Row Co. at December 31, Year 5, follows:
Total income since incorporation $420,000
Total cash dividends paid 130,000
Total value of property dividends distributed 30,000
Excess of proceeds over cost of treasury stock sold, 110,000

accounted for using the cost method
In its December 31, Year 5, financial statements, what amount should Row report as retained earnings?
a. $260,000
b
$400,000
.
c. $370,000
d. $290,000
Explanation
Choice "a" is correct. Look at each item given and decide how it affects retained earnings: income since
incorporation equals unadjusted ending retained earnings (RE), that is, current year income is included; cash
dividends is a direct deduction from RE on the date of declaration; property dividends are deducted from RE at
market value on the date of declaration; the excess proceeds from the sale of treasury stock is considered
additional paid-in capital. Thus, ending RE = unadj. RE - cash dividends - property dividends = $420,000 -
$130,000 - $30,000 = $260,000.
A company issued rights to its existing shareholders without consideration. The rights allowed the recipients to
purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the
following accounts will be increased?
Additiona
l
Commo paid-in
n stock capital
a. No Yes
b
No No
.
c. Yes Yes
d. Yes No
Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock at December 31,
Year 1. During Year 2, transactions involving Nest's common stock were as follows:
May 3 1,000 shares of treasury stock were sold.
August 6 10,000 shares of previously unissued stock

were sold.
November 18 A 2-for-1 stock split took effect.
Laws in Nest's state of incorporation protect treasury stock from dilution. At December 31, Year 2, how many
shares of Nest's common stock were issued and outstanding?
Shares
Outstandin
Issued g
a. 220,000 216,000
b
222,000 214,000
.
c. 222,000 218,000
d. 220,000 212,000
Explanation
Choice "d" is correct. 220,000 shares issued, and 212,000 shares outstanding.
Shares In Shares
issued treasury Outstanding
Dec. 31, Year 1 status 100,000 (5,000) 95,000
May 3, 1,000 shares of −− 1,000 1,000

treasury stock sold
Sub total 100,000 (4,000) 96,000

Aug. 6, sale of 10,000 −− 10,000
previously unissued
stock
Sub total 110,000 (4,000) 106,000
Nov. 18, 2-for-1 stock 110,000 (4,000) 106,000

split
Dec. 31, Year 2 status 220,000 (8,000) 212,000
Asp Co. was organized on January 2, Year 1, with 30,000 authorized shares of $10 par common stock. During
Year 1, the corporation had the following capital transactions:
January 5 Issued 20,000 shares at $15 per share.
July 14 Purchased 5,000 shares at $17 per share.
December 27 Reissued the 5,000 shares held in treasury at $20 per

share.
Asp used the U.S. GAAP par value method to record the purchase and reissuance of the treasury shares. In its
December 31, Year 1, balance sheet, what amount should Asp report as additional paid-in capital?
a. $125,000
b
$100,000
.
c. $140,000
d. $150,000
Explanation
Choice "a" is correct.
Jan. 5 ISSUED 20,000 shares, $10 par at $15
Debit (Dr) Credit (Cr)

Cash [$15/sh × 20,000] $ 300,000
Common stock $ 200,000
APIC [$5/sh × 20,000 sh] 100,000
July 14 PURCHASE OF TREASURY STOCK
5,000 shares at $17 = $85,000

Treasury stock [$10 par × 5,000 sh] $ 50,000
APIC [$5 orig APIC/sh × 5,000 sh] 25,000
Retained earnings [$85,000 − 50,000 − 25,000 10,000
Cash $ 85,000
Dec 27 TREASURY STOCK REISSUANCE
5,000 shares at $20 = $100,000
Debit Credit
(Dr) (Cr)
Cash $ 100,000
Treasury stock [$10 par × 5,000 sh] $ 50,000
APIC [5,000 sh × ($20/sh − $10
50,000
par)]
APIC: $100,000 - 25,000 + 50,000 = $125,000
In September, Year 1, West Corp. made a dividend distribution of one right for each of its 120,000 shares of
outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West's $50
variable rate preferred stock at an exercise price of $80 per share. On March 20, Year 5, none of the rights had
been exercised, and West redeemed them by paying each stockholder $0.10 per right. As a result of this
redemption, West's stockholders' equity was reduced by:
a. $2,400
b
$120
.
c. $12,000
d. $36,000
Explanation
Choice "c" is correct. In Year 1, no dividend was recorded since none of the rights were exercised and no value
was assigned. In Year 5, redemption reduced equity by $12,000 [120,000 rights x $.10 per share].
East Co. issued 1,000 shares of its $5 par common stock to Howe as compensation for 1,000 hours of legal
services performed. Howe usually bills $160 per hour for legal services. On the date of issuance, the stock was
trading on a public exchange at $140 per share. By what amount should the additional paid-in capital account
increase as a result of this transaction?
a. $140,000
b
$155,000
.
c. $135,000
d. $160,000
Explanation
Choice "c" is correct. The fair market value surrendered for the legal services equals $140,000 ($140 × 1,000
shares). The billing rate is similar to a list price and would be used for valuation purposes if no other
information was available. The par value of the stock is $5,000 ($5 × 1,000 shares) and the additional paid in
capital equals $135,000 ($140,000 less $5,000).
During Year 1, Brad Co. issued 5,000 shares of $100 par convertible preferred stock for $110 per share. One
share of preferred stock can be converted into three shares of Brad's $25 par common stock at the option of the
preferred shareholder. On December 31, Year 2, when the market value of the common stock was $40 per share,
all of the preferred stock was converted. What amount should Brad credit to Common Stock and to Additional
Paid-in Capital - Common Stock as a result of the conversion?
Additiona
l
Commo paid-in
n stock capital
a. $500,000 $50,000
b
$375,000 $175,000
.
c. $375,000 $225,000
d. $600,000 $0
Explanation
$100 par $25 par Add'l
preferre common paid-in
Shares d stk stk capital Total
Preferred 5,000 $ 500,000 $ 50,000 $ 550,000
Conversion
:
Pref to (5,000) (500,000) (50,000) (550,000)

Common 15,000 375,000 175,000 550,000
The correct answer can also be determined using journal entries:
Issuance of Preferred Stock:

Cash $ 550,000
Preferred Stock $ 500,000
APIC - PS 50,000
Conversion to Common Stock:
Preferred Stock $ 500,000
APIC - PS 50,000
Common Stock $ 375,000
APIC - CS 175,000
$375,000 common stock.
$175,000 additional paid-in capital.
When a company declares a cash dividend, retained earnings is decreased by the amount of the dividend on the
date of:
a. Declaration or record, whichever is earlier.
b
Payment.
.
c. Record.
d. Declaration.
Long Co. had 100,000 shares of common stock issued and outstanding at January 1, Year 2. During Year 2,
Long took the following actions:
March 15 Declared a 2-for-1 stock split, when the fair value of

the stock was $80 per share.
December 15 Declared a $.50 per share cash dividend.
In Long's statement of stockholders' equity for Year 2, what amount should Long report as dividends?
a. $950,000
b
$50,000
.
c. $100,000
d. $850,000
Explanation: Choice "c" is correct. $100,000 dividends declared in the Year 2 statement of stockholders' equity.
Date Activity
Jan. 1, Year 2 Shares outstanding 100,000
Mar. 15, Year 2 2-for-1 stock split 100,000
Total shares outstanding Dec. 15 200,000
Dec. 15, Year 2 Declared cash dividend per share $ 0.50
Dividends declared for Year 2 $ 100,000
If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be:
a. Credited to additional paid-in capital.
b
Reported as a gain in the income statement.
.
c. Credited to retained earnings.

d. Treated as a reduction in the carrying amount of remaining treasury stock.
The primary purpose of a quasi-reorganization is to give a corporation the opportunity to:
a. Eliminate a deficit in retained earnings.
b Distribute the stock of a newly-created subsidiary to its stockholders in exchange for part of their stock
. in the corporation.
c. Revalue understated assets to their fair values.
d
Obtain relief from its creditors.
.
East Corp., a calendar-year company, had sufficient retained earnings in Year 1 as a basis for dividends, but was
temporarily short of cash. East declared a dividend of $100,000 on April 1, Year 1, and issued promissory notes
to its stockholders in lieu of cash. The notes, which were dated April 1, Year 1, had a maturity date of March 31,
Year 2, and a 10% interest rate.
How should East account for the scrip dividend and related interest?
Debit retained earnings for $100,000 on April 1, Year 1, and debit interest expense for $10,000 on March
a.
31, Year 2.
b
Debit retained earnings for $110,000 on April 1, Year 1.
.
c. Debit retained earnings for $110,000 on March 31, Year 2.
d Debit retained earnings for $100,000 on April 1, Year 1, and debit interest expense for $7,500 on
. December 31, Year 1.
Explanation
Choice "d" is correct.
Debit Credit
(Dr) (Cr)
Rretained earnings on April 1, Year 1 $ 100,000
Notes payable to stockholders $ 100,000
Interest expense on Dec. 31, Year 1 7,500
Accrued interest payable 7,500
A property dividend should be recorded in retained earnings at the property's:
a. Market value at date of issuance (payment).
b
Market value at date of declaration.
.
c. Book value at date of issuance (payment).
d. Book value at date of declaration.
On January 2, Year 2, Lake Mining Co.'s board of directors declared a cash dividend of $400,000 to
stockholders of record on January 18, Year 2, payable on February 10, Year 2. The dividend is permissible under
law in the state where Lake is incorporated. Selected balances from its December 31, Year 1 balance sheet are as
follows:
Accumulated depletion $100,000
Capital stock 500,000
Additional paid-in capital 150,000
Retained earnings 300,000

The $400,000 dividend includes a liquidating dividend of:
a. $150,000
b
$100,000
.
c. $0
d. $300,000
Explanation
Choice "b" is correct. $100,000 liquidating dividend (amount in excess of retained earnings balance).
$ 400,00
Total cash dividend
0
declared
(300,000)
Less retained earnings
$ 100,00
Liquidating dividend 0
In a compensatory stock option plan for which the grant and exercise dates are different, the stock options
outstanding account should be reduced at the:
a. Date of grant.
b
Beginning of the service period.
.
c. Beginning of the vesting period.
d. Exercise date.
On January 2 of the current year, Kine Co. granted Morgan, its president, compensatory stock options to buy
1,000 shares of Kine's $10 par common stock. The options call for a price of $20 per share and are exercisable
for 3 years following the grant date. Morgan exercised the options on December 31 of the current year. The
market price of the stock was $45 on January 2 and $70 on December 31. Using an acceptable options pricing
model, Morgan determined that the fair value of the options granted was $30,000. By what net amount should
stockholders' equity increase as a result of the grant and exercise of the options?
a. $70,000
b
$20,000
.
c. $30,000
d. $50,000
Explanation
Choice "b" is correct. $20,000 increase in stockholders' equity.
Compensation cost should be charged to expense over the service period. In this problem, since the options are
exercised in the same period as the grant date, the total compensation cost must be charged to expense in Year 1.
Effect on
Stockholders'
DR CR Equity
Jan 2, Year 1 (when options

granted)
Compensation expense* $ 30,000 $ (30,000)
Paid-in capital-stock-options- $ 30,000 30,000

outstanding
Dec 31, Year 1 (when options

exercised)
Cash ($20 × 1,000) $ 20,000
Paid-in capital-stock-options- 30,000 $ (30,000)

outstanding
Common stock at par ($10 × $ 10,000 10,000

1,000)
Paid in capital in excess of par 40,000 40,000

(squeeze)
Net effect on stockholders' equity $ 20,000
On November 2, Year 1, Finsbury, Inc. issued warrants to its stockholders giving them the right to purchase
additional $20 par value common shares at a price of $30. The stockholders exercised all warrants on March 1,
Year 2. The shares had market prices of $33, $35, and $40 on November 2, Year 1, December 31, Year 1, and
March 1, Year 2, respectively. What were the effects of the warrants on Finsbury's additional paid-in capital and
net income?
Additional
Paid-in capital Net income
Decreased in
a. Increased in Year 2
Year 1 and Year 2
b. Increased in Year 1 No effect
c.
Increased in Year 1 Decreased in
Year 1 and Year 2
d. Increased in Year 2 No effect
Cobb Co. purchased 10,000 shares (2% ownership) of Roe Co. on February 12, Year 1. Cobb received a stock
dividend of 2,000 shares on March 31, Year 1, when the carrying amount per share on Roe's books was $35 and
the market value per share was $40. Roe paid a cash dividend of $1.50 per share on September 15, Year 1. In
Cobb's income statement for the year ended October 31, Year 1, what amount should Cobb report as dividend
income?
a. $15,000
b
$98,000
.
c. $18,000
d. $88,000
Explanation
Choice "c" is correct. Stock dividends are not recorded as income on the books of the recipient. The total
number of shares increases in a stock dividend and the subsequent cash dividend is $1.50 on 12,000 shares or
$18,000.
Quoit, Inc. issued preferred stock with detachable common stock warrants. The issue price exceeded the sum of
the warrants' fair value and the preferred stock's par value. The preferred stock's fair value was not
determinable. What amount should be assigned to the warrants outstanding?
a. The fair value of the warrants.
b
Excess of proceeds over the par value of the preferred stock.
.
c. Total proceeds.
d
The proportion of the proceeds that the warrants' fair value bears to the preferred stock's par value
.
Rudd Corp. had 700,000 shares of common stock authorized and 300,000 shares outstanding at December 31,
Year 1. The following events occurred during Year 2:
January 31 Declared 10% stock dividend
June 30 Purchased 100,000 shares
August 1 Reissued 50,000 shares
November 30 Declared 2-for-l stock split
At December 31, Year 2, how many shares of common stock did Rudd have outstanding?
a. 660,000
b
600,000
.
c. 630,000
d. 560,000
Explanation
Choice "d" is correct. 560,000 shares of common stock outstanding at 12/31/Year 2 is calculated as follows:
$ 300,000
Shares outstanding, 12/31/Year 1
30,000
10% stock dividend (10% x 300,000), 1/31/Year 2
(100,000)
Treasury shares purchased, 6/30/Year 2
50,000
Treasury shares reissued, 8/1/Year 2
280,000
x2
2-for-1 stock split, 11/30/Year 2
$ 560,000
Beck Corp. issued 200,000 shares of common stock when it began operations in Year 1 and issued an additional
100,000 shares in Year 2. Beck also issued preferred stock convertible to 100,000 shares of common stock. In
Year 3, Beck purchased 75,000 shares of its common stock and held it in Treasury. At December 31, Year 3,
how many shares of Beck's common stock were outstanding?
a. 400,000
b
300,000
.
c. 225,000
d. 325,000
Explanation
Choice "c" is correct. 225,000 shares outstanding at 12/31/Year 3 is calculated as follows:
$ 200,00
Common shares outstanding, Year 1 0
100,000
Additional shares issued, Year 2
300,000
(75,000)
Treasury shares purchased, Year 3
$ 225,00
Common shares outstanding, 12/31/Year 0
3
Universe Co. issued 500,000 shares of common stock in the current year. Universe declared a 30% stock
dividend. The market value was $50 per share, the par value was $10, and the average issue price was $30 per
share. By what amount will Universe decrease stockholders' equity for the dividend?
a. $1,500,000
b
$4,500,000
.
c. $0
d. $7,500,000
Explanation
Choice "c" is correct. The net effect on Universe's stockholders equity is zero, as the reduction to retained
earnings is offset by an equal increase in common stock.
Journal Entry:

