Chap012 2

Chapter 12 - Income and Changes in Retained Earnings
Chapter 12
Income and Changes in Retained Earnings
True / False Questions
1. An extraordinary item appears on the income statement before the section on discontinued
operations.
True False
2. Earnings per share is equal to net income applicable to common stock, divided by the
weighted number of common shares outstanding.
True False
3. In determining earnings per share when a preferred stock has dividends in arrears, only the
current year's dividend is deducted to arrive at earnings per share.
True False
4. The price earnings ratio is based on expected future earnings, while the earnings per share
ratio is based on historical earnings.
True False
5. In order to receive a dividend, a stockholder must have owned the stock as of the
declaration date.
True False
6. A stock dividend provides a stockholder with more shares of stock, but his or her
percentage of ownership in the company is no larger than before.
True False
12-1
7. When a small (under 10%) stock dividend is declared, the market value of the stock is
transferred from Retained Earnings into other stockholder equity accounts.
True False
8. A stock split changes the par value of a stock, whereas a stock dividend does not.
True False
9. Comprehensive income differs from net income in that it includes events that are
recognized but not realized.
True False
10. Diluted earnings per share are shown to alert investors that earnings per share could be
increased by the effects of conversions of securities into common stock.
True False
11. Comprehensive income is a component of net income.

True False
12. Recent rulings by the SEC now require all corporations to prepare an expanded version of
the Statement of Retained Earnings showing all equity accounts and their changes for the last
three years.
True False
13. A statement of stockholders' equity is not a required financial statement and need not be
prepared along with a statement of retained earnings.
True False
12-2
14. In order for a loss on the disposal of a discontinued operation to be classified on the
income statement as a discontinued operation, it must be unusual in nature.
True False
15. Extraordinary items and the results of discontinued operations are shown in the income
statement net of any related income tax effects.
True False
16. The FASB has not compiled a comprehensive list of what is considered to be an
extraordinary item, thus the determination is a matter of judgment.
True False
17. The amount of cash dividends paid to common stockholders is part of the computation of
earnings per share.
True False
18. A prior period adjustment to retained earnings is made when a discovery of a material
error was made to prior years' income.
True False
19. Diluted earnings per share represents a hypothetical case, showing what earnings per share
would be if certain securities were converted into additional shares of common stock.
True False
20. When a corporation presents both "basic" and "diluted" earnings per share, basic earnings
per share will be the smaller of the two figures.
True False
12-3
21. Stock splits are always in a 2 for 1 ratio.

True False
22. "Discontinued operations" is an example of an extraordinary item.

True False
23. Stock dividends and stock splits do not cause a change in the total amount of stockholders'
equity.
True False
24. The amount transferred out of retained earnings when a 4% stock dividend is declared is
equal to the prevailing market value per share times the number of dividend shares to be
distributed.
True False
25. Large stock dividends tend to keep stock prices down.

True False
26. Prior period adjustments are shown in the financial statements by adjusting the beginning
balance of retained earnings in the statement of retained earnings.
True False
27. Prior period adjustments appear in the statement of retained earnings and in the income
statement for the current year.
True False
12-4
28. Discontinued operations should be shown on the statement of retained earnings net of
taxes.
True False
29. The expropriation (seizure of) of a multinational company's assets by a government is an

example of a discontinued operation item.
True False
30. The statement of stockholders' equity discloses the amount of cash dividends as well as
stock dividends declared during the current year.
True False
31. Comprehensive income may be presented in a statement with net income, in a separate
statement, or as part of stockholders' equity.
True False
32. In an attempt to appeal to investors, a company may be tempted to overstate net income.
True False
33. According to the Sarbanes-Oxley Act, lying to an external auditor can create a criminal
penalty as well as a civil penalty.
True False
Multiple Choice Questions
12-5
34. Stock splits:

A. Allow management to conserve cash.
B. Give stockholders more shares.
C. Cause no change in total assets, liabilities, or stockholders' equity.
D. Allow management to conserve cash, give stockholders more shares, and cause no change
in total assets, liabilities, or stockholders' equity.
35. It would be reasonable to assume that:

A. Basic earnings per share should exceed diluted earnings per share.
B. Diluted earnings per share should exceed basic earnings per share.
C. Basic earnings per share should be equal to diluted earnings per share.
D. Basic earnings per share would not be presented with diluted earnings per share.
36. A small stock dividend is recorded at:

A. Market value.
B. Book value.
C. Par value.
D. No amount, just a memorandum entry is required.
37. Treasury stock appears as:

A. An asset account.
B. A liability account.
C. An expense account.
D. An equity account.
38. Extraordinary items are found on the income statement:

A. Before discontinued operations.
B. After discontinued operations.
C. Before income from continuing operations.
D. After prior period adjustments.
12-6
39. A company had 125,000 shares of common stock outstanding on January 1 and then sold
35,000 additional shares on March 30. Net income for the year was $594,750. What are
earnings per share?
A. $4.73.
B. $4.58.
C. $3.93.
D. $6.61.
40. A company failed to make an adjusting entry in the prior year to accrue earned revenue.
To correct this they should:
A. Correct last year's statement by increasing net income.
B. Correct this year's statements with a prior period adjustment increasing beginning retained
earnings.
C. Correct this year's statements with a prior period adjustment decreasing beginning retained
earnings.
D. Correct this year's statements with a prior period adjustment increasing ending retained
earnings.
41. A prior period adjustment is a correction made to:

A. Retained earnings of the beginning of the period.
B. Retained earnings at the end of the period.
C. Net income of the current year.
D. Only to last years' financial statements.
42. The price-earnings ratio is the:

A. Book value of a share of common stock divided by EPS.
B. Market price of a share of common stock divided by EPS.
C. Par value of a share of common stock divided by EPS.
D. Market price divided by book value of a share of stock.
12-7
43. Which of the following would have no effect on Retained Earnings?

A. Declaration of a cash dividend.
B. Declaration of a stock dividend.
C. Declaration of a stock split.
D. A prior period adjustment.
44. Doogle Corporation sold a segment of its operations in 2009 and suffered an extraordinary
loss in 2010. Which of the following would be the most useful in attempting to predict
Doogle's performance for 2011?
A. Doogle's income from continuing operations in 2009 and 2010.
B. Doogle's net income in 2009 and 2010.
C. Doogle's total assets at the end of 2010.
D. Doogle's retained earnings at the end of 2010.
45. On January 31, 2009, Village Bank had 500,000 shares of $2 par value common stock
outstanding. On that date, the company declared a 14% stock dividend when the market price
of the stock was $37 per share. The immediate effect of this dividend upon Village Bank
was:
A. A reduction in cash of $2,590,000.
B. A reduction in retained earnings of $2,590,000.
C. A reduction in retained earnings of $140,000.
D. A liability to the stockholders of $140,000.
46. Execucomp Corporation's financial statements in the current year show a loss from
discontinued operations, a prior period adjustment, and an extraordinary gain. If Execucomp's
income statement is prepared according to generally accepted accounting principles (as
illustrated in your text), which of the following four items would appear second in sequence
in the income statement?
A. Prior period adjustment.
B. Income from continuing operations.
C. Loss from discontinued operations.
D. Extraordinary gain.
12-8
47. Of the items listed, which would appear closest to the bottom of the income statement?
A. Extraordinary items.
B. Prior period adjustment.
C. Income from continuing operations.
D. Discontinued operations.
48. Large stock dividends tend to:

A. Increase stock prices.
B. Have no effect upon stock prices.
C. Keep stock prices down.
D. Describe total assets.
49. The purpose of developing the subtotals "Income before Extraordinary Items" and
"Income from Continuing Operations" in an income statement is to:
A. Assist investors in forecasting future operating results.
B. Increase the amount of reported net income.
C. Decrease the amount of income subject to income taxes.
D. Provide investors with the information necessary to compute earnings per share.
50. To qualify as an extraordinary item, a gain or loss must:

A. Affect the income of a prior period.
B. Be larger in amount than any other item in the income statement.
C. Be material in amount, unusual in nature, and not expected to recur.
D. Be associated with a segment of the business that has been discontinued during the current
period.
51. Which of the following would be classified as an extraordinary item?

A. A large gift given to the company.
B. A loss from obsolete inventory.
C. A loss from a natural disaster that affects the company at infrequent intervals.
D. A loss from an enacted law that made inventory unsalable.
12-9
52. An example of an extraordinary gain or loss is:

A. A large loss arising from inability to collect an account receivable from a bankrupt
customer.
B. A large gain from disposal of a segment of the business.
C. A gain or loss from sale of an expensive machine no longer needed in the business.
D. A loss due to the expropriation of assets by a foreign government.
53. In computing earnings per share, the number of shares used is:
A. The year-end number of shares outstanding.
B. The beginning of the year number of shares outstanding.
C. The average of the beginning and the year-end number of shares outstanding.
D. The weighted average of shares outstanding for the year.
54. The amount of earnings per share is usually computed:

A. For both preferred and common stock.
B. For common stock by deducting the dividends on preferred stock from net income and
dividing the remaining amount by the weighted average number of common shares
outstanding.
C. By dividing net income by the combined number of preferred and common shares.
D. On the basis of the number of shares outstanding at year-end, regardless of changes in the
number of shares during the year.
55. Which of the following statistics is generally computed for both common and preferred
stock?
A. Earnings per share.
B. Price-earnings ratio (p/e ratio).
C. Annual dividend per share.
D. Retained earnings per share.
12-10
56. Earnings per share figures are shown in the income statement:
A. For income before extraordinary items and for income from continuing operations, as well
as for net income.
B. For common stock as well as for preferred stock.
C. For all publicly owned, as well as for all privately held, corporations.
D. As an optional disclosure for all corporations, and may be omitted completely or disclosed
in a footnote at the option of the issuing corporation.
57. The numerator in calculating earnings per share is reduced for:

A. Preferred dividends.
B. Common dividends.
C. Common stock dividends.
D. Any form of dividend.
58. All things being equal, if investors expect earnings to increase substantially from current
levels, the price/earnings ratio will:
A. Be quite low.
B. Be quite high.
C. Not change.
D. Not be affected by income expectations.
59. The common stock of Securetech Corporation consistently sells at a market price of 20
times earnings (i.e., at a p/e ratio of 20). What would be the most likely effect of a 10 cent
increase in Securetech's basic EPS?
A. An increase in market price of approximately 10 cents per share.
B. An increase in market price of approximately $2 per share.
C. A reduction in the p/e ratio due to the larger EPS.
D. Nothing, since market price reflects expectations of future earnings.
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60. Which of the following has no effect on the computation of earnings per share for the
current period?
A. The amount of cash dividends declared or paid to preferred stockholders.
B. The amount of cash dividends declared or paid to common stockholders.
C. Net income.
D. The number of shares of common stock authorized.
61. Diluted earnings per share is a hypothetical computation to warn stockholders what could
happen if:
A. Loss contingencies turn out adversely.
B. Convertible securities are converted into shares of common stock.
C. Extraordinary losses were to recur.
D. Consideration was given to the loss from operations discontinued during the current
period.
62. To receive the next cash dividend, an investor must purchase the stock before the:
A. Dividend declaration date.
B. Ex-dividend date.
C. Date of record.
D. Payment date announced by the board of directors.
63. Dividends become a liability of a corporation:

A. On the date the board of directors declares the dividend.
B. On the date of record.
C. On the date payment is to be made.
D. When cumulative preferred stock dividends are in arrears.
64. When a company reports both diluted earnings per share and basic earnings per share:
A. Basic EPS would be greater than fully diluted EPS.
B. Basic EPS would be less than fully diluted EPS.
C. Basic EPS may be either greater or less than fully diluted EPS.
D. Both should never be shown - only one would be reported.
12-12
65. A liquidating dividend:

A. Occurs when a corporation distributes shares of its own stock as a dividend, rather than
cash.
B. Occurs whenever a corporation distributes non-cash assets as a dividend to its
stockholders.
C. Represents a distribution of a corporation's profits to the stockholders.
D. Represents a return of invested capital to a corporation's owners, the stockholders.
66. Dividends are first recorded and retained earnings are reduced on:
A. The ex-dividend date.
B. The date of record.
C. The date of declaration.
D. The date of payment.
67. As a result of a 5% stock dividend:

A. Total stockholders' equity decreases by 5%.
B. The par value per share decreases by 5%.
C. The number of shares owned by each stockholder increases by 5%, but total stockholders'
equity does not change.
D. Both the number of shares outstanding and the total stockholders' equity increase by 5%.
68. If a company presents both the basic and diluted earnings per share, the price/earnings
ratio is based on:
A. The basic figure.
B. The diluted figure.
C. The average of the basic and diluted figures.
D. A combination of the basic and diluted figures.
69. A large stock dividend and a stock split are similar in that they both cause a:
A. Reduction in total stockholders' equity.
B. Reduction in retained earnings.
C. Reduction in the par value per share.
D. Reduction in the market price per share.
12-13
70. Supervox Corporation declared a 3-for-2 common stock split, but this transaction was
erroneously recorded as a 50% common stock dividend. As a result:
A. Retained earnings is understated.
B. The total dollar amount of stockholders' equity is overstated.
C. The corporate records do not show the correct number of shares of common stock
outstanding.
D. The common stock account is understated.
71. Declaration and distribution of a stock dividend cause each of the following effects
except:
A. An increase in the number of shares of stock outstanding.
B. A decrease in retained earnings.
C. A decrease in total assets of the issuing corporation.
D. An increase in legal capital of the issuing corporation.
72. A 2-for-1 stock split:

A. Is accounted for in the same way as a 100% stock dividend.
B. Increases the number of outstanding shares of common stock, but par value per share
remains the same as before the split.
C. Is recorded by transferring the par value of additional shares from retained earnings to the
common stock account.
D. Should logically cause the market price per share to drop by approximately 50%.
73. If a material accounting error was made in a prior year, that error:
A. Should be reflected on the current year's income statement.
B. Should be reflected, net of taxes, on the retained earnings statement.
C. Should be reflected as a change in accounting principle.
D. Should be considered as an extraordinary item, and shown, net of taxes, on the income
statement.
12-14
74. When a stock dividend is declared, total stockholders' equity will:

A. Decrease.
B. Increase.
C. Not change.
D. Increase or decrease, depending upon certain variables.
75. Comprehensive income can be displayed to users of financial statements in which of the
following way(s):
A. As a second income statement.
B. As a single income statement that includes both the components of net income and the
components of other comprehensive income.
C. As an element in the changes in stockholders' equity displayed as a column in the
statement of stockholders' equity.
D. Either as a second income statement, as a single income statement that includes both the
components of net income and the components of other comprehensive income, or as an
element in the changes in stockholders' equity displayed as a column in the statement of
stockholders' equity.
76. Which of the following would be treated as a prior period adjustment by Gold Corporation
in 2010?
A. In 2010, it was discovered that Gold Corporation recorded the purchase of a warehouse in
2007 as a debit to Repairs Expense.
B. In 2010, Gold Corporation switched from the straight-line method of depreciation to
another method of computing depreciation.
C. In 2010, Gold Corporation's management decided that the estimated useful life of its
computer equipment should be changed from five years to nine years.
D. In 2010, Gold Corporation sold a segment of the business that it has operated since 1996.
77. A prior period adjustment appears in:

A. The income statement following the subtotal "Income before Prior Period Adjustments."
B. The statement of retained earnings, as an adjustment to the ending balance of retained
earnings.
C. Footnotes to the financial statements.
D. The statement of retained earnings, as an adjustment to the beginning balance of retained
earnings.
12-15
78. After preparing the financial statements for 2011, the accountant for the Dawson
Corporation discovered that a prior period adjustment had been omitted from the 2009
financial statements. Which of the following is most likely to require correction as a result of
this oversight?
A. Earnings per share as originally computed.
B. Net income for 2011 as originally reported.
C. Ending retained earnings at December 31, 2011.
D. Extraordinary items as originally reported.
79. A prior period adjustment appears in the financial statements of the current year when:
A. An error was made in computing the net income of the current period.
B. An error was made in measuring the net income of a previous year or years.
C. An extraordinary loss in a prior year was included among normal results of operations in
the prior year.
D. Earnings per share figures from prior years are restated to reflect the increased number of
shares outstanding due to a stock split or a stock dividend.
80. A restriction of retained earnings:

A. Reduces the dollar amount of retained earnings shown in the balance sheet.
B. Appears in the statement of retained earnings as a reduction of ending retained earnings.
C. Appears in the liability section of the balance sheet.
D. Limits the dollar amount of dividends a corporation may declare.
81. Which of the following items would not reduce retained earnings?
A. A common stock dividend.
B. A preferred stock dividend.
C. A cash dividend.
D. Cash payment of a previously declared dividend.
12-16

A. Occurs only when a company is going out of business.
B. Occurs when a corporation pays a dividend that exceeds the balance in the retained
earnings account.
C. Is an expense to the corporation.
D. Occurs only when the corporation has a loss for the year.
83. The statement of stockholders' equity:

A. Is a required financial statement.
B. May be issued as a substitute for the statement of retained earnings.
C. Shows the changes during the year in all stockholders' equity accounts except retained
earnings.
D. Is a statement sent to each stockholder showing that person's return on equity.
84. A statement of stockholders' equity discloses each of the following except:

A. The market value of the stockholders' equity at the end of the year.
B. The cost of treasury stock owned at the end of the year.
C. Net income for the current year.
D. The amount of cash dividends declared during the current year.
85. Which of the following items would be included in comprehensive income but not
reported as a component of net income?
A. A lower-of-cost-or-market write-down of inventory.
B. A material loss due to natural disaster.
C. An unrealized gain on the portfolio of available-for-sale marketable securities.
D. A gain on the sale of a segment of the business.
86. Which of the following items would be included in the discontinued operations section of
the income statement?
A. Income or loss from operating the segment prior to its disposal.
B. The gain or loss on disposal of the segment.
C. Both the income or loss from operating the segment prior to its disposal, and the gain or
loss on disposal of the segment.
D. Only losses and not gains on the disposal of a segment.
12-17
87. Family Fashions Corporation discontinued Kid-Choice, its entire line of children's
clothing, in November of 2009. Prior to the disposal, Kid-Choice generated a loss of $600,000
(net of tax) for the period from January through the sale date. Because of the value of the real
estate and machinery, there was a gain of $850,000 (net of tax) on the actual sale. How should
this situation be reported in the financial statements of Family Fashions for 2009?
A. A $250,000 gain should be included in the 2009 income statement as an extraordinary
item.
B. A $600,000 loss should be included in income from operations and a $850,000 gain should
be reported in the "discontinued operations" section of the income statement.
C. A $250,000 adjustment to beginning retained earnings should be in the statement of
retained earnings.
D. A $250,000 gain should be in the "discontinued operations" section of the income
statement.
88. Sovereign Foods suffered a $1,500,000 loss (net of tax) when the FDA prohibited the sale
of food products containing red dye no. 3. On its other products, Sovereign Foods had net
sales of $6,580,000 and costs and other expenses of $6,505,000. Which of the following
statements is not true? (Ignore taxes)
A. Sovereign Foods reports a net loss of $1,425,000 for the current year.
B. Sovereign Foods reports income before extraordinary items of $75,000.
C. Sovereign Foods combines the $1,500,000 loss with its other costs and expenses of
$6,505,000, since this item does not qualify for any special disclosure.
D. Sovereign Foods shows the $1,500,000 loss in a separate section of the income statement
as an extraordinary item.
89. Corona Corporation's financial statements for the current year include the following:
On the basis of this information, net income for the current year is:
A. $1,359,600.
B. $818,400.
C. $1,485,000.
D. $1,234,200.
12-18
90. During the year 2009, Tosco Corporation suffered an $800,000 loss when its factory was
destroyed in a flood. Assuming the corporate income tax rate is 36%, what amount will Tosco
report as an extraordinary loss on its income statement for 2009? Assume floods are not
common in this area.
A. $800,000.
B. $512,000.
C. $288,000.
D. Nothing, since this does not qualify as an extraordinary item.
91. General Corporation was organized on January 1 and issued 500,000 shares of common
stock on that date. On July 1, an additional 200,000 shares were issued for cash. Net income
for the year was $5,184,000. Net earnings per share amounted to:
A. $7.41.
B. $7.98.
C. $8.41.
D. $8.64.
92. On January 1, 2009, Carleton Corporation had 55,000 shares of $6 par value common
stock outstanding. On March 31, 2009, Carleton issued an additional 10,000 shares in
exchange for a building. What number of shares will be used in the computation of basic
earnings per share for the year 2009?
A. 55,000.
B. 65,000.
C. 62,500.
D. 62,000.
93. Platinum Company reports net income of $520,000 for 2009 and declared a cash dividend
of $1 per share on each of its 100,000 shares of common stock outstanding. What are earnings
per share for 2009?
A. $5.20 per share.
B. $1.00 per share.
C. $1.20 per share.
D. $4.80 per share.
12-19
94. Designs, Inc. had 4,000 shares of $7, $100 par preferred stock and 50,000 shares of
common stock outstanding throughout 2009. During 2009, Designs declared a dividend of $7
per share on its common stock. Compute earnings per share for 2009 if Designs' income
statement showed net income of $630,000.
A. $7.00 per share.
B. $6.00 per share.
C. $12.04 per share.
D. $12.60 per share.
95. Unique Corp. had 50,000 shares of $5 preferred stock, $100 par, and 100,000 shares of $1
par common stock outstanding throughout the year. Net income for the year was $780,000,
and Unique declared and distributed a cash dividend of $1 per share on its common stock.
Earnings per share amounted to:
A. $7.80.
B. $1.00.
C. $5.30.
D. $2.30.
96. On January 1, 2010, Edward Corporation had 10,000 shares of $6 par value common
stock and 10,000 shares of 8%, $100 par value convertible preferred stock outstanding. The
preferred shares carried a 3 for 1 conversion privilege. On October 1, 2010, all of the
preferred shares were converted to common. What number of shares must Edward use in
computing basic earnings per share at December 31, 2010?
A. 17,500.
B. 40,000.
C. 7,500.
D. 10,000.
12-20
97. For the current year, Voque Company reported basic earnings per share of $8 and diluted
earnings per share of $3. The difference between these figures is attributable to outstanding
shares of convertible preferred stock. If all this preferred stock had actually been converted
into common stock at the beginning of the current year, Voque Company would have reported
only one earnings per share amount, which would have been:
A. $8.
B. $5.
C. $3.
D. Cannot be determined.
98. At the beginning of the current year, Elite Corporation had 200,000 shares of $1 par
common stock outstanding and had retained earnings of $4,800,000. During the year, the
company earned $1,675,000, declared a 10% stock dividend when the price of stock was $28
per share, and paid a year-end cash dividend of $3 per share. (The cash dividend was paid
after the stock dividend had been distributed.) What was Elite Corporation's retained earnings
at the end of the year?
A. $5,915,000.
B. $5,255,000.
C. $5,311,000.
D. $3,580,000.
12-21
The stockholders' equity section of the balance sheet of Caesar Corporation at December 31,
2009, appears as follows: (The company engaged in no treasury stock transactions prior to
2009)
99. Refer to the information above. What was the original cost of the treasury stock to Caesar
Corporation?
A. $5 per share.
B. $7 per share.
C. $8 per share.
100. Refer to the information above. What was the average issue price per share of preferred
stock?
A. $100.
B. $110.
C. $115.
D. $5.
12-22
101. Refer to the information above. How many shares of common stock are outstanding?
A. 100,000.
B. 95000.
C. 75,000.
D. 70,000.
102. Refer to the information above. A small stock dividend of 1,000 shares was declared and
distributed during 2009. What was the market price per share on the date of declaration?
A. $8.00 per share.
B. $2 per share.
C. $16 per share.
103. Refer to the information above. If Caesar Corporation had reacquired 7,000 shares of
treasury stock early in 2009, then some treasury stock must have been sold during 2009 for:
A. $8 per share.
B. $12.00 per share.
C. $1.50 per share.
D. $5 per share.
104. Refer to the information above. Assume that all remaining treasury stock is reissued at a
price of $14 per share in January of 2010. What amount should be credited to the account
Additional Paid-In Capital: Treasury Stock Transactions in the journal entry to record this
transaction?
A. $14,000.
B. $30,000.
C. $40,000.
D. $70,000.
12-23
60,000 additional shares on April 30. Net income for the year was $426,750. What are
earnings per share?
A. $1.42.
B. $1.52.
C. $1.78.
D. $7.11.
106. Colfax Corporation's financial statements for the current year include the following:
A. $1,251,200.
B. $696,400.
C. $570,600.
D. $1,439,600.
107. During the year 2011, Torino Corporation suffered a $1,200,000 loss when its factory
was severely damaged in an earthquake. Assuming the corporate income tax rate is 30%, what
amount will Torino report as an extraordinary loss on its income statement for 2010? Assume
earthquakes are not common in this area.
A. $1,200,000.
B. $840,000.
C. $360,000.
12-24
108. National Corporation was organized on January 1 and issued 600,000 shares of common
A. $5.25.
B. $6.13.
C. $4.59.
D. $9.19.
109. On January 1, 2011, Ole Corporation had 75,000 shares of $8 par value common stock
outstanding. On July 31, 2011, Ole issued an additional 10,000 shares in exchange for a
building. What number of shares will be used in the computation of basic earnings per share
for the year 2011?
A. 75,000.
B. 80,000.
C. 79,167.
D. 85,000.
110. On January 1, 2010, Alice Corporation had 20,000 shares of $6 par value common stock
and 10,000 shares of 8%, $100 par value convertible preferred stock outstanding. The
preferred shares carried a 3 for 1 conversion privilege. As of December 31, 2010, none of the
preferred shares had been converted. What number of shares must Alice use in computing
diluted earnings per share at December 31, 2010?
A. 10,000.
B. 20,000.
C. 30,000.
D. 50,000.
111. At the beginning of the current year, Wilson Corporation had 200,000 shares of $1 par
company earned $1,675,000 and paid a year-end cash dividend of $3 per share. What was
Wilson Corporation's retained earnings at the end of the year?
A. $6,275,000.
B. $5,875,000.
C. $6,475,000.
D. $4,800,000.
12-25
112. On January 31, Village Bank had 500,000 shares of $3 par value common stock
was:
The stockholders' equity section of the balance sheet of Crammond Corporation at December
31, appears as follows:
stock?
A. $100.00.
B. $125.71.
C. $175.50.
D. $300.00.
A. 100,000.
B. 80,000.
C. 75,000.
D. 110,000.
Essay Questions
12-26
115. Accounting terminology