$ 1,500,00
Retained earnings (.30 x 500,000 x $10)
0
Common stock ($10 per value) $ 1,500,000
The following changes in Vel Corp.'s account balances occurred during the current year:
Increas
e
$ 89,000
Assets
27,000
Liabilities
60,000
Capital stock
Additional paid-in 6,000

capital
Except for a $13,000 dividend payment and the year's earnings, there were no changes in retained earnings for
the current year. What was Vel's current year net income?
a. $13,000
b
$17,000
.
c. $4,000
d. $9,000
Explanation
Balance sheet changes:
Assets 89
Liabilities 27
Capital stock 60
Additional paid-in capital 6
Retained earnings (squeeze) (4)
Total liabilities and equity 89
Retained earnings changes
Begin R/E 0
Add net income (squeeze) 9
Less dividends paid (13)

Ending R/E (4)
Choice "d" is correct. $9,000 net income for the current year.
At December 31, Year 1 and Year 2, Carr Corp. had outstanding 4,000 shares of $100 par value 6% cumulative
preferred stock and 20,000 shares of $10 par value common stock. At December 31, Year 1, dividends in arrears
on the preferred stock were $12,000. Cash dividends declared in Year 2 totaled $44,000. Of the $44,000, what
amounts were payable on each class of stock?
Preferre Commo
d stock n stock
a. $36,000 $8,000
b
$24,000 $20,000
.
c. $32,000 $12,000
d. $44,000 $0
Explanation
Rule: Cumulative preferred stock dividends are paid on par value (not sales price) of preferred stock and have a
"preference" over common stock dividends until all past preferred stock dividends are paid.
4,000 shs 20,000 shs

preferred common
stock stock Total
1. Dividends in arrears $12,000 $0 $12,000
2. 6% preferred stk div 24,000 0 24,000

(4,000 sh x $100 x 6%)
current year
3. Equivalent or balance to 0 8,000 8,000

common stock
$36,000 $8,000 $44,000
dividends payable
Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The par value
of the stock is $1 per share. During January of the current year, Porter bought back 500 shares at $6 per share,
which were reported by Porter as treasury stock. The treasury stock shares were reissued later in the current year
at $10 per share. Porter used the cost method to account for its equity transactions. What amount should Porter
report as paid-in capital related to its treasury stock transactions on its balance sheet for the current year?
a. $1,500
b
$20,000
.
c. $2,000
d. $4,500
Explanation
Choice "c" is correct. Using the cost method, the treasury stock transactions include the reissuance of the
treasury shares at $10 per share ($4 per share to APIC x 500 shares = $2,000). The additional paid-in capital
from the original issuance of the stock is not paid-in capital related to the treasury stock and is not included.
At December 31, Year 1, Eagle Corp. reported $1,750,000 of appropriated retained earnings for the construction
of a new office building, which was completed in Year 2 at a total cost of $1,500,000. In Year 2, Eagle
appropriated $1,200,000 of retained earnings for the construction of a new plant. Also, $2,000,000 of cash was
restricted for the retirement of bonds due in Year 3. In its Year 2 balance sheet, Eagle should report what amount
of appropriated retained earnings?
a. $2,950,000
b
$1,450,000
.
c. $3,200,000
d. $1,200,000
Explanation
Rule: When the purpose of the appropriation has been achieved, it should be restored to unappropriated retained
earnings.
Choice "d" is correct. $1,200,000 appropriated retained earnings at Dec. 31, Year 2 (for the construction of a
new plant only).
On which of the following dates is a public entity required to measure the cost of employee services in
exchange for an award of equity interests, based on the fair market value of the award?
a. Date of exercise.
b
Date of grant.
.
c. Date of restriction lapse.
d. Date of vesting.
The stockholders of Meadow Corp. approved a stock-option plan that grants the company's top three executives
options to purchase a maximum of 1,000 shares each of Meadow's $2 par common stock for $19 per share. The
options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determined that
the fair value of the compensation is $300,000 and the vesting period is three years. What amount of
compensation expense from the options should Meadow record in the year the options were granted?
a. $20,000
b
$100,000
.
c. $300,000
d. $60,000
On April 1, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
 Common stock, no par, $1 stated value, 20,000 shares originally issued for $30
per share.
 Preferred stock, $10 par value, 6,000 shares originally issued for $50 per share.
Hyde's April 1 statement of stockholders' equity should report:
Additional
Common Preferred paid-in
stock stock capital
a. $600,000 $300,000 $0
b. $600,000 $60,000 $240,000
c. $20,000 $300,000 $580,000
d. $20,000 $60,000 $820,000
Explanation
Choice "d" is correct. Common and preferred stock are recorded at the number of shares issued times stated or
par value. Any excess is paid-in capital.

Cash $ 600,000
Common stock $ 20,000
Paid-in capital 580,000
Cash 300,000
Preferred stock 60,000
Paid-in capital 240,000
During the current year, Onal Co. purchased 10,000 shares of its own stock at $7 per share. The stock was
originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. The firm uses the cost
method to account for treasury stock. What amount should Onal report in its income statement for these
transactions?
a. $10,000 loss.
b
$5,000 gain.
.
c. $15,000 gain.
d. $0
In Year 1, Fogg, Inc. issued $10 par value common stock for $25 per share. No other common stock transactions
occurred until March 31, Year 3, when Fogg acquired some of the issued shares for $20 per share and retired
them. Which of the following statements correctly states an effect of this acquisition and retirement?
a. Year 3 net income is decreased.
b
Retained earnings is increased.
.
c. Additional paid-in capital is decreased.
d. Year 3 net income is increased.
Explanation
Illustration with assumed shares:
Common Additional Total

assumed stock at paid-in Retained Stockholders'
shares $10 par capital earnings Equity
Year 1 1,000 10,000 15,000 0 25,000

stock
issued at
$25
Year 3 (100) (1,000) (1,000) 0 (2,000)
stock
retired at
$20
900 9,000 14,000 0 23,000
Choice "c" is correct. Additional paid-in capital is decreased upon the acquisition and retirement of shares at a
cost ($20) less than initial selling price ($25). Since 1/10 of the shares are assumed retired, 1/10 of common
stock at par is retired. The difference between the cost of retirement ($2,000) and par retired ($1,000) is the
decrease in additional paid-in capital.
On December 1, Line Corp. received a donation of 2,000 shares of its $5 par value common stock from a
stockholder. On that date, the stock's market value was $35 per share. The stock was originally issued for $25
per share. By what amount would this donation cause total stockholders' equity to decrease?
a. $20,000
b
$0
.
c. $70,000
d. $50,000
Baker Co. issued 100,000 shares of common stock in the current year. On October 1, Baker repurchased 20,000
shares of its common stock on the open market for $50.00 per share. At that date, the stock's par value was
$1.00 and the average issue price was $40.00 per share. Baker uses the cost method for treasury stock
transactions. On December 1, Baker reissued the stock for $60.00 per share. What amount should Baker report
as treasury stock gain at December 31?
a. $200,000
b
$0
.
c. $400,000
d. $980,000
Explanation
Choice "b" is correct. Corporations are not permitted to report income statement gains and losses from treasury
stock transactions. Instead, treasury stock "gains and losses" are reported as direct adjustments to stockholders'
equity. Gains are recorded by crediting APIC - Treasury Stock, while losses are recorded by first reducing any
existing APIC - Treasury Stock to $0, and then debiting any additional loss to Retained Earnings.
Baker's treasury stock transactions would be recorded as follows:
10/1 - Repurchase of Treasury Stock

$ 1,000,00
Treasury stock
0
Cash $ 1,000,000
12/1 - Resell Treasury Stock
Credit
Debit (Dr)
(Cr)
$ 1,200,00
Cash
0
Treasury stock $ 1,000,000
APIC - Treasury
200,000
stock
Jensen performed legal services to assist Balm Co. in accomplishing its initial organization. Jensen accepted
1,000 shares of $5 par common stock in Balm as payment for his services. The Balm shares were not yet
publicly traded, but they had a book value of $4 per share. Jensen provided 48 hours of service, which is
normally billed at $125 per hour. By what amount should the common stock account increase?
a. $1,000
b
$5,000
.
c. $6,000
d. $4,000
Explanation
Choice “b” is correct. The common stock account will increase by the number of shares issued multiplied by the
par value of the shares themselves (1,000 shares × $5).
The following is the stockholders' equity section of Harbor Co.'s balance sheet at December 31:
Common stock $10 par, 100,000 shares authorized,

50,000 shares issued
of which 5,000 have been reacquired, and are held in
treasury $ 450,000
Additional paid-in capital common stock 1,100,000
Subtotal $ 2,350,000
Less treasury stock (150,000)
Total stockholders' equity $ 2,200,000
Harbor has insignificant amounts of convertible securities, stock warrants, and stock options. What is the book
value per share of Harbor's common stock?
a. $44
b
$49
.
c. $46
d
. $31
Explanation
Choice "b" is correct. Book value per common share is computed as follows:
Common shareholders' equity includes the reduction for treasury stock. Common shares outstanding is computed as
total shares issued less treasury shares (50,000 issued - 5,000 treasury = 45,000 outstanding).
The following trial balance of Trey Co. at December 31, has been adjusted except for income tax expense.
Dr. Cr.
$ 550,000
Cash
1,650,000
Accounts receivable, net
300,000
Prepaid taxes
$ $ 120,000
Accounts payable
500,000
Common stock
680,000
Additional paid-in capital
Dr. Cr.
630,000
Retained earnings
430,000
Foreign currency translation adjustment
3,600,000
Revenues
2,600,000
Expenses
$ 5,530,000 $ 5,530,000
Additional information
 Estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income
tax expense. There were no differences between financial statement and income tax income, and Trey's
tax rate is 30%.
 Included in accounts receivable is $500,000 due from a customer. Special terms granted to this customer
require payment in equal semiannual installments of $125,000 every April 1 and October 1.
In Trey's December 31 balance sheet, what amount should be reported as total retained earnings?
a. $1,200,000
b
$1,330,000
.
c. $1,029,000
d. $1,630,000
Explanation
Choice "b" is correct. $1,330,000.
$ 3,600
Revenue
(2,600)
Expenses
1,000
Pre-tax income
(300)
Tax expense - 30%
700
Net income
Beginning retained 630

earnings
$ 1,330
Ending retained earnings
Notes:
1. The estimated tax payments do not affect the expense.
2. For GAAP purposes, 100% of the profit on an installment sale is recorded at time of sale unless there is
doubt as to collectibility.
3. Godart Co. issued $4,500,000 notes payable as a scrip dividend that matured in five years. At maturity,
each shareholder of Godart's three million shares will receive payment of the note principal plus interest.
The annual interest rate was 10%. What amount should be paid to the stockholders at the end of the fifth
year?
a. $4,500,000
b
$450,000
.
c. $2,250,000
d. $6,750,000
Explanation
Note: For purposes of this question, to clarify the question, we are assuming that what the examiners
mean is that each shareholder will receive his/her "portion" of the note receivable plus interest; however,
the interpretation does not really make any difference because the question is what amount should be
paid to the stockholders (in total). Further, there is nothing about a note that automatically says the
interest on the note has to be simple interest. Many notes are short-term (less than a year), and the issue
thus never arises.
Choice "d" is correct. The annual interest rate on the notes is 10% assumed to be non-compounding (the
question does not say that, or indicate it in any way, but it is the only way to get the answer that the
examiners have provided). Simple interest each year is $450,000 ($4,500,000 x .10), and 5 years of this
interest is $2,250,000. The note principal plus interest is thus $4,500,000 plus $2,250,000, or
$6,750,000.
Division Corporation has 20,000 shares of $5.00 participating 9 percent cumulative preferred stock and 100,000
shares of $2.00 common stock. On July 1, the board of Division declared a $30,000 dividend at the time the
common stock was selling for $25 per share and the preferred stock was selling for $30. The total dividends
paid to each class of stock on the payment date was:
Preferre Commo
d n
a. $10,000 $20,000
b
$9,500 $20,500
.
c. $16,000 $14,000
d. $12,500 $17,500
Explanation
Choice "a" is correct. Participating preferred stock splits dividend distributions with common shareholders only
after the common shareholders have received percentage dividends equivalent to preferred shareholders. The
remaining dividend is shared in relation to relative capitalization. The following calculation illustrates the
distribution of dividends by share classification.
Preferred Common Capitalization Dividends
Dividends
Total dividends $30,000

declared
Shares 20,000 100,000
Par value $5.00 $2.00
Total capitalization $100,000 $200,000 $300,000
Preferred dividend rate 9% 9%

Dividends $9,000 $18,000 $27,000
Relative capitalization 33.3% 66.7%
Undistributed dividends $1,000 $2,000 $3,000

subject to participation
Total dividends per $10,000 $20,000 $30,000

class
Kuchman Kookware issued 40,000 shares of its $8.00 par value common stock for $9 on January 1, Year 1.
Kuchman repurchased 1,000 shares at $8 per share on April 1, Year 2, resold 500 shares at $9 per share on July
1, Year 2, and, on October 1, Year 2, resold the final 500 shares at $5 per share. Assuming Kuchman uses the par
value method of accounting for its treasury stock, retained earnings at December 31. Year 2 would be reduced
by:
a. $0
b
$500
.
c. $1,500
d. $1,000
Explanation
Choice "b" is correct. Using the par value method, the company effectively retires reacquired stock at the time
of repurchase and accounts for any gain through Additional Paid-in Capital--Treasury Stock and any loss
through retained earnings. Resale of stock above par results in elimination of the related treasury stock amount
and in the recording of Additional Paid-in Capital. Resale of stock significantly below par results in recording a
loss in retained earnings to the extent the loss exceeds the previously recorded Additional Paid-in Capital--
Treasury Stock. The fact pattern above is displayed below:
Gregory's on Ormond, Inc. grants its president 2,000 stock options on January 1, Year 1 that give him rights to
purchase shares of the company for $40 per share on December 31, Year 2. At the time the options were
granted, the fair value of the options totaled $20,000. At December 31, Year 1 the company's stock sold for $45
per share and at December 31, Year 2 the selling price of the stock was $55 per share. On December 31, Year 2,
the president resigned from the company and did not elect to exercise the options. In its Year 2 financial
statements, Gregory's on Ormond would recognize compensation expense relative to the options of:
a. $0
b
. $15,000
c. ($10,000)
d. $10,000
Explanation
Choice "d" is correct. The company would calculate compensation expense on the grant date and recognize this
expense over the service period (matching principle). Compensation expense relative to stock options is
recognized regardless of whether the option is exercised.
Compensation expense is calculated as follows:
$ 20,000
Total compensation expense
÷2
Years
$ 10,000
Compensation in the second year
Aldrich Co. distributes cash dividends to its shareholders during the current year. The dividends are declared on
March 9 and are payable to shareholders as of the date of record, which is April 15. The dividends are actually
paid on May 19. At which of the following dates would the dividends become a liability to Aldrich?
a. April 15
b
March 9
.
c. May 19
d. December 31
Jones Fortune Company issued 10,000 shares of $15 par common stock on February 1 for $20 per share. The
company bought back 2,000 shares when the share price fell to $16 per share on August 31 and then resold
1,000 shares when the price rebounded to $22/share on December 15. Jones accounts for its treasury stock
transactions using the cost method. What amount would Jones report as Common Stock in the equity section of
its December 31 balance sheet?
a. $150,000
b
$140,000
.
c. $135,000
d. $190,000
Explanation
Choice "a" is correct. When the cost method is used to account for treasury stock, common stock is reported on
the balance sheet as the total shares issued at par value:
10,000 shares issued x $15/share = $150,000
Treasury shares are shown separately as a reduction to equity, not as an adjustment to common stock at par. In
this problem, the stock issuance and subsequent treasury stock transactions would be accounted for as follows
under the cost method:
February 1st - Stock issuance:

Cash $ 200,000
Common stock - par $ 150,000
APIC - common
50,000
stock
August 31st - Treasury stock repurchase:
Treasury stock $ 32,000
Cash $ 32,000
December 15th - Treasury stock resale:
Cash $ 22,000
APIC - treasury stock 6,000
Lem Co., which accounts for treasury stock under the par value method, acquired 100 shares of its $6 par value
common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what
amount would Lem's additional paid-in capital from common stock decrease as a result of the acquisition?
a. $100
b
$0
.
c. $300
d. $400
Explanation
Choice "a" is correct. Under the par value method, when the shares are (re)acquired by Lem, the treasury stock
is recorded at par value ($6/share) and additional paid-in-capital is reduced by the $100 recorded when the
shares were originally issued. The difference, in this case between the $10 buy-back price and the $7 initial
issuance price, or $3/share, is assigned to retained earnings as a reduction.
Here are the journal entries for additional clarification:
At issuance:
Cash $ 700
Common Stock $ 600
Add'l Paid-In-Capital 100
At (re)acquisition:
Treasury Stock $ 600
Add'l Paid-In-Capital 100
Retained Earnings-plug 300
Cash $ 1,000
Which of the following financial instruments issued by a public company should be reported on the issuer's
books as a liability on the date of issuance?
a. Common stock that is issued at a 5% discount as part of an employee share purchase plan.
b
Preferred stock that is convertible to common stock five years from the issue date.
.
c. Cumulative preferred stock.
d. Common stock that contains an unconditional redemption feature.
An entity authorized 500,000 shares of common stock. At January 1, Year 2, the entity had 110,000 shares of
common stock issued and 100,000 shares of common stock outstanding. The entity had the following
transactions in Year 2:
March 1 Issued 15,000 shares of common stock
June 1 Resold 2,500 shares of treasury stock
September 1 Completed a 2-for-1 common stock split
What is the total number of shares of common stock that the entity has outstanding at the end of Year 2?
a. 250,000
b
235,000
.
c. 117,500
d.
230,000
Explanation
Choice "b" is correct. When treasury stock is resold, the stock is regarded as outstanding because after the
resale, the stock becomes stock held by shareholders other than the corporation itself. Prior to the stock split on
September 1, the entity will have 117,500 shares of common stock outstanding, which is calculated as follows:
100,000 of common stock outstanding on January 1, plus the issuance of 15,000 shares of common stock on
March 1, plus the resale of 2,500 of treasury shares on June 1. The stock split doubles the number of
outstanding shares (117,500) to 235,000, which would be the number of shares outstanding at the end of Year 2.
Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $0.50 par common stock, when the market
price was $10 per share. The option expired in three months and had an exercise price of $9 per share. What
was the intrinsic value of the call option at the time of initial investment?
a. $100
b
$200
.
c. $900
d. $50
Explanation
Choice "a" is correct. Under the intrinsic value method, a corporation measures the intrinsic value of options
using the following formula:
Number of share options × Market price of the stock on the date of the grant less exercise price of the share
option
Thus, the intrinsic value of the call option at the time of the initial investment would be 100 × ($10.00 − $9.00)
= $100.
On January 1, Year 1, a company issued its employees 10,000 shares of restricted stock. On January 1, Year 2,
the company issued to its employees an additional 20,000 shares of restricted stock. Additional information
about the company's stock is as follows:
Date Fair value of stock (per share)

January 1, Year 1 $20
December 31, Year 1 22
January 1, Year 2 25
The shares vest at the end of a four-year period. There are no forfeitures. What amount should be recorded as
compensation expense for the 12-month period ended December 31, Year 2?
a. $205,000
b
$175,000
.
c. $500,000
d. $225,000
Explanation
Choice "b" is correct. Compensation cost for restricted share plans is determined using the following formula:
Total compensation cost = Market price of the share on date of grant × Number of restricted shares awarded
Using the above formula, the total compensation cost for Year 1 is $20.00 × 10,000 shares = $200,000.
Using the above formula, the total compensation cost for Year 2 is $25.00 × 20,000 shares = $500,000.
Total compensation cost is allocated to compensation expense on a straight-line basis over the time period in
which the employee must provide service. This company has a four-year service period. The compensation
expense for the 12 months ended December 31, Year 2 would be one fourth of the compensation cost of Year 1,
which is $50,000 (1/4 × $200,000) and one fourth of the compensation cost of Year 2, which is $125,000 (1/4 ×
$500,000), for a total of $175,000.
Murphy Co. had 200,000 shares outstanding of $10 par common stock on March 30 of the current year. Murphy
reacquired 30,000 of those shares at a cost of $15 per share, and recorded the transaction using the cost method
on April 15. Murphy reissued the 30,000 shares at $20 per share, and recognized a $50,000 gain on its income
statement on May 20. Which of the following statements is correct?
a. Murphy's net income for the current year is understated.
b
Murphy's net income for the current year is overstated.
.
c. Murphy should have recognized a $50,000 loss on its income statement for the current year.
d. Murphy's comprehensive income for the current year is correctly stated.
A company whose stock is trading at $10 per share has 1,000 shares of $1 par common stock outstanding when
the board of directors declares a 30% common stock dividend. Which of the following adjustments should be
made when recording the stock dividend?
a. Additional paid-in capital is credited for $2,700.
b
Treasury stock is debited for $300.
.
c. Common stock is debited for $3,000.
d. Retained earnings is debited for $300.
Explanation
Choice "d" is correct. A 30% common stock dividend would be classified as a large stock dividend by GAAP
because the stock dividend is more than 20% to 25% of the previously outstanding shares. For a large stock
dividend, retained earnings is debited for the par value of the additional shares issued. The stock dividend would
be recorded as follows on the date of declaration by the board of directors:
Date of Declaration

Retained earnings (30% × 1,000 shares × $1.00 par value) $ 300
Common stock to be distributed $ 300
Choice "b" is incorrect. Treasury stock is debited when a company reacquires its own stock, not in a stock
dividend transaction.
Choice "a" is incorrect. Additional paid in capital would be credited for $2,700 if this stock dividend was
regarded as a small stock dividend. A stock dividend that is less than 20% or 25% of the previously outstanding
shares would be regarded as a small dividend. If the transaction was regarded as a small dividend rather than a
large dividend, the stock dividend would be recorded as follows on the date of declaration by the board of
directors:
Date of Declaration
Debit Credit
(Dr) (Cr)
Retained earnings (30% × 1,000 shares × $10.00 fair
$ 3,000
value)
Common stock to be distributed $ 300
Additional paid-in-capital from stock dividend 2,700
Earnings per share disclosure is required for which of the following:
a. Companies who have made a filing with the SEC in preparation for a sale of public securities.
b
Non-public companies.
.
c. Wholly-owned subsidiaries of public companies.
d
Investment companies.
.
Deck Co. had 120,000 shares of common stock outstanding at January 1, Year 2. On July 1, Year 2, it issued
40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible
cumulative preferred stock. What is the number of shares that Deck should use to calculate Year 2 earnings per
share?
a. 140,000
b
150,000
.
c. 170,000
d. 160,000
Explanation
Choice "a" is correct. 140,000 shares of common stock is the weighted average for earnings per share. The
calculation is as follows:
$ 120,00
1-1-Year 2: Outstanding all
0
year
7-1-Year 2: 40,000 issued x 20,000

6/12
$ 140,00
Weighted average 0
Which of the following items, if dilutive and if other conditions are met, would enter into the determination of
the weighted average shares outstanding to be used in the basic earnings per share (basic EPS) calculation?
I. Stock options.
II. Contingent shares.
a. I only.
Both I and
b.
II.
Neither I
c.
nor II.
d. II only.
In computing the weighted-average number of shares outstanding during the year, which of the following
midyear events must be treated as if it had occurred at the beginning of the year?
a. Declaration and distribution of stock dividend.

b
Purchase of treasury stock.
.
c. Sale of preferred convertible stock.
d
Sale of additional common stock.
.
Elizabeth Corporation acquired Allen Corporation at the end of Year 1. Under terms of the acquisition
agreement, Elizabeth agreed to provide former Allen shareholders 1,000 additional shares of Elizabeth stock for
each new retail outlet opened during Year 2. Two new outlets were opened during Year 2:
 One on May 1, Year 2
 One on September 1, Year 2
What number of shares related to the openings of the new retail outlets should enter into the calculation of
Elizabeth's basic earnings per share as of December 31, Year 2, the end of its fiscal year?
a. 1,250
b
2,000
.
c. -0-
d. 1,000
Explanation
Rule: Contingent shares are included in the calculation of basic EPS as of the date all conditions have been
satisfied. (In this question, the dates the new outlets were opened.)
Choice "d" is correct. 1,000 shares, computed as follows:
x =
Total Shares Period Outstanding Weighted Average
1,000 May-Aug. 4/12 333 1/3
2,000 Sept.-Dec. 4/12 666 2/3

1,000 shares
Which one of the following is not considered contingent shares for purposes of computing EPS?
a. Shares issuable upon the passage of a specific period of time.
b
Shares issuable upon achieving a specific net income target.
.
c. Shares issuable upon exercise of a stock option.
d. Shares issuable upon the issuance of a patent.
Ute Co. had the following capital structure during Year 1 and Year 2:
Preferred stock, $10 par, 4% cumulative, 25,000 shares $250,000

issued and outstanding
Common stock, $5 par, 200,000 shares issued and 1,000,000

outstanding
Ute reported net income of $500,000 for the year ended December 31, Year 2. Ute paid no preferred dividends
during Year 1 and paid $16,000 in preferred dividends during Year 2. In its December 31, Year 2, income
statement, what amount should Ute report as basic earnings per share?
a. $2.48
b
$2.45
.
c. $2.42
d. $2.50
Explanation
Choice "b" is correct. $2.45 earnings per share.
Year 1 Year 2
$ ? $ 500,000
Net income
Less: Cumulative preferred Stock dividend "requirement" ($10 par × 25,000 shs × (10,000) (10,000)
4%)
490,000
Income available to common shares
÷
Divide by average common shares O/S 200,000
$ 2.45
Basic earnings per common share
When computing the weighted average of common shares outstanding for basic earnings per share, convertible
securities are:
a. Ignored.
b
Recognized whether they are dilutive or anti-dilutive.
.
c. Recognized only if they are anti-dilutive.
d. Recognized only if they are dilutive.

West Co. had earnings per share of $15.00 for the current year before considering the effects of any convertible
securities. No conversion or exercise of convertible securities occurred during the year. However, possible
conversion of convertible bonds would have reduced earnings per share by $0.75. The effect of possible
exercise of common stock options would have increased earnings per share by $0.10. What amount should West
report as diluted earnings per share for the current year?
a. $15.00
b
$15.10
.
c. $14.25
d. $14.35
Explanation
Choice "c" is correct. $14.25 diluted earnings per share.
Basic Diluted
EPS EPS
$ 15.00 $ 15.00
EPS before the effect of any convertibles
-- (.75)
Possible conversion of bonds
$ 15.00 $ 14.25
Diluted earnings per share
On December 1 of the current year, Clay Co. declared and issued a 6% stock dividend on its 100,000 shares of
outstanding common stock. There was no other common stock activity during the year. What number of shares
should Clay use in determining basic earnings per share for the current year?
a. 103,000
b
106,000
.
c. 100,000
d.
100,500
Explanation
Choice "b" is correct. A 6% stock dividend equals 6,000 shares with a total of 106,000 shares outstanding after
the distribution of the dividend. Stock dividends and stock splits require restatement of the shares outstanding
before the stock dividend or stock split. Thus, the stock dividend would be treated as if it had occurred at the
beginning of the fiscal year.
The following information pertains to Jet Corp.'s outstanding stock for Year 2:
Common stock, $5 par value
Shares outstanding, 1/1/Year 2 20,000
2-for-1 stock split, 4/1/Year 2 20,000
Shares issued, 7/1/Year 2 10,000
Preferred stock, $10 par value, 5% cumulative
Shares outstanding, 1/1/Year 2 4,000
What are the number of shares Jet should use to calculate Year 2 earnings per share?
a. 45,000
b
54,000
.
c. 50,000
d. 40,000
Explanation
Choice "a" is correct. 45,000 shares should be used to calculate Year 2 EPS.
1/1/Year 2 Shares outstanding 20,000
4/1/Year 2 2-for-1 stock split 20,000
40,000 x 1/2 (6 = 20,000

mos)
7/1/Year 2 Share issued 10,000
50,000 x 1/2 (6 = 25,000

mos)
Weighted-average shares O/S 45,000

On January 31, Year 2, Pack, Inc. split its common stock 2 for 1, and Young, Inc. issued a 5% stock dividend.
Both companies issued their December 31, Year 1, financial statements on March 1, Year 2. Should Pack's Year
1 earnings per share (EPS) take into consideration the stock split, and should Young's Year 1 EPS take into
consideration the stock dividend?
Pack'
s Young's
Year 1 Year 1
EPS EPS
a. Yes Yes
b
No No
.
c. No Yes
d. Yes No
In determining earnings per share, interest expense, net of applicable income taxes, on convertible debt that is
dilutive should be:
a. Deducted from net income for both basic earnings per share and diluted earnings per share.
b
Added back to net income for both basic earnings per share and diluted earnings per share.
.
c. Deducted from net income for basic earnings per share, and ignored for basic diluted earnings per share.
d. Added back to net income for diluted earnings per share, and ignored for basic earnings per share.
When computing diluted earnings per share, convertible securities are:
a. Recognized only if they are dilutive.
b
Recognized whether they are dilutive or anti-dilutive.
.
c.
Ignored.
d. Recognized only if they are anti-dilutive.
Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible
into common stock. During Year 1, 100,000 shares of common stock were outstanding. In Year 2, two
distributions of additional common shares occurred: On April 1, 20,000 shares of treasury stock were sold, and
on July 1, a 2-for-1 stock split was issued. Net income was $410,000 in Year 2 and $350,000 in Year 1. What
amounts should Strauch report as earnings per share in its Year 2 and Year 1 comparative income statements?
Year Year
2 1
a. $1.78 $1.75
b
$2.34 $1.75
.
c. $1.78 $3.50
d. $2.34 $3.50
Explanation
Choice "a" is correct. $1.78 and $1.75 EPS Year 2 and Year 1.
Year 2 Year 1
Net income $ 410,000 $ 350,000
Weighted Avg. ÷ 230,000 ÷ 200,000

Shares
EPS $ 1.78 $ 1.75
Stock
Shares O/S Mo's O/S Split Total
1/1/Year 2 to 100,000 × 3 × 2 600,000

4/1/Year 2
4/1/Year 2 to 120,000 × 3 × 2 720,000

7/1/Year 2
7/1/Year 2 to 240,000 × 6 × 1 1,440,000

12/31/Year 2
12 2,760,000
Weighted shares O/S (2,760,000 ÷ 12) = 230,000
Poe Co. had 300,000 shares of common stock issued and outstanding at December 31, Year 1. No common
stock was issued during Year 2. On January 1, Year 2, Poe issued 200,000 shares of nonconvertible preferred
stock. During Year 2, Poe declared and paid $75,000 cash dividends on the common stock and $60,000 on the
preferred stock. Net income for the year ended December 31, Year 2 was $330,000. What should be Poe's Year
2 earnings per common share?
a. $0.85
b
$0.90
.
c. $1.10
d. $0.65
Explanation
Choice "b" is correct. $0.90 earnings per common share.
$ 330,00
Net income 0
(60,000)
Less: Preferred dividends paid
$ 270,00
Income available for common
0
stock
Peters Corp.'s capital structure was as follows:
December 31
Year 1 Year 2
Outstanding shares of
stock:
Common 110,000 110,000
Convertible preferred 10,000 10,000
8% convertible bonds $ 1,000,000 $ 1,000,000
During Year 2, Peters paid dividends of $3.00 per share on its preferred stock. The preferred shares are
convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shares of common
stock. Net income for Year 2 was $850,000. Assume that the income tax rate is 30%. The basic earnings per
share for Year 2 is:
a. $6.31
b
$7.45
.
c. $7.08
d. $6.54
Explanation
Choice "b" is correct. $7.45 basic earnings per share for Year 2.
Which of the following is not disclosed on the statement of cash flows when prepared under the direct method,
either on the face of the statement or in a separate schedule under U.S. GAAP?
a. A reconciliation of net income to net cash flow from operations.
b
A reconciliation of ending retained earnings to net cash flow from operations.
.
c. The major classes of gross cash receipts and gross cash payments.
d. The amount of income taxes paid.
Jones Corp.'s capital structure was as follows:
December 31
Year 1 Year 2
Outstanding shares of
stock:
Common 110,000 110,000
Convertible 10,000 10,000

preferred
8% convertible bonds $ 1,000,000 $ 1,000,000
During Year 2, Jones paid dividends of $3.00 per share on its preferred stock. The preferred shares are
convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shares of common
stock. Net income for Year 2 is $850,000. Assume that the income tax rate is 30%.
The diluted earnings per share for Year 2 is:

a. $5.48
b
$5.66
.
c. $5.81
d. $6.26
Explanation: Choice "b" is correct. $5.66 diluted EPS.
Rule: All potentially dilutive convertible bonds and preferred stock are used in computing diluted EPS.
Adjusted net income
Net income $ 850,000
Add: Interest expense ($1,000,000 x 8%) 80,000
Less: Tax deduction eliminated (30%) (24,000)
Adjusted net income $ 906,000
Adjusted shares outstanding
Shares outstanding - common 110,000
Conversion of preferred shares 20,000
Conversion of bonds 30,000
Adjusted shares outstanding 160,000

Dilutive stock options would generally be used in the calculation of:
Basic Diluted
earnings per share earnings per share
a. Yes Yes
b. No No
c. Yes No
d. No Yes
During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par,
10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were
originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net
income was $200,000, no dividends were declared, and the tax rate was 30%. What amount was Comma's basic
earnings per share for the current year?
a. $3.38
b
$8.00
.
c. $7.36
d. $7.55
Explanation
Choice "c" is correct. The formula:

Mend Co. purchased a three-month U.S. Treasury bill. Mend's policy is to treat as cash equivalents all highly
liquid investments with an original maturity of three months or less when purchased. How should this purchase
be reported in Mend's statement of cash flows?
a. As an outflow from investing activities.
b
As an outflow from operating activities.
.
c. Not reported.
d. As an outflow from financing activities.
Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative preferred
stock. No dividends on common stock were declared during the year. Net income was $2,000,000. What was
Jen's basic earnings per share?
a. $9.09
b
$11.11
.
c. $10.00
d. $9.00
Explanation
Choice "d" is correct. When a company has cumulative preferred stock, the preferred dividends deducted from
net income to derive income available to common shareholders are equal to the dividends accumulated in the
period, regardless of whether they have been declared. Given this, Jen Co.'s basic EPS is calculated as follows:
A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be
dilutive?
Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share
a.
convertible into four shares of common stock.
b Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of
. common stock.
Ten percent convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of
c.
common stock.
d
Cumulative 8%, $50 par preferred stock.
.
The senior accountant for Carlton Co., a public company with a complex capital structure, has just finished
preparing Carlton's income statement for the current fiscal year. While reviewing the income statement,
Carlton's finance director noticed that the earnings per share data has been omitted. What changes will have to
be made to Carlton's income statement as a result of the omission of the earnings per share data?
a. Carlton's income statement will have to be revised to include the earnings per share data.
b Carlton's income statement will only have to be revised to include the earnings per share data if Carlton's
. market capitalization is greater than $5,000,000.
No changes will have to be made to Carlton's income statement. The income statement is complete
c.
without the earnings per share data.
d Carlton's income statement will only have to be revised to include the earnings per share data if Carlton's
. net income for the past two years was greater than $5,000,000.
The following information pertains to Ceil Co., a company whose common stock trades in a public market:
Shares outstanding at 1/1 100,000
Stock dividend at 3/31 24,000
Stock issuance at 6/30 5,000
What is the weighted-average number of shares Ceil should use to calculate its basic earnings per share for the
year ended December 31?
a. 129,000
b
120,500
.
c. 126,500
d. 123,000
Explanation
Choice "c" is correct. When calculating the weighted - average number of shares to be used in the earnings-per-
share calculation, stock dividends are treated as if they occurred at the beginning of the period. Ceil Co.'s
weighted average number of shares should therefore be calculated as:
$ 62,000
124,000 shares x 6/12 =
64,500
129,000 shares x 6/12 =
$ 126,50
Weighted average 0
The per-share amount must be reported on the face of a public company’s income statement for which of the
following items?
a. U.S. Treasury stock.

b
Preferred stock dividend.
.
c. Compensation effect of fair value on stock options.
d. Income from continuing operations.
Ian Co. is calculating earnings per share amounts for inclusion in the Ian's annual report to shareholders. Ian has
obtained the following information from the controller's office as well as shareholder services:
Net income from January 1 to December 31 $ 125,000
Number of outstanding shares:
January 1 to March 31 15,000
April 1 to May 31 12,500
June 1 to December 31 17,000
In addition, Ian has issued 10,000 incentive stock options with an exercise price of $30 to its employees and a
year-end market price of $25 per share. What amount is Ian's diluted earnings per share for the year ended
December 31?
a. $4.85
b
$7.35
.
c. $7.94
d. $4.63
Explanation
Choice "c" is correct. Ian's diluted earnings per share will be equal to its basic earnings per share because the
stock options are out of the money. Out of the money stock options are antidilutive because the exercise price
exceeds the market price of the stock. Ian's basic and diluted earnings per share are calculated as follows:
* The weighted-average number of common shares outstanding is:
Total Period
Share Outstandin Weighted
s g -Average
15,000 3/12 3,750
12,500 2/12 2,083
17,000 7/12 9,917
Total 15,750
The following information is relevant to the computation of Chan Co.'s earnings per share to be disclosed on
Chan's income statement for the year ending December 31:
 Net income for 2002 is $600,000.

 $5,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were issued four
years ago at a discount which is being amortized in the amount of $20,000 per year. The stated rate of
interest on the bonds is 9%, and the bonds were issued to yield10%. Each $1,000 bond is convertible
into 20 shares of Chan's common stock.
 Chan's corporate income tax rate is 25%.
Chan has no preferred stock outstanding, and no other convertible securities. What amount should be used as
the numerator in the fraction used to compute Chan's diluted earnings per share assuming that the bonds are
dilutive securities?
a. $130,000
b
$952,500
.
c. $247,500
d. $1,070,000
Explanation
Choice "b" is correct. The numerator in the diluted EPS computation is equal to income available to common
shareholders plus the after-tax interest expense that would not have been incurred if the bonds had been
converted. Note that the company is using straight-line amortization rather than effective interest amortization.
Under straight-line amortization, interest expense of $470,000 is reported each period. The interest expense is
equal to the interest payment of $450,000 ($5,000,000 face x 9% stated rate) plus the discount amortization of
$20,000. Therefore, the numerator is calculated as:
Income available to common shareholders + Interest of dilutive securities
= $600,000 + [$470,000 x (1 - 25%)] = $600,000 + $352,500 = $952,500
Under U.S. GAAP, earnings per share data should be reported for:
Income
from
Discontinue continuin
d g
operations operations
a. Yes No
b
No No
.
c. No Yes
d. Yes Yes
Chape Co. had the following information related to common and preferred shares during the year:
Common shares outstanding, 1/1 700,000
Common shares repurchased, 3/31 20,000
Conversion of preferred shares, 6/30 40,000
Common shares repurchased, 12/1 36,000
Chape reported net income of $2,000,000 at December 31. What amount of shares should Chape use as the
denominator in the computation of basic earnings per share?
a. 740,000
b
702,000
.
c. 684,000
d. 700,000
Explanation
Choice "b" is correct. When computing the weighted average number of common shares outstanding (WACSO),
shares issues, repurchased or converted must be time-weighted for the number of months outstanding:
 The 20,000 common shares repurchased (treasury stock) on 3/31 have a time-weight of 9 months.
 The conversion of 40,000 preferred shares on 6/30 have a time-weight of 6 months.
 The 36,000 common shares repurchased (treasury stock) on 12/1 have a time-weight of 1 month.
1/1 700,000 x 12/12 = 700,000
3/31 20,000 x 9/12 = (15,000)
6/30 40,000 x 6/12 = 20,000
12/1 36,000 x 1/12 = (3,000)
WACSO = 700,000 – 15,000 + 20,000 – 3,000 = 702,000 shares
Which of the following should not be disclosed in an enterprise's statement of cash flows prepared using the
indirect method?
a. Income taxes paid.
b
Interest paid, net of amounts capitalized.
.
c. Cash flow per share.
d. Dividends paid on preferred stock.
X Co. had the following stock transactions during the fiscal year ended June 30, Year 2:
Beginning stock balance, July 1, Year 1 100,000 shares
2:1 stock split, September 30, Year 1
Issuance of additional shares, January 1, Year 2 50,000 shares
Repurchase of shares, June 23, Year 2 1,040 shares
What was X Co.'s weighted average number of shares outstanding at June 30, Year 2:
a. 225,140
b
151,040
.
c. 224,980
d. 251,040
Explanation
Choice "c" is correct. The weighted average number of shares outstanding is computed by applying the ratio of
the period the shares are outstanding to the total shares in each transaction for sales and repurchases. Stock
splits are handled as if they had occurred at the beginning of the year. The weighted average is computed as
follows:
Beginning balance 100,000 x 12/12 = 100,000
Stock split 100,000 x 12/12 = 100,000
Sale of shares 50,000 x 6/12 = 25,000
Repurchase 1,040 x 1/52 = (20)

Total 224,980
Wood Co.'s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared
or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in
the current year. For the purpose of computing basic earnings per share, how should the income available to
common stockholders be calculated?
Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the
a.
dividends in arrears on cumulative preferred stock should be included in the calculation.
b The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative
. preferred stock should be added to the net loss.
The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year
c. dividends and the dividends in arrears on the cumulative preferred stock should not be included in the
calculation.
The current-year dividends and the dividends in arrears on the cumulative preferred stock should be
d
added to the net loss, but the dividends on the noncumulative preferred stock should not be included in
.
the calculation.
Simpson Corporation computed its diluted earnings per share for the current year ended September 30. The
company had 200,000 shares outstanding at the beginning of the year, issued 60,000 shares at April 1, and
reacquired 2,000 shares to be held in its treasury on July 1. The company also had 2,000 options outstanding
exercisable at $40 per share. The average market price of Simpson's shares during the year was $50. The
common stock equivalents added to the company's weighted average shares outstanding used for basic earnings
per share was computed using the treasury stock method. How many additional shares would Simpson include
in its diluted earnings per share calculation?
a. 1,600
b
1,200
.
c. 400
d. 0
Explanation
Choice "c" is correct. The treasury stock method presumes that option proceeds can be used to reacquire shares
on the open market and that any option requirement will be satisfied by the issuance of new shares to be held in
the treasury. Treasury shares themselves do not have an impact on the calculation. Compute the dilutive effect
of options using the following formula:
Jones Co. had 50,000 shares of $5 par value common stock outstanding at January 1. On August 1, Jones
declared a 5% stock dividend followed by a two-for-one stock split on September 1. What amount should Jones
report as common shares outstanding at December 31?
a. 52,500
b
105,000
.
c. 100,000
d. 50,000
Explanation: Choice "b" is correct. The common shares outstanding at year-end are calculated as follows:
50,000 shares outstanding at the beginning of the year × 1.05 (stock dividend) × 2 (stock split) = 105,000
Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred
during the year:
4/1 Issued 30,000 shares of common stock.
6/1 Issued 36,000 shares of common stock.
7/1 Declared a 5% stock dividend.
9/1 Purchased as treasury stock 35,000 shares of its common stock.