Listed below are nine technical accounting terms introduced in this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In
the space provided beside each statement, indicate the accounting term described, or answer
"None" if the statement does not correctly describe any of the terms.
____ (a) A financial statement showing the revenue, expenses, and net earnings of a
corporation during the current accounting period.
____ (b) A distribution of cash to stockholders.
____ (c) A distribution to stockholders of additional shares of stock, accompanied by a
proportionate reduction in the par value per share.
____ (d) The market price of a share of preferred stock, divided by the net income of the
corporation.
____ (e) A correction in the amount of net income reported in an earlier accounting period.
____ (f) An event that is material in dollar amount, unusual in nature, and not expected to
recur in the foreseeable future.
____ (g) A subtotal sometimes included in an income statement to assist investors in
forecasting the income of future accounting periods.
12-27
116. Discontinued operations

The operations of Global Entertainment, Inc., for the current year are summarized below:
Global Entertainment had 400,000 shares of capital stock outstanding. Complete the
following condensed income statement for the year, including the appropriate earnings per
share figures.
12-28
117. Income statement and earnings per share

Shown below is information relating to operations of Broadway Industries for 2009:
In the space provided, complete the income statement for Broadway Industries, including
earnings per share figures. Broadway Industries has 100,000 shares of a single class of
common stock outstanding throughout the year.
12-29

Shown below is information relating to operations of Laconia, Inc., for 2009:
In the space provided, complete the income statement for Laconia, Inc., including earnings-
per-share figures. Laconia has 100,000 shares of a single class of common stock outstanding
throughout the year.
12-30
119. Earnings per share-basic and diluted