Balm used the cost method to account for the treasury stock.
What is Balm's weighted average of common stock outstanding at December 31?
a. 139,008
b
150,675
.
c. 131,000
d. 162,342
Explanation
Choice "a" is correct. See chart below for calculation. Stock dividends are assumed to be issued at the beginning
of the year. The 139,300 is calculated as follows: 166,000 shares × 1.05 = 174,300 outstanding when the
treasury shares are acquired. Then, 174,300 minus 35,000 treasury shares = 139,300.
Total × Period × Adjustment for = Weighted

Shares Outstanding dividend Avg.
100,000 3/12(Jan-Mar) 1.05 26,250
130,000 2/12(Apr-May) 1.05 22,750
166,000 3/12(June-Aug) 1.05 43,575

139,300 4/12(Sept-Dec) 46,433
Weighted = 139,008
Average
The primary purpose of a statement of cash flows is to provide relevant information about:
a. An enterprise's ability to generate future positive net cash flows.
b
The cash receipts and cash disbursements of an enterprise during a period.
.
c. Differences between net income and associated cash receipts and disbursements.
d
An enterprise's ability to meet cash operating needs.
.
A company had the following outstanding shares as of January 1, Year 2:
Preferred stock, $60 par, 4%, cumulative 10,000 shares
Common stock, $3 par 50,000 shares
On April 1, Year 2, the company sold 8,000 shares of previously unissued common stock. No dividends were in
arrears on January 1, Year 2, and no dividends were declared or paid during year 2. Net income for Year 2
totaled $236,000. What amount is basic earnings per share for the year ended December 31, Year 2?
a. $3.66
b
$4.07
.
c. $3.79
d. $4.21
Explanation
Choice "c" is correct. Basic earnings per share is calculated using the following formula:
Income available to common shareholders
Weighted average number of common shares outstanding
Step 1: The first step is to compute the income available to common shareholders. This amount is net income of
$236,000 less dividends accumulated in the period on cumulative preferred stock, regardless of whether or not
the dividends have been paid. For this company, income available to common shareholders is $236,000 less
$24,000 (4% × $60 × 10,000) = $212,000.
Step 2: The second step is to compute the weighted average number of common shares outstanding. This would
be calculated as follows:
Shares outstanding at the beginning of the period 50,000 shares
Shares sold on April 1, Year 2 on a weighted basis (8,000 × 9/12) 6,000 shares
Weighted average number of common shares outstanding for the 56,000 shares
entire period
Step 3: Step 3 is the calculation of the basic earnings per share, which is $212,000 / 56,000 shares = $3.79
How should a gain from the sale of used equipment for cash be reported in a statement of cash flows using the
indirect method?
a. In operating activities as an addition to income.
b
In investment activities as a cash outflow.
.
c. In operating activities as a deduction from income.
d. In investment activities as a reduction of the cash inflow from the sale.
Based on the stock transactions below, what is the weighted average number of shares outstanding as of
December 31, Year 1, which should be used in the calculation of basic earnings per share in financial statements
issued on March 1, Year 2?
Date Transactions
January 1, Year 1 Beginning balance 100,000
April 1, Year 1 Issued 30,000 shares for cash
June 1, Year 1 50% stock dividend
February 15, Year 2 2-for-1 stock split
March 15, Year 2 Issued 40,000 shares for cash
a. $367,500
b. $183,750
c. $295,000
d. $147,500
Explanation
Choice “a” is correct. The weighted average common shares outstanding total is calculated as shown below:
Total × Period × Adjustment × Adjustment = Weighted

Shares
for Stock
Outstanding Dividend for Stock Split Average
100,000 3/12 (Jan–Mar) 1.5 2 75,000
130,000 9/12 (Apr–Dec) 1.5 2 292,500
367,500
On September 1, Canary Co. sold used equipment for a cash amount equaling its carrying amount for both book and tax
purposes. On September 15, Canary replaced the equipment by paying cash and signing a note payable for new
equipment. The cash paid for the new equipment exceeded the cash received for the old equipment. How should these
equipment transactions be reported in Canary's statement of cash flows?
a. Cash inflow equal to the cash received and a cash outflow equal to the cash paid and noted payable.
b. Cash inflow equal to the cash received and a cash outflow equal to the cash paid.
c. Cash outflow equal to the cash paid and note payable less the cash received.
d. Cash outflow equal to the cash paid less the cash received
In preparing its cash flow statement for the year ended December 31, Reve Co. collected the following data:
$ (6,000)
Gain on sale of equipment
10,000
Proceeds from sale of equipment
(180,000)
Purchase of A.S., Inc. bonds (par value $200,000)
2,000
Amortization of bond discount
(45,000)
Dividends declared
(38,000)
Dividends paid
75,000
Proceeds from sale of Treasury stock (carrying amount $65,000)
In its December 31, statement of cash flows, what amount should Reve report as net cash used in investing
activities?
a. $170,000
b
$176,000
.
c. $188,000
d. $194,000
Explanation
Choice "a" is correct. Investing activities include acquisitions and sales of long-term assets or investment assets.
Cash used equals $170,000 ($180,000 paid less $10,000 received from the sale of the equipment).
On July 1 of the current year, Dewey Co. signed a 20-year building lease that it reported as a capital lease.
Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments
in the financing activities section of its statement of cash flows?
An inflow equal to the present value of future lease payments at July 1, less current year principal and
a.
interest payments.
b
The lease payments should not be reported in the financing activities section.
.
c. An outflow equal to the current year principal and interest payments on the lease.
d
An outflow equal to the current year principal payments only.
.
In preparing its cash flow statement for the year ended December 31, Reve Co. collected the following data:
$ (6,000)
10,000
Proceeds from sale of equipment
(180,000)
Purchase of A.S., Inc. bonds (par value $200,000)
2,000
Amortization of bond discount
(45,000)
Dividends declared
(38,000)
Dividends paid
Proceeds from sale of treasury stock (carrying amount 75,000

$65,000)
In its December 31, statement of cash flows, what amount should Reve report as net cash provided by financing
activities?
a. $27,000
b
$37,000
.
c. $30,000
d. $20,000
Explanation
Cash provided by financing activities:
$ (38,000)
Dividends paid
75,000
Proceeds from sale of treasury stock
$ 37,000
Net cash provided by financing activities
Choice "b" is correct. $37,000. Financing activities include obtaining resources from owners and providing
them with a return on, and a return of, their investment; borrowing money and repaying amounts borrowed.
Dividends paid, not dividends declared, should be included as an outflow of cash from financing activities.
Which of the following information should be disclosed as supplemental information in the statement of cash
flows?
Cash flow Conversion of

per share debt to equity
a. No No
b. No Yes
c. Yes Yes
d. Yes No
Fara Co. reported bonds payable of $47,000 at December 31, Year 1, and $50,000 at December 31, Year 2.
During Year 2, Fara issued $20,000 of bonds payable in exchange for equipment. There was no amortization of
bond premium or discount during the year. What amount should Fara report in its Year 2 statement of cash flows
for redemption of bonds payable?
a. $23,000
b
$17,000
.
c. $20,000
d. $3,000
Explanation
Beginning balance 12/31/Year 1 $ 47,000

Add: issuance of bonds for equipment 20,000
Subtotal 67,000
Less: redemption of bonds payable (17,000)
Ending balance 12/31/Year 2 $ 50,000
Choice "b" is correct. $17,000 redemption of bonds payable
In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a cash inflow from
investing activities equals the carrying amount of the equipment:
a. With no addition or subtraction.
b Plus both the gain and the amount of tax attributable to the
. gain.
c. Plus the gain.
d. Plus the gain and less the amount of tax attributable to the gain.
Lino Co.'s worksheet for the preparation of its Year 2 statement of cash flows included the following:
December January
31 1
$ 29,000 $ 23,000
Accounts receivable
1,000 800
Allowance for uncollectible accounts
8,200 12,400
December January
31 1
Prepaid rent expense
22,400 19,400
Accounts payable
Lino's Year 2 net income is $150,000. What amount should Lino include as net cash provided by operating
activities in the statement of cash flows?
a. $151,000
b
$145,400
.
c. $151,400
d. $148,600
Explanation
Choice "c" is correct. $151,400 net cash provided by operating activities, as follows:
$ 150,000
Net income
(6,000)
Increase in A/R
200
Increase in allowance
4,200
Decrease in prepaid
3,000
Increase in A/P
$
151,400
Karr, Inc. reported net income of $300,000 for Year 2. Changes occurred in several balance sheet accounts as
follows:
Equipment $ 25,000 increase
Accumulate 40,000 increase

d
depreciation
Note payable 30,000 increase
Additional information:
 During Year 2, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a
gain of $5,000.
 In December, Year 2, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note
payable of $30,000.
 Depreciation expense for the year was $52,000.
In Karr's Year 2 statement of cash flows, net cash provided by operating activities should be:
a. $357,000
b
$352,000
.
c. $347,000
d. $340,000
Explanation
Choice "c" is correct. Cash provided by operations is computed as follows:
$ 300,000
Net income
52,000
Depreciation expense
(5,000)
$ 347,00
Cash provided by
0
operations
The journal entry for the equipment sold is:
Debit
Credit (Cr)
(Dr)
Cash $ 18,000
Accumulated
12,000
depreciation
Gain $ 5,000
Equipment 25,000
Karr, Inc. reported net income of $300,000 during the current year. Changes occurred in several balance sheet
accounts as follows:
Equipment $25,000 increase
Accumulate 40,000 increase

d
depreciation
Note payable 30,000 increase
Additional information:
 During the year, Karr sold equipment costing $25,000, with accumulated depreciation of $12,000, for a
gain of $5,000.
 In December, Karr purchased equipment costing $50,000 with $20,000 cash and a 12% note payable of
$30,000.
 Depreciation expense for the year was $52,000.
In Karr's statement of cash flows, net cash used in investing activities should be:
a.
$12,000
b
$2,000
.
c. $35,000
d. $22,000
Explanation
Choice "b" is correct. Cash used for investing activities is computed as follows:
$ 18,000
Sale of equipment
(20,000)
Purchase of equipment
$ 2,000
Cash used for investing
The $30,000 note is noncash financing activity. The journal entry for the sale of equipment is:

Cash $ 18,000
Accumulated
12,000
depreciation
Gain $ 5,000
Equipment 25,000
During Year 2, Xan, Inc. had the following activities related to its financial operations:
Payment for the early retirement of long-term bonds $375,000

payable (carrying amount $370,000)
Distribution in Year 2 of cash dividend declared in Year 1 31,000

to preferred shareholders
Carrying amount of convertible preferred stock in Xan, 60,000
converted into common shares
Proceeds from sale of treasury stock (carrying amount at 50,000

cost, $43,000)
Xan uses U.S. GAAP. In Xan's Year 2 statement of cash flows, net cash used in financing operations should be:
a. $265,000
b
$296,000
.
c. $356,000
d. $358,000
Explanation
Choice "c" is correct. $356,000 net cash used in financing operations.
Note: Conversion of preferred stock into common stock is a noncash financing disclosure.
$ (375,000
Payment to retire bonds )
(31,000)
Payment of dividend
Proceeds from Treasury 50,000

stock
$ (356,000
Total )
Which of the following items is included in the financing activities section of the statement of cash flows?
a. Cash effects of transactions that enter into the determination of net income.
b
. Cash effects of transactions obtaining resources from owners and providing them with a return on their
investment.
c. Cash effects of transactions involving making and collecting loans.
d
Cash effects of acquiring and disposing of investments and property, plant, and equipment.
.
Duke Co. reported cost of goods sold of $270,000 for Year 2. Additional information is as follows:
December January
31 1
$ 60,000 $ 45,000
Inventory
Accounts 26,000 39,000

payable
If Duke uses the direct method, what amount should Duke report as cash paid to suppliers in its Year 2
statement of cash flows?
a. $268,000
b
$298,000
.
c. $272,000
d. $242,000
Explanation
Choice "b" is correct. $298,000 cash paid to suppliers under the direct method.
$ 270,000
COGS
15,000
Increase in inventory
13,000
Decrease in accounts
payable
$ 298,000
Payne Co. prepares its statement of cash flows using the indirect method. Payne's unamortized bond discount
account decreased by $25,000 during the year. How should Payne report the change in unamortized bond
discount in its statement of cash flows?
a. As a financing cash outflow.
b
As an addition to net income in the operating activities section.
.
c. As a financing cash inflow.
d. As a subtraction from net income in the operating activities section.
In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not
capitalize any interest during the current year. Decreases occurred in several balance sheet accounts as follows:
Accrued interest payable $17,000
Prepaid interest 23,000
In its income statement for the current year, what amount should Ness report as interest expense?
a. $30,000
b
$76,000
.
c. $110,000
d. $64,000
Explanation
Choice "b" is correct. Interest expense is reported on a cash basis in the Statement of Cash Flows, and on the
accrual basis in the Income Statement. Convert from cash basis to accrual basis:
$ 70,000
Cash basis interest expense
23,000
Add decrease in prepaid interest
93,000
Subtotal
Subtract decrease in interest (17,000)

payable
$ 76,000
Accrual basis interest expense
Which of the following transactions should be classified as investing activities on an entity's statement of cash
flows?
a. Sale of property, plant and equipment.
b
Issuance of common stock to the shareholders.
.
c. Increase in accounts receivable.
d
Payment of cash dividend to the shareholders.
.
Reed Co.'s statement of cash flows reported cash provided from operating activities of $400,000. Depreciation
of equipment was $190,000, impairment of goodwill was $5,000, and dividends paid on common stock were
$100,000. In Reed's statement of cash flows, what amount was reported as net income?
a. $595,000
b
$205,000
.
c. $305,000
d. $105,000
Explanation
Choice "b" is correct. Start with cash flows from operating activities and subtract depreciation and impairment
expenses. Dividends paid are not included because dividends reduce retained earnings, not net income, and are
included in cash flows from financing activities.
Cash flows from operating $ 400,000

activities
(190,000)
Depreciation on equipment
(5,000)
Impairment of goodwill
$ 205,000
Net Income
New England Co. had net cash provided by operating activities of $351,000; net cash used by investing
activities of $420,000; and cash provided by financing activities of $250,000. New England's cash balance was
$27,000 on January 1. During the year, there was a sale of land that resulted in a gain of $25,000 and proceeds
of $40,000 were received from the sale. What was New England's cash balance at the end of the year?
a. $27,000
b
$208,000
.
c. $248,000
d. $40,000
Explanation
Choice "b" is correct. New England's cash balance at the end of the year includes the cash balance at the
beginning of the year, the net cash provided by operating activities, the net cash used by investing activities, and
the net cash provided by financing activities ($27,000 + $351,000 - $420,000 + $250,000 = $208,000). The sale
of the land was included in the cash from the investing activities and does not have to be considered separately.
When working this type of question, be sure to distinguish between the net cash used and the net cash provided.
Paper Co. had net income of $70,000 during the year. Dividend payment was $10,000. The following
information is available:
Mortgage repayment $20,000
Available-for-sale securities purchased 10,000 increase
Bonds payable - issued 50,000 increase
Inventory 40,000 increase
Accounts payable 30,000 decrease
What amount should Paper report as net cash provided by operating activities in its statement of cash flows for
the year under U.S. GAAP?
a. $10,000
b
$0
.
c. $30,000
d. $20,000
Explanation
Choice "b" is correct. The operating activities section includes cash flows from working capital (current assets
and current liabilities) and other income statement items. Under the indirect method, net income is adjusted for
non-cash items and increases/decrease in working capital items to arrive at net cash from operating activities.
Increases in current assets and decreases in current liabilities are uses of cash, while decreases in current assets
and increases in current liabilities increase cash.
$ 70,000
Net income
(40,000)
Less: Increase in inventory
(30,000)
Less: Decrease in AP
Net cash provided by operating $0

activities
Which of the following would be reported as an investing activity in a company's statement of cash flows?
a. Collection of a note receivable from a related party.
b
Collection of an overdue account receivable from a customer.
.
c. Collection of proceeds from a note payable.
d. Collection of a tax refund from the government.
Savor Co. had $100,000 in cash-basis pretax income for Year 2. At December 31, Year 2, accounts receivable
had increased by $10,000 and accounts payable had decreased by $6,000 from their December 31, Year 1,
balances. Compared to the accrual basis method of accounting, Savor's cash pretax income is:
a. Lower by $4,000.
b
Higher by $16,000.
.
c. Lower by $16,000.
d. Higher by $4,000.
Explanation
Choice "c" is correct. A $10,000 increase in accounts receivable means that $10,000 of the sales revenue
recorded using the accrual basis during the year has not yet been paid by the customers. Under cash basis
accounting, revenue is not recorded until the cash has been received, so this amount must be deducted to arrive
at cash basis income.
The $6,000 decrease in accounts payable means that total cash payments to vendors during the year exceeded
the current period's accrual basis expenses. Under the cash basis, expenses are recorded when payment is made,
so the $6,000 must be deducted to arrive at cash basis income.
If cash-basis pretax income is $100,000, then accrual-basis pretax income must be $116,000 ($100,000 cash
basis income = $116,000 accrual basis income - $10,000 increase in AR - $6,000 decrease in AP).
During the current year, Ace Co. amortized a bond discount. Ace prepares its statement of cash flows using the
indirect method. In which section of the statement should Ace report the amortization of the bond discount?
a. Financing activities.
b
Operating activities.
.
c. Supplemental disclosures.
d. Investing activities.
For the year ended December 31, Ion Corp. had cash inflows of $25,000 from the purchases, sales, and
maturities of held-to-maturity securities and $40,000 from the purchases, sales, and maturities of available-for-
sale securities. What amount of net cash from investing activities should Ion report in its cash flow statement?
a. $0
b
$25,000
.
c. $40,000
d. $65,000
Explanation
Choice "d" is correct. Net cash from investing activities is $65,000 ($25,000 + $40,000) because investing
activities include cash flows from both available-for-sale and held-to-maturity security transactions.
Green Co. had the following equity transactions at December 31:
Cash proceeds from sale of investment in Blue Co. (carrying $75,000

value - $60,000)
Dividends received on Grey Co. stock 10,500
Common stock purchased from Brown Co. 38,000
What amount should Green recognize as net cash from investing activities in its statement of cash flows at
December 31 under U.S. GAAP?
a. $85,500
b
$47,500
.
c. $75,000
d. $37,000
Explanation
Choice "d" is correct. Net cash from investing activities should include the cash received from the sale of the
investment in Blue Co. offset by the cash paid to purchase the common stock from Brown Co.:
$ 75,000
Cash proceeds from sale of Blue Co.
Cash paid to purchase Brown Co. common (38,000)

stock
$ 37,000
Net cash received from investing activities
Under IFRS, dividends paid during a period are reported on the statement of cash flows in:
a.
Operating or investing cash flow.
b
Operating or financing cash flow.
.
c. Financing cash flow only.
d. Operating cash flow only.
In order to improve its operating cash flow to total debt ratio, a firm reporting under IFRS will classify:
a. Interest paid as CFI.
b
Dividends paid as CFF.
.
c. Taxes paid as CFO.
d
Dividends received as CFI.
.
Tam Co. reported the following items in its year-end financial statements:
Capital expenditures $1,000,000
Capital lease payments 125,000
Income taxes paid 325,000
Dividends paid 200,000
Net interest payments 220,000