Greenwich Corporation had net income of $1,712,500 in 2009. The company had 300,000
shares of $4 par value common stock and 25,000 shares of 8%, $100 par, convertible
preferred stock outstanding throughout the year. Each share of preferred stock is convertible
into four shares of common stock. Compute the following for 2009:

Stainless Corporation had net income of $7,800,000 in 2010. The company had 500,000
into two shares of common stock. Compute the following for 2010:
12-31
121. Stock dividend-effect on book value

Olympic Corporation has 75,000 shares of $1 par value stock outstanding. The largest single
stockholder is Lou Cheng, who owns 6,000 shares. On December 31, the total assets of the
company amount to $4,360,000 and total liabilities to $2,230,000. On that date, the board of
directors declared a stock dividend of one new share for each five shares outstanding.
Compute the following:
12-32
122. Stock dividends and stock split-journal entries

Eagle Corporation has 250,000 shares of $6 par value capital stock outstanding. Prepare
journal entries in the space provided to record the following transactions during the current
year:
12-33
123. Equity transactions-journal entries

A partial list of the ledger accounts of Soundview Corporation is shown below, followed by a
list of transactions. Indicate the accounts that would be debited and credited in recording each
transaction by placing the appropriate account number(s) in the space provided. If no journal
entry is required for a particular transaction, use "None."
12-34
124. Retained earnings

At the beginning of 2009, Falcon Corporation had 2 million shares of $2 par value common
stock outstanding and retained earnings of $17 million. During 2009, Falcon earned $12
million, declared a 5% stock dividend when the price of the stock was $19 per share, and paid
a year-end cash dividend of $2.50 per share. (The cash dividend was declared after the stock
dividend had been distributed.) At the end of 2009, what are the company's retained
earnings?
125. Stock dividend and treasury stock

At the beginning of the current year, King Cole, Inc. had 300,000 shares of capital stock
outstanding and total stockholders' equity of $1,200,000. During the year, the company earned
net income of $325,000, declared cash dividends of $150,000, distributed a 5% stock dividend
of 15,000 shares when the market price of the stock was $16 per share, and purchased 3,000
shares of treasury stock at a cost of $13 per share. Compute the following at the end of the
current year:
(a) Total stockholders' equity:
(b) Number of shares of stock outstanding:
(c) Book value per share:
12-35
126. Stockholders' equity

The stockholders' equity section of the balance sheet of Nautilus Corporation at December 31,
Answer the following questions based on the stockholders' equity section given above. Each
question is a separate situation, unless otherwise indicated.
(a). What is the total dollar amount paid annually as dividends to preferred stockholders?
(b). What was the average issue price per share of preferred stock?
(c). What was the average issue price per share of common stock?
(d). How many shares of common stock are outstanding?
(e). What is the book value per share of the common stock?
(f). If all the treasury stock is reissued at a price of $45 per share, what amount will be
credited to the account Additional Paid-In Capital: Treasury Stock Transactions?
12-36

The stockholders' equity section of the balance sheet of Creative Corporation at December 31,
Answer the following questions based on the stockholders' equity section given above. The
company had no treasury stock transactions before 2009.
(a) What is the average price per share of preferred stock?
(b) How many shares of common stock are outstanding?
(c) A small stock dividend of 5,000 shares was declared and distributed during 2009. What
was the market price per share on the date of declaration?
(d) If Creative Corporation had reacquired 7,000 shares of treasury stock early in 2009,
compute the price per share for which the reissued treasury stock was sold.
(e) Assume all remaining treasury stock is reissued at a price of $12 per share in January of
2010.
Give the journal entry to record this transaction.
12-37
128. Special sections in an income statement What is the purpose of arranging an income
statement to show subtotals for Income from Continuing Operations and for Income before
Extraordinary Items?
129. Accounting changes and prior period adjustment

Prior period adjustments affect the income of past accounting periods. Explain how prior
period adjustments are shown in the financial statements.
130. Stock dividends