What amount should Tam report as supplemental disclosures in its statement of cash flows prepared using the
indirect method?
a. $545,000
b
$1,870,000
.
c. $745,000
d. $1,125,000
Explanation
Choice "a" is correct. When the indirect method is used, a supplemental disclosure of cash paid for interest and
income taxes is required. Tam will report total cash paid for interest and income taxes of $545,000 ($325,000
income taxes paid + $220,000 net interest payments).
How should the amortization of bond discount on long-term debt be reported in a statement of cash flows
prepared using the indirect method?
a. As a financing activities inflow.
b
As a financing activities outflow.
.
c. In operating activities as a deduction from income.
d. In operating activities as an addition to income.
Under IFRS, interest received during a period is reported on the statement of cash flows in:
a. Operating or investing cash flow.
b
Investing cash flow only.
.
c. Operating or financing cash flow.
d.
Operating cash flow only.
Under IFRS, interest paid during a period is reported on the statement of cash flows in:
a. Operating cash flow only.
b
Operating or financing cash flow.
.
c. Financing cash flow only.
d. Operating or investing cash flow.
Baker Co. began its operations during the current year. The following is Baker's balance sheet at December 31:
Baker Co.
Balance Sheet
Assets
Cash $192,000
Accounts receivable 82,000
Total assets $274,000
Liabilities and stockholders' equity
Accounts payable $24,000
Common stock 200,000

Total liabilities and stockholders' equity $274,000
Baker's net income for the current year was $78,000 and dividends of $28,000 were declared and paid. Common
stock was issued for $200,000. What amount should Baker report as cash provided by operating activities in its
statement of cash flows for the current year under U.S. GAAP?
a. $250,000
b
$50,000
.
c. $192,000
d. $20,000
Explanation
Choice "d" is correct. Cash provided by operating activities is $20,000, computed as follows under the U.S.
GAAP indirect method:
$ 78,000
Net income
(82,000)
Increase in accounts receivable
24,000
Increase in accounts payable
Cash provided by operating $ 20,000

activities
Note that under IFRS, an entity may report dividends paid in operating activities.
Choice "b" is incorrect. Cash provided by operating activities is not equal to year-end retained earnings.
Choice "c" is incorrect. Cash provided by operating activities is not equal to the ending cash balance of
$192,000 because the company also had financing activities during the period. The ending cash balance is
calculated as follows:
Cash Flows from Operating Activities
Net income $78,000
Increase in accounts receivable (82,000)
Increase in accounts payable 24,000
Cash provided by operating activities 20,000
Cash Flows from Financing Activities
Proceeds from issuance of stock $200,000
Dividends paid (28,000)
Cash provided by financing activities 172,000
Net increase in cash 192,000
Beginning cash 0
Ending cash $192,000
Abbott Co. is preparing its statement of cash flows for the year. Abbott's cash disbursements during the year
included the following:
Payment of interest on bonds payable $500,000

Payment of dividends to stockholders 300,000
Payment to acquire 1,000 shares of Marks Co. 100,000

common stock
What should Abbott report as total cash outflows for financing activities in its statement of cash flows under
U.S. GAAP?
a. $0
b
$900,000
.
c. $300,000
d. $800,000
Explanation
Choice "c" is correct. The $300,000 dividend to stockholders should be classified as a financing cash outflow.
Other financing activities would include the issuance of stock, the purchase of treasury stock, the issuance of
bonds, borrowing funds, and paying back principal related to bonds and loans. The payment of interest on the
bonds payable is an operating cash outflow under U.S. GAAP and the payment to acquire the common stock of
Marks is an investing cash outflow.
A company calculated the following data for the period:
Cash received from customers $25,000
Cash received from sale of equipment 1,000
Interest paid to bank on note 3,000
Cash paid to employees 8,000

What amount should the company report as net cash provided by operating activities in its statement of cash
flows?
a. $14,000
b
$18,000
.
c. $26,000
d. $15,000
Explanation
Choice "a" is correct. Cash received from customers, interest paid to bank on note, and cash paid to employees
are all operating activities within the direct method statement of cash flows. Cash received from customers is a
cash inflow and interest paid to bank on note and cash paid to employees are cash outflows:
$ 25,000
Cash received from customers
(8,000)
Cash paid to employees
(3,000)
Interest paid
$ 14,00
Net cash provided by operating
0
activities
Under IFRS, a company that receives $150,000 in interest and pays $55,000 in dividends may show which of
the following on its cash flow statement?
a. CFO inflow of $95,000.
b
CFF inflow of $150,000.
.
c. CFF inflow of $95,000.
d. CFI outflow of $55,000.
Explanation
Choice "a" is correct. Interest received can be classified as CFO or CFI. Dividends paid can be classified as
CFO or CFF. If both interest received and dividends paid are classified as CFO, the net inflow would be 95,000.
Twin House Inc. reported net income of $753,000 for the current year-ended December 31. Twin House's
financial statements reflected the following information:
Depreciation expense $ 150,000
Gain on sale of trading securities 6,000
Goodwill impairment 75,000
Decrease in accounts receivable 48,000
Increase in inventory 33,000
Decrease in trading securities 50,000
Increase in available-for-sale securities 62,000
Decrease in taxes payable 15,000
Dividend paid 200,000
Dividend received 27,000
What should Twin House report as net cash provided by operating activities on the statement of cash flows,
assuming that Twin House classifies the proceeds from the sale of the trading securities as an operating cash
inflow?
a. $1,119,000
b
$1,092,000
.
c. $1,030,000
d. $892,000
Explanation
Choice "b" is correct. Based on the information given, operating cash flow must be calculated using the indirect
method:
Net income $ 753,000
Adjustments to reconcile net income to

net
cash provided by operating activities:
Depreciation expense $ 150,000
Goodwill impairment 75,000
Gain on sale of trading securities (6,000)
Changes in current assets and liabilities:
Decrease in accounts receivable 48,000
Increase in inventory (33,000)
Decrease in trading securities 50,000

Decrease in taxes payable (15,000)
Total Adjustments 339,000
Net cash provided by operating $ 1,092,000

activities
In its current year income statement, Kilm Co. reported cost of goods sold of $450,000. Changes occurred in
several balance sheet accounts as follows:
Inventor $160,000 decrease

y
Accounts 40,000 decrease

payable-
suppliers
What amount should Kilm report as cash paid to suppliers in its current year cash flow statement, prepared
under the direct method?
a. $330,000
b
$570,000
.
c. $650,000
d. $250,000
Explanation
Choice "a" is correct. In order to compute the cash paid to suppliers, Kilm Co. must determine how much
inventory was purchased and the change in accounts payable. AP increases with purchases and decreases with
payment. Thus,
Purchases = COGS + change in inventory
= $450,000 + ($160,000) = $290,000
However, since AP decreased, Kilm paid more cash to suppliers that just the amount for purchases:
Cash paid = Purchases - change in AP
= $290,000 - ($40,000) = $330,000
Which of the following transactions is included in the operating activities section of a cash flow statement
prepared using the indirect method?
a. Payment of cash dividend to the shareholders.
b
Issuance of common stock to the shareholders.
.
c. Gain on sale of plant asset.
d
Sale of property, plant and equipment.
.
Dyna Corporation had cost of goods sold of $300,000 for the current year ended December 31 and an ending
inventory balance of $50,000. The beginning balances in inventory and accounts payable were $20,000 and
$16,000, respectively. Dyna finances 80 percent of its inventory purchases with trade accounts payable, incurs
purchases ratably throughout the year, and consistently pays for its purchases 30 days after acquisition. What
was the amount of cash paid on accounts payable during the year ended December 31?
a. $240,000
b
$300,000
.
c. $258,000
d. $264,000
Explanation
Choice "c" is correct. The facts given are sufficient to derive the amount of inventory purchases and, by
extension, the additions to accounts payable and the ending accounts payable at 1/12 of purchases. Use the
BASE mnemonic to compute the additions (purchases) to inventory, apply the 80% trade credit financing
assumption to determine the additions to payables and the related ending balances, then squeeze the subtractions
from the accounts payable, which represent cash paid.
Account
Inventor s
y Payable
B Beginning ↓ $20,000 $16,000 ↓

inventory
A Purchases 330,000 → 264,000 ↓
350,000 280,000 ↑
S Ending ↑ 50,000 258,000 Cas

inventory h
paid
E Cost of $300,000 $22,000

goods
sold
80% of inventory purchases are financed with trade accounts payable. Purchases occur ratably throughout the
year and are paid 30 days in arrears.
$ 264,000
Purchases
12
Months per year
Payable per $ 22,000

month
Indigo Corporation is preparing its Statement of Cash Flows for the current year ended December 31 using the
indirect method and has developed the following data:
Increase in deferred tax liabilities 23,000
Decrease in accounts payable (58,000)
Increase in accrued interest payable 43,000
Interest paid 31,000
Proceeds from issuance of long-term debt 600,000
Increase in capital lease payable 67,000
Payments on long-term debt (49,000)
Purchase of bonds payable 90,000
Based on the information developed above, Indigo would report net cash provided from financing activities of:
a. 587,000
b
677,000
.
c. 551,000
d. 618,000
Explanation
Choice "c" is correct. The transactions identified for Indigo would be reported as follows in the Statement of
Cash Flows using the indirect method. Indigo would report the cash proceeds associated with long term debt
and the principal payments on that debt as cash flows from financing activities in the statement of cash flows.
Interest paid would be disclosed in a supplemental section of the statement of cash flows. Increases in leases
payable, which do not involve cash transactions, would be disclosed in a supplemental schedule of noncash
investing and financing activities. Purchases of bonds payable represent an investment in the debt of others, and
would be included as investing activities. Changes in the other current obligations listed are classified as cash
flows from operating activities.
Operatin Financin Disclosur

g Investing g e
$ 23,00
$ 23,000
Increase in deferred tax liabilities 0
(58,000) (58,000)
Decrease in accounts payable
43,000 43,000
Increase in accrued interest payable
31,000 $ (31,000)
Interest paid
Proceeds from issuance of long-term 600,000 $ 600,000

debt
67,000 67,000
Increase in capital lease payable
(49,000) (49,000)
Payments on long-term debt
90,000 $ (90,000)
Purchase of bonds payable
$
$ 8,000 $ 551,000 $ 36,000
Totals (90,000)
Baler Co. prepared its statement of cash flows at year-end using the direct method. The following amounts were
used in the computation of cash flows from operating activities:
Beginning inventory $ 200,000
Ending Inventory 150,000
Cost of goods sold 1,200,000

Beginning accounts payable 300,000
Ending accounts payable 200,000
What amount should Baler report as cash paid to suppliers for inventory purchases?
a. $1,200,000
b
$1,350,000
.
c. $1,300,000
d. $1,250,000
Explanation: Choice "d" is correct. Cash paid to suppliers is calculated as follows:
Cost of goods sold $ 1,200,000
Minus: Decrease in inventory (50,000)
Plus: Decrease in accounts payable 100,000
Cash paid to suppliers $ 1,250,000

Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance
the remaining $27,000. On March 1, Year 1, Polk pays the $3,000 down and accepted delivery of the forklift.
Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning
July 1, Year 1. What amount should Polk report as an investing activity in the statement of cash flows for the
year ended December 31, Year 1?
a. $9,000
b
$30,000
.
c. $12,000
d. $3,000
Explanation
Choice "d" is correct. Only the cash down payment is considered to be a cash flow from the purchase of
noncurrent assets. The remaining $27,000 note is a non-cash investing and financing activity, disclosed
separately and not considered as a cash flow. The $6,000 in principal payments on the note are financing
activities since they are payments on a debt obligation.
Ina Co. had the following beginning and ending balances in its prepaid expense and accrued liabilities accounts
for the current year:
Prepaid Accrued
expense liabilitie
s s
Beginnin $ 5,000 $ 8,000

g balance
Ending 10,000 20,000

balance
Debits to operating expenses totaled $100,000. What amount did Ina pay for operating expenses during the
current year?
a. $117,000
b
$93,000
.
c. $83,000
d. $107,000
Explanation
Choice "b" is correct. The starting point for this problem is the $100,000 of debits to operating expenses. The
increase in accrued liabilities represents operating expenses which have been incurred or used but not paid. To
determine the amount of operating expenses which have been paid, the $12,000 increase in accrued liabilities
must be subtracted from the $100,000 of operating expenses, because operating expenses would have been
debited each time the accrued liability account was credited in the following manner.
A company is preparing its year-end cash flow statement using the indirect method. During the year, the
following transactions occurred:
Dividends paid $ 300
Proceeds from the issuance of common stock 250
Borrowings under a line of credit 200
Proceeds from the issuance of convertible 100

bonds
Proceeds from the sale of a building 150
What is the company's increase in cash flows provided by financing activities for the year?
a. $550
b
$50
.
c.
$250
d. $150
Explanation: Choice "c" is correct. The company's increase in cash flows provided by financing activities when
using the indirect method for the year-end cash flow statement is calculated as follows:
Dividends paid (represents decrease in cash flow) $ (300)
Proceeds from the issuance of common stock (represents 250

increase in cash flow)
Borrowings under a line of credit (represents increase in cash 200

flow)
Proceeds from the issuance of convertible bonds (represents 100

increase in cash flow)
Company's increase in cash flows provided by financing $ 250

activities for the year
Dunbarn Co. had the following activities during the year:

Purchase of inventory $ 120,000
Purchase of equipment 80,000
Purchase of available-for-sale 60,000

securities
Purchase of treasury stock 70,000
Issuance of common stock 150,000
What amount should Dunbarn report as cash provided (used) by investing activities in its statement of cash
flows for the year?
a. ($120,000)
b
$150,000
.
c. ($140,000)
d. ($210,000)
Explanation
Choice “c” is correct. Cash flows from investing activities come from transactions involving the purchase or
sale of non-current assets. Both equipment and available-for-sale (AFS) security purchases are cash flows used
by investing activities.
Purchase of equipment $ 80,000
Purchase of AFS security 60,000
Total $ 140,000 outflow

Bear Co. prepares its statement of cash flows using the indirect method. Bear sold equipment with a carrying
value of $500,000 for cash of $400,000. How should Bear report the transaction in the operating and investing
activities sections of its statement of cash flows?
Operating activities Investing activities
a. $100,000 subtraction from net income $500,000 cash inflow
b. $100,000 addition to net income $400,000 cash inflow
c. $100,000 subtraction from net income $400,000 cash inflow
d. $100,000 addition to net income $500,000 cash inflow
Explanation
Choice "b" is correct. Cash flows from the sale of noncurrent assets are included in investing activities. Bear
will have recognized a $100,000 loss in net income. Using the indirect method to prepare the statement of cash
flows, the $100,000 will be an addition to net income to arrive at net cash flows from operating activities. The
$400,000 received in cash will be recorded as a cash inflow from investing activities.
Martin Co. had net income of $70,000 during the year. Depreciation expense was $10,000. The following
information is available:
Accounts receivable increase $20,000
Equipment gain on sale increase 10,000
Nontrade notes payable increase 50,000
Prepaid insurance increase 40,000

Accounts payable increase 30,000
What amount should Martin report as net cash provided by operating activities in its statement of cash flows for
the year?
a. $100,000
b
$0
.
c. $50,000
d. $40,000
Explanation
Choice “d” is correct. The information provided facilitates using the indirect method for the calculation of
Martin’s cash flow from operations. The calculation is as follows:
Net income $70,000
Depreciation + 10,000
Gain on the sale of equipment – 10,000
Increase in A/R – 20,000
Increase in prepaid insurance – 40,000
Increase in accounts payable + 30,000
Total $ 40,000
A corporation issuing stock should charge retained earnings for the market value of the shares issued in a(an):
a. 2-for-1 stock split.
b
Employee stock bonus.
.
c. 10% stock dividend.
d. Pooling of interests.
Stent Co. had total assets of $760,000, capital stock of $150,000, and retained earnings of $215,000. What was
Stent's debt-to-equity ratio?
a. 0.52
b
2.63
.
c. 0.48
d. 1.08
Explanation
Choice "d" is correct. To calculate Stent Co.'s debt-to-equity ratio, Stent's total liabilities and total equity must
be derived from the facts:
Equity = Capital stock + Retained earnings = $150,000 + 215,000 = $365,000
Liabilities = Assets - Equity = $760,000 - 365,000 = $395,000
Stent's debt-to-equity ratio is then calculated as:

For the last 10 years, Woody Co. has owned cumulative preferred stock issued by Hadley, Inc. During Year 11,
Hadley declared and paid both the Year 11 dividend and the Year 10 dividend in arrears. How should Woody
report the Year 10 dividend in arrears that was received in Year 11?
a. As a reduction in cumulative preferred dividends receivable.
b
As a retroactive change of the prior period financial statements.
.
c. Include, net of income taxes, after Year 11 income from continuing operations.
d. Include in Year 11 income from continuing operations
TGR Enterprises provided the following information from its statement of financial position for the year ended
December 31, Year 1:
January December
1 31
$ 10,000 $ 50,000
Cash
Accounts 120,000 100,000

receivable
January December
1 31
200,000 160,000
Inventories
20,000 10,000
Prepaid expenses
175,000 120,000
Accounts payable
25,000 30,000
Accrued liabilities
TGR's sales and cost of sales for Year 1 were $1,400,000 and $840,000, respectively. What is the accounts
receivable turnover, in days?
a. 31.3
b
41.7
.
c. 26.1
d. 28.7
Explanation
Choice "d" is correct. Accounts receivable turnover in days is calculated as:
All of the following distributions to stockholders are considered asset or capital distributions, except:
a. Stock splits.
b
Cash dividends.
.
c. Liquidating dividends.
d. Property distributions.
The controller of Peabody, Inc. has been asked to present an analysis of accounts receivable collections at the
upcoming staff meeting. The following information is used:
12/31, Year 2 12/31, Year 1
$ 100,000 $ 130,000
Accounts receivable
Allowance, doubtful (20,000) (40,000)

accounts
400,000 200,000
Sales
350,000 70,000
Cost of goods sold
What is the receivables turnover ratio as of December 31, year 2?
a. 5.0
b
0.6
.
c. 4.7
d
3.5
.
Explanation
Choice "c" is correct. To calculate AR turnover, average net receivables must first be calculated:
Average net receivables = [($100,000 - $20,000) + ($130,000 - $40,000)]/2 = $85,000
Accounts receivable turnover is then calculated as:
AR Turnover = Net credit sales / Average net receivables = 400,000 / 85,000 = 4.7
How would the declaration of a 15% stock dividend by a corporation affect each of the following?
Retaine
d Total
earning stockholders
s ' equity
a. Decrease Decrease
b
Decrease No effect
.
No Decrease
c.
effect
No No effect
d.
effect
The following information was taken from Baxter Department Store's financial statements:
Inventory at January 1 $ 100,000
Inventory at December 31 300,000
Net sales 2,000,000
Net purchases 700,000
What was Baxter's inventory turnover for the year ending December 31?
a. 10
b
3.5
.
c. 2.5
d
5
.
Explanation
Choice "c" is correct. To calculate inventory turnover, cost of goods sold must first be calculated:
Beginning inventory $ 100,000
+ Purchases + 700,000
Goods available for sale $ 800,000
- Ending inventory - 300,000
Cost of goods sold $ 500,000
Inventory turnover is then calculated as follows:
Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked
merchandise. The excess of the merchandise's carrying amount over its market value should be:
a. Reported as a reduction in income before income from continuing operations.
b
Ignored.
.
c. Reported as a separately disclosed reduction of retained earnings.
d
Reported as a separate item on the income statement, net of income taxes
.
The following financial ratios and calculations were based on information from Kohl Co.'s financial statements
for the current year:
Accounts receivable turnover

Ten times during the year
Total assets turnover

Two times during the year
Average receivables during the year

$200,000
What was Kohl's average total assets for the year?
a. $400,000
b
$200,000
.
c. $1,000,000
d. $2,000,000
Explanation
Choice "c" is correct. By formula:

Pott Co. owned shares in Rose Co. On December 1, Pott declared and distributed a property dividend of Rose
shares when their fair value exceeded the carrying amount. As a consequence of the dividend declaration and
distribution, the accounting effects would be:
Dividend
Recorde Retained
d at earnings
Fair Increased
a.
value
b
Cost Increased
.
Fair Decreased
c.
value
d. Cost Decreased
Kline Co. had the following sales and accounts receivable balances at the end of the current year:
Cash sales $ 1,000,000
Net credit sales 3,000,000
Net accounts receivable, 1/1 100,000
Net accounts receivable, 12/31 400,000

What is Kline's average collection period for its accounts receivable?
a. 48.0 days.
b
12.0 days.
.
c. 22.5 days.
d. 30.0 days.
Explanation
Choice "d" is correct. To compute the average collection period, we must first calculate accounts receivable
turnover.
A corporation declared a dividend, a portion of which was liquidating. How would this declaration affect each
of the following?
Additional Retained
paid-in capital earnings
a. Decrease Decrease
b. Decrease No effect
c. No effect Decrease
d. No effect No effect
A corporation was organized in January, Year 1 with authorized capital of $10 par value common stock. On
February 1, Year 1, shares were issued at par for cash. On March 1, Year 1, the corporation's attorney accepted
5,000 shares of the common stock in settlement for legal services with a fair value of $60,000. Additional paid-
in capital would increase on:
Februar Marc
y 1, Year h 1,
1 Year 1
a. Yes No
b
No No
.
c. Yes Yes
d. No Yes
Explanation
Choice "d" is correct. No - Yes.
February 1, Year 1 - sale of common stock at par

$ 1,000,00
Cash
0
Common stock at par value ($10 x 100,000 sh assumed) $ 1,000,000
Additional paid-in capital 0
March 1, Year 1 - 5,000 shares of common for $60,000 legal services
Debit Credit
(Dr) (Cr)
Legal services (Organization cost) $ 60,000
Common stock at par value ($10 x 5,000
$ 50,000
sh)
Additional paid-in capital (excess) 10,000
Grid Corp. acquired some of its own common shares at a price greater than both their par value and original
issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is
the impact of this acquisition on total stockholders' equity and the book value per common share?
Total Book
stockholders value
' per
equity share
a. Increase Decrease
b
Increase Increase
.
c. Decrease Increase
d. Decrease Decrease
Mag, Inc.'s December 31 unadjusted current assets and stockholders' equity sections are as follows:
Current Assets:
Cash $15,000
Investments in marketable equity securities 100,000

(including $75,000 of Mag, Inc. common stock)
Trade accounts receivable 85,000
Inventories 37,000
Total $237,000
Stockholders' Equity:
Common stock $556,000
Retained earnings (deficit) (56,000)
Total $500,000
The investments and inventories are reported at their costs, which approximate market values.
Mag's stockholders' equity at December 31 should be:
a. $481,000
b
$425,000
.
c. $556,000
d. $500,000
Explanation
Choice "b" is correct. $425,000 ($500,000 - $75,000). Shares of its own stock held by a corporation should be
recorded as treasury stock and shown as a reduction in the stockholders' equity section of the B/S.
Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole's:
Paid- Retaine
in d
capita earning
l s
a. No No
b
No Yes
.
c. Yes Yes
d. Yes No
Pugh Co. reported the following in its statement of stockholders' equity on January 1 of the current year:
Common stock, $5 par value, authorized 200,000 shares, issued 100,000 $ 500,000
shares
1,500,000
516,000
Retained earnings
2,516,000
(40,000)
Less treasury stock, at cost, 5,000 shares
$ 2,476,000
Total stockholders' equity
The following events occurred during the current year:
May 1 1,000 shares of treasury stock were sold for $10,000.
July 9 10,000 shares of previously unissued common stock

were sold for $12 per share.
October 1 The distribution of a 2-for-1 stock split resulted in the

common stock's per share par value being halved.
Pugh accounts for treasury stock under the cost method. Laws in the state of Pugh's incorporation protect shares
held in treasury from dilution when stock dividends or stock splits are declared.
In Pugh's December 31 statement of stockholders' equity, the par value of the issued common stock should be:
a. $291,000
b
$518,000
.
c. $550,000
d. $275,000
Explanation: Choice "c" is correct. $550,000. At year-end there will be 220,000 shares issued with a par value
of $2.50. Issued common stock is calculated as follows:
Issued shares, 1/1 100,000
New stock issued, 7/9 10,000
2-for-1 stock split, 10/1 110,000
220,000
Pugh Co. reported the following in its statement of stockholders' equity on January 1 of the current year:
Common stock, $5 par value, authorized 200,000 shares, issued 100,000 $ 500,000
shares
1,500,000
516,000
Retained earnings
2,516,000
(40,000)
Less treasury stock, at cost, 5,000 shares
$ 2,476,000
Total stockholders' equity
The following events occurred during the current year:
May 1 1,000 shares of treasury stock were sold for $10,000.
July 9 10,000 shares of previously unissued common stock were sold

for $12 per share.
October 1 The distribution of a 2-for-1 stock split resulted in the common

stock's per share par value being halved.
Pugh accounts for treasury stock under the cost method. Laws in the state of Pugh's incorporation protect shares
held in treasury from dilution when stock dividends or stock splits are declared.
The number of outstanding common shares at December 31 should be:
a. 222,000
b
212,000
.
c. 216,000
d. 220,000
Explanation: Choice "b" is correct. 212,000.
Original shares outstanding 100,000
Less: Shares in treasury (5,000)
Plus: Treasury shares sold 1,000
Plus: New shares issued 10,000
Total shares O/S before split 106,000

Two-for-one stock split ×2
Shares O/S after stock split 212,000
The following stock dividends were declared and distributed by Sol Corp.:
Percentage of common
shares outstanding at
declaration date Fair value Par value
10 $15,000 $10,000
28 40,000 30,800
What aggregate amount should be debited to retained earnings for these stock dividends?
a. $50,000
b
$55,000
.
c. $40,800
d. $45,800
Explanation
Choice "d" is correct. $45,800.
For a small stock dividend (i.e., less than 20% of the shares outstanding prior to the split) the FMV of the shares
is capitalized from retained earnings. For a large stock dividend "a stock split effected in the form of a dividend"
only the amount legally required to be capitalized is transferred from retained earnings (typically the par value
of the stock).
Posy Corp. acquired treasury shares at an amount greater than their par value, but less than their original issue
price. Compared to the cost method of accounting for treasury stock, does the par value method report a greater
amount for additional paid-in capital and a greater amount for retained earnings?
Additiona Retaine
l d
paid-in earning
capital s
a. No No
b
Yes No
.
c. No Yes
d. Yes Yes
Of the 125,000 shares of common stock issued by Vey Corp., 25,000 shares were held as treasury stock at
December 31, Year 1. During Year 2, transactions involving Vey's common stock were as follows:
January 1 through October 31 13,000 treasury shares were distributed to officers as part
of a stock compensation plan.
November 1 A 3-for-1 stock split took effect.
December 1 Vey purchased 5,000 of its own shares to discourage an

unfriendly takeover. These shares were not retired.
At December 31, Year 2, how many shares of Vey's common stock were issued and outstanding?
Issued Shares
Outstandin
g
a. 375,000 334,000
b
375,000 324,000
.
c. 334,000 334,000
d. 324,000 324,000
Explanation
Choice "a" is correct. 375,000 issued and 334,000 outstanding common shares.
Treasury
Issued Outstanding stock
Balance 12-31-Year 1 125,000 100,000 25,000
Oct. 31 distributed to −− 13,000 (13,000)

officers
125,000 113,000 12,000
Nov. 1 - 3-for-1 split* ×3 ×3 ×3
375,000 339,000 36,000
Dec. 1 share purchase −− (5,000) 5,000
Balance 12-31-Year 2 375,000 334,000 41,000

Hoyt Corp.'s current balance sheet reports the following stockholders' equity:
5% cumulative preferred stock, par value $100 per share; $250,000

2,500 shares issued and outstanding
Common stock, par value $3.50 per share; 100,000 shares 350,000
issued and outstanding
Additional paid-in capital in excess of par value of 125,000

common stock
Dividends in arrears on the preferred stock amount to $25,000. If Hoyt were to be liquidated, the preferred
stockholders would receive par value plus a premium of $50,000. The book value per share of common stock is:
a. $7.25
b. $7.75
c. $7.00
d. $7.50
$ 250,000
Preferred stock
350,000
Common stock
125,000
a. $7.25
300,000
Retained earnings
1,025,000
Total stockholders equity
(325,000)*
Less: PR stock interest
700,000
÷ 100,000
Total shares O/S
$ 7.00
Book value per share
250,000
* Par value preferred
50,000
Premium on preferred
25,000
Div. In arrears
$ 325,000
Total preferred stock interest
On December 1, Nilo Corp. declared a property dividend of marketable securities to be distributed on December
31 to stockholders of record on December 15. On December 1, the marketable securities had a carrying amount
of $60,000 and a fair value of $78,000. What is the effect of this property dividend on Nilo's retained earnings,
after all nominal accounts are closed?
a. $78,000 decrease.
b
$0
.
c. $60,000 decrease.
d. $18,000 increase.
Explanation
Choice "c" is correct. $60,000 decrease.

Two factors will affect retained earnings as a result of this transaction. Nilo will recognize a gain on disposition
of marketable securities as well as a dividend, as follows:
Gain on marketable $ 18,000

securities
(78,000)
Property dividend
$ (60,000
Impact on RE )
The following information pertains to Meg Corp.:
 Dividends on its 1,000 shares of 6%, $10 par value cumulative preferred stock have not been declared or
paid for 3 years.
 Treasury stock that cost $15,000 was reissued for $8,000.
What amount of retained earnings should be appropriated as a result of these items?
a. $8,800
b
$7,000
.
c. $1,800
d. $0
The following format was used by Gee, Inc. for its Year 2 statement of owners' equity:
Commo Additiona
n l
stock paid-in Retained
$1 per capital earnings
$ 90,000 $ 800,000 $ 175,000

Balance at 1/1/Year 1
Additions and deductions:

Commo Additiona
n l
stock paid-in Retained
$1 per capital earnings
100% stock dividend
5% stock dividend
$- $- $ -
Balance at 12/31/Year 2
When both the 100% and the 5% stock dividends were declared, Gee's common stock was selling for more than
its $1 par value.
How would the 5% stock dividend affect the additional paid-in capital and retained earnings amounts reported
in Gee's Year 2 statement of owners' equity?
Additional Retained
paid-in capital earnings
a. Increase Decrease
b. Increase Increase
c. No change Increase
d. No change Decrease
On March 1, Rya Corp. issued 1,000 shares of its $20 par value common stock and 2,000 shares of its $20 par
value convertible preferred stock for a total of $80,000. At this date, Rya's common stock was selling for $36
per share, and the convertible preferred stock was selling for $27 per share. What amount of the proceeds
should be allocated to Rya's convertible preferred stock?
a. $54,000
b
$44,000
.
c. $48,000
d. $60,000
Explanation
Choice "c" is correct. $48,000 allocated to preferred.
Rule: Allocate "issue proceeds" of a basket purchase or sale of convertible preferred stock based on relative fair
market values:
Allocated
Shares $ Fair Value Basis
Common stock 1000 × 36 = $36,000 $32,000
Preferred stock 2000 × 27 = 54,000 48,000
Total fair value $90,000 $80,000
On March 4, Year 1, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share. On September
26, Year 1, Evan received 1,000 stock rights to purchase an additional 1,000 shares at $90 per share. The stock
rights had an expiration date of February 1, Year 2. On September 30, Year 1, LVC's common stock had a
market value, ex-rights, of $95 per share and the stock rights had a market value of $5 each. What amount
should Evan report on its September 30, Year 1, balance sheet for investment in stock rights?
a. $4,000
b
$10,000
.
c. $5,000
d. $15,000
Explanation
On September 1, Year 1, Hyde Corp., a newly-formed company, had the following stock issued and outstanding:
 Common stock, no par, $1 stated value, 5,000 shares originally issued for $15 per share.
 Preferred stock, $10 par value, 1,500 shares originally issued for $25 per share.
Hyde's September 1, Year 1, statement of stockholders' equity should report:
Additiona
Commo Preferre l
n d paid-in
stock stock capital
a. $5,000 $15,000 $92,500
b
$75,000 $15,000 $22,500
.
c. $5,000 $37,500 $70,000
d. $75,000 $37,500 $0
Explanation
Common stock (5,000 shares x $5,000
$1 stated value)
Preferred stock (1,500 shares x $15,000

$10 par value)
Additional paid-in capital from:
Common stock ($15 - $1) x $70,000

5,000 shs =
Preferred stock ($25 - $10) 22,500 $92,500

x 1,500 shs =
A retained earnings appropriation can be used to:
Provide for a contingent loss that is probable and

a.
reasonable.
b
Smooth periodic income.
.
c. Absorb a fire loss when a company is self-insured.
d. Restrict earnings available for dividends

Cross Corp. had outstanding 2,000 shares of 11% preferred stock, $50 par. On August 8, Cross redeemed and
retired 25% of these shares for $22,500. On that date, Cross' additional paid-in capital from preferred stock
totaled $30,000. To record this transaction, Cross should debit (credit) its capital accounts as follows:
Additiona
Preferre l
d paid-in Retained
stock capital earnings
a. $25,000 ($2,500) --
b
$25,000 $7,500 ($10,000)
.
c. $25,000 -- ($ 2,500)
d. $22,500 -- --
Explanation
Rule: If the reacquisition price is:
a) Less than original issue price, the "gain" is credited to APIC;
b) More than original issue price, the "loss" is debited to retained earnings.
Preferred Add. paid- Retained

stock in capital earnings Cash
Recorded book values (2,000 sh x $50) 100,000 30,000
Percentage redeemed x 25% x 25%
Book value of redemption 25,000 7,500
Redemption/retirement debit (credit) (25,000) 2,500 ±0 = (22,500)

On June 1, Year 1, Oak Corp. granted stock options to certain key employees as additional compensation. The
options were for 1,000 shares of Oak's $2 par value common stock at an option price of $15 per share. Market
price of this stock on June 1,Year 1, was $17 per share. Using an acceptable option pricing model Oak
determined that total compensation cost under the stock option plan was $5,000. The options were exercisable
beginning January 2, Year 2, and expire on December 31, Year 3. On April 1, Year 2, when Oak's stock was
trading at $21 per share, all the options were exercised. What amount of pretax compensation should Oak report
in Year 1 in connection with the options?
a. $2,500
b
$6,000
.
c. $2,000
d. $5,000
Mio Corp was the sole stockholder of Plasti Corp. On September 30, Mio declared a property dividend of
Plasti's 2,000 outstanding shares of $1 par value common stock, distributable to Mio's stockholders. On that
date, the book value of Plasti's stock was $1.50 per share. Immediately after the distribution, the market value of
Plasti's stock was $4.50 per share. What amount should Mio report in its financial statements as gain on disposal
of the Plasti stock?
a. $6,000
b
$3,000
.
c. $2,000
d. $1,000
Explanation
Choice "a" is correct. $6,000 gain on disposal of Plasti stock.
Rule: The difference between book value and fair market value of the property dividend should be recorded as
gain/loss on disposal of asset.
Per- 2,000
share shares
value total value
$ 4.50 $ 9,000
FMV of stock at declaration
Book value of Plasti stock (1.50) (3,000)

investment
$ 3.00 $ 6,000
Gain on disposal of stock
Stock dividends on common stock should be recorded at their fair market value by the investor when the related
investment is accounted for under which of the following methods?
Cos Equit
t y
a. No Yes
b
Yes Yes
.
c. Yes No
d. No No
When collectibility is reasonably assured, the excess of the subscription price over the stated value of the no par
common stock subscribed should be recorded as:
a. Additional paid-in capital when the common stock is issued.
b
No par common stock.
.
c. Additional paid-in capital when the subscription is recorded.
d
Additional paid-in capital when the subscription is collected.
.
Explanation
Choice "c" is correct. When collectibility is reasonably assured, the excess of the subscription price over the
stated value of the no par common stock subscribed should be recorded as additional paid-in capital (APIC)
when the subscription is received.
Entry to record subscription of 1,000 shares of common stock ($5 stated value or par value) at a price of $18
with down payment of $3 per share:
Debit
Credit (Cr)
(Dr)
Cash (1,000 x $3) $ 3,000
Subscription received - common stock 15,000
Common stock subscribed (1,000 shs x
$ 5,000
$5)
Additional paid-in capital ($13 x 1,000) 13,000
Tem Co. issued rights to its existing stockholders without consideration. A stockholder received a right to buy
one share for each 20 shares held. The exercise price was in excess of par value, but less than the current market
price. Retained earnings decreases when:
Rights
Right are
s are exercise
issued d
a. Yes No
b
No Yes
.
c. No No
d. Yes Yes
At December 31, Year 2 and Year 3, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock
outstanding. No dividends were in arrears as of December 31, Year 1. Apex did not declare a dividend during
Year 2. During Year 3, Apex paid a cash dividend of $10,000 on its preferred stock. Apex should report
dividends in arrears in its Year 3 financial statements as a(an):
a. Accrued liability of $15,000.
b
Disclosure of $15,000.
.
c. Disclosure of $20,000.
d. Accrued liability of $20,000.
Explanation
Cumulative preferred stock dividends:
$ 15,000
For Year 2 (3,000 sh x $100 par x 5% rate)
15,000
For Year 3
30,000
(10,000)
Less amount paid during Year 3
$ 20,000
Disclosure of dividends in arrears in Year 3 F/S
Bal Corp. declared a $25,000 cash dividend on May 8, to stockholders of record on May 23, payable on June 3.
As a result of this cash dividend, working capital:
a. Decreased on May 8.
b
. Was not affected.
c. Decreased on May 23.
d. Decreased on June 3.
On January 1, Year 1, Ward Corp. granted stock options to corporate executives for the purchase of 20,000
shares of the company's $20 par value common stock at $48 per share. All stock options were exercised on
December 28, Year 1. Using an acceptable option pricing model, Ward calculated total compensation cost of
$240,000. The quoted market prices of Ward's $20 par value common stock were as follows:
As a result of the grant and exercise of the stock options and the issuance of the common stock, Ward's
additional paid-in capital increased by:
a. $800,000
b
$560,000
.
c. $500,000
d. $740,000
Explanation
Choice "a" is correct. $800,000 increase to additional paid-in capital.
January 1 Journal Entry

Compensation expense $ 240,000
APIC - Stock options $ 240,000
December 28 Journal Entry
Cash ($48 x 20,000 shares) $ 960,000
APIC - Stock options 240,000
Common stock (20,000 x
$ 400,000
$20)
APIC 800,000
On January 1, Year 1, Lord Corp. granted stock options for 10,000 shares at $38 per share as additional
compensation for services to be rendered over the next three years. Using an acceptable option pricing model,
Lord calculated total compensation cost of $90,000. The options are exercisable during a 4-year period
beginning January 1, Year 4, by grantees still employed by Lord. Market price of Lord's stock was $47 per share
at the grant date. No stock options were terminated during Year 1. In Lord's Year 1 income statement, what
amount should be reported as compensation expense pertaining to the options?
a. $40,000
b
$90,000
.
c. $0
d. $30,000
Explanation
Choice "d" is correct.
The compensation should be allocated over the period for which the services are performed.
$ 90,000
Fair value of options at grant date
÷3
Services for 3 years
$ 30,000
Compensation expense - Year 1
Wall Corp.'s employee stock purchase plan specifies the following:
 For every $1 withheld from employees' wages for the purchase of Wall's common stock, Wall
contributes $2.
 The stock is purchased from Wall's treasury stock at market price on the date of purchase.
The following information pertains to the plan's current year transactions:
Employee withholdings for the year $350,000

Market value of 150,000 shares issued 1,050,000
Carrying amount of treasury stock issued (cost) 900,000
Before payroll taxes, what amount should Wall recognize as expense in the current year for the stock purchase
plan?
a. $550,000
b
$1,050,000
.
c. $900,000
d. $700,000
Explanation
Choice "d" is correct. $700,000 expense recognized in the current year for the stock purchase plan, because the
plan states that the company will donate $2 for every $1 withheld from employees' wages. A total of $350,000
was withheld from employees and another $700,000 was contributed and expensed by the company because the
stock is purchased from the treasury at market price on the date of purchase.

Liability for employee withholdings $ 350,000
Employee stock purchase expense 700,000
Additional paid-in capital 150,000
On January 2, Year 1, Farm Co. granted an employee an option to purchase 1,000 shares of Farm's common
stock at $40 per share. The option became exercisable on December 31, Year 2, after the employee had
completed two years of service, and was exercised on that date. The market prices of Farm's stock were as
follows:
Using an acceptable option pricing model, Farm determined that the fair value of the options granted was
$10,000. What amount should Farm recognize as compensation expense for Year 2?
a. $5,000
b
$0
.
c. $15,000
d. $25,000
Explanation
Choice "a" is correct.
Compensation cost is measured on the grant date (in this problem, $10,000) and is charged to compensation
expense over the service period (Years 1 and 2).
$ 10,000
Total compensation cost
÷ 2 years
÷ Service period
$ 5,000
Compensation expense per
year

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Plack Co. purchased 10,000 shares (2% ownership) of Ty Corp. on February 14, Year 1.

Plack received a stock

Choice "c" is correct.

Dividend Income = No. of shares × dividend per

a. January 15, Year 1

d. January 31, Year 1

Total income since incorporation $420,000

Total cash dividends paid 130,000

Total value of property dividends distributed 30,000

Excess of proceeds over cost of treasury stock sold, 110,000

August 6 10,000 shares of previously unissued stock

November 18 A 2-for-1 stock split took effect.

Dec. 31, Year 1 status 100,000 (5,000) 95,000

May 3, 1,000 shares of −− 1,000 1,000

Sub total 100,000 (4,000) 96,000

Sub total 110,000 (4,000) 106,000

Nov. 18, 2-for-1 stock 110,000 (4,000) 106,000

Dec. 31, Year 2 status 220,000 (8,000) 212,000

January 5 Issued 20,000 shares at $15 per share.

July 14 Purchased 5,000 shares at $17 per share.

December 27 Reissued the 5,000 shares held in treasury at $20 per

Choice "a" is correct.

Jan. 5 ISSUED 20,000 shares, $10 par at $15

Debit (Dr) Credit (Cr)

July 14 PURCHASE OF TREASURY STOCK

5,000 shares at $17 = $85,000

Debit (Dr) Credit (Cr)

Dec 27 TREASURY STOCK REISSUANCE

5,000 shares at $20 = $100,000

APIC: $100,000 - 25,000 + 50,000 = $125,000

Preferred 5,000 $ 500,000 $ 50,000 $ 550,000

Pref to (5,000) (500,000) (50,000) (550,000)

The correct answer can also be determined using journal entries:

Issuance of Preferred Stock:

$375,000 common stock.

$175,000 additional paid-in capital.

a. Declaration or record, whichever is earlier.

March 15 Declared a 2-for-1 stock split, when the fair value of

Jan. 1, Year 2 Shares outstanding 100,000

Mar. 15, Year 2 2-for-1 stock split 100,000

Total shares outstanding Dec. 15 200,000

Dec. 15, Year 2 Declared cash dividend per share $ 0.50

Dividends declared for Year 2 $ 100,000

a. Credited to additional paid-in capital.

c. Credited to retained earnings.

The primary purpose of a quasi-reorganization is to give a corporation the opportunity to:

a. Eliminate a deficit in retained earnings.

c. Revalue understated assets to their fair values.

c. Debit retained earnings for $110,000 on March 31, Year 2.

A property dividend should be recorded in retained earnings at the property's:

a. Market value at date of issuance (payment).

c. Book value at date of issuance (payment).

d. Book value at date of declaration.

Accumulated depletion $100,000

Capital stock 500,000

Additional paid-in capital 150,000

Retained earnings 300,000

c. Beginning of the vesting period.

Choice "b" is correct. $20,000 increase in stockholders' equity.

Jan 2, Year 1 (when options

Compensation expense* $ 30,000 $ (30,000)

Paid-in capital-stock-options- $ 30,000 30,000