What is the effect of a stock dividend?
131. MRB Company purchased 1,000 shares of its own outstanding $12 par value common
stock for $16 per share and then sold 400 shares six months later for $19 a share. Prepare the
journal entries for the purchase of the stock and for the sale.
12-38
132. Baron Corporation was authorized by its charter to issue 80,000 shares of 12%, $100 par
cumulative preferred stock and 200,000 shares of $1 par value common stock. In its first year
of operations, Baron had the following transactions.
(1) Sold 50,000 shares of common stock for $300,000 on January 1.
(2) Sold 3,000 shares of preferred stock for $360,000 on January 1.
(3) Earned $185,000 for the sale of their merchandise of which $135,000 was on credit.
(4) Had expenses of $122,500 in connection with selling the merchandise. All expenses were
paid in cash.
(5) Purchased 5,000 shares of outstanding common stock for $8.00 per share for the treasury.
(6) Declared a dividend of $.20 per share of common stock and for the amount due the
preferred stock.
(7) Paid the required dividends.
Required:
(a). Prepare the necessary journal entries.
(b). Prepare the stockholders' equity section of the balance sheet.
133. Beck Corporation declared a 2-for-1 common stock split, but this transaction was
A. The common stock account is overstated.
outstanding.
D. The par value per share is understated.
12-39
134. Fuller Mfg.'s financial statements for the current year include the following:
Income from continuing operations $663,200
Prior period adjustment (increase in prior-year net income, net of taxes) 180,000
Cash dividends paid to preferred stockholders 196,800
Gain from discontinued operations (net of taxes) 433,600
Extraordinary loss (net of tax benefit) 174,400
A. $488,800.
B. $922,400.
C. $725,600.
D. $1,102,400.
135. The following two items are disclosed in the stockholders' equity section of Cort
Corporation's December 31, 2010, balance sheet:
Treasury stock (500 shares, at cost) $50,000
Additional paid-in capital: treasury stock transactions 22,500
If the company had reacquired 3,000 shares of treasury stock in February of 2010 then some
of the treasury stock must have been sold during 2010 for:
A. $9 per share above its par value.
B. $9 per share.
C. $109 per share.
D. $109 per share above its cost.
136. At the beginning of the current year, Bard Corporation had 400,000 shares of $1 par
after the stock dividend had been distributed.) Bard Corporation's retained earnings at the end
of the year amount to:
A. $16,000,000.
B. $14,660,000.
C. $14,320,000.
D. $14,700,000.
12-40
137. Donnell Corp. had 100,000 shares of 8% preferred stock, $100 par, and 500,000 shares
of $1 par common stock outstanding throughout the year. Net income for the year was
$4,800,000, and Donnell declared and distributed a cash dividend of $4 per share on its
common stock. Earnings per share amounted to:
A. $8.80.
B. $4.00.
C. $8.00.
D. $2.00.
The stockholders' equity section of the balance sheet of Global Publishing at December 31,
company had no treasury stock purchases before 2009.
138. What was the average issue price per share of preferred stock?
A. $80.
B. $100.
C. $124.
D. $148.
12-41
139. How many shares of common stock are outstanding?

A. 140,000.
B. 126,000.
C. 500,000.
D. 120,000.
140. A small stock dividend of 5,000 shares was declared and distributed during 2009. What
A. $82 per share.
B. $80 per share.
C. $2 per share.
D. $78 per share.
141. If Global Publishing had reacquired 16,000 shares of treasury stock early in 2009, then
some treasury stock must have been sold during 2009 for:
A. $5 per share.
B. $8 per share.
C. $6 per share.
D. $16 per share.
142. Assume that all remaining treasury stock is reissued at a price of $18 per share in
January of 2010. What amount should be credited to the account Additional Paid-in Capital:
Treasury Stock Transactions in the journal entry to record this transaction?
A. $96,000.
B. $140,000.
C. $112,000.
D. $288,000.
Short Answer Questions
12-42
The stockholders' equity section of the balance sheet of Xanadu Fashions, Inc., at December
31, 2010 appears as follows:
company purchased no treasury stock before 2010.
12-43
146. If Xanadu Fashions had reacquired 35,000 shares of treasury stock early in 2010,
147. Assume all remaining treasury stock is reissued at a price of $24 per share in January of
2011. Prepare the journal entry to record this transaction:
Essay Questions
12-44
148. Shown below is information relating to operations of R. Brook, Inc for the current year:
Continuing operations:
In the space provided, complete the income statement for R. Brook, Inc., including earnings
per share figures. R. Brook, Inc. has 100,000 shares of a single class of common stock
outstanding throughout the year.
R. BROOK, INC.
Condensed Income Statement
For the Year Ended December 31, 2009
149. The primary purpose of showing special types of events separately in the income
statement is to:
A. Increase earnings per share.
B. Assist users of the income statement in evaluating the profitability of normal, ongoing
operations.
C. Minimize the income taxes paid on the results of ongoing operations.
D. Prevent unusual losses from recurring.
12-45
150. Which of the following situations would not be presented in a separate section of the
current year's income statement of Hamilton Corporation? (More than one answer may be
correct.) During the current year:
A. Hamilton's St. Louis headquarters are destroyed by a tornado.
B. Hamilton sells its entire juvenile furniture operations and concentrates upon its remaining
children's clothing segment.
C. Hamilton's accountant discovers that the entire price paid several years ago to purchase
company offices in Texas had been charged to a Land account; consequently, no depreciation
has ever been taken on these buildings.
D. As a result of labor union contract changes, Hamilton paid increased compensation
expense during the year.
151. When a corporation has outstanding both common and preferred stock:
A. Basic and diluted earnings per share are reported only if the preferred stock is cumulative.
B. Earnings per share are reported for each type of stock outstanding.
C. Earnings per share are computed without regard to the amount of dividends declared on
preferred stock.
D. Earnings per share are computed without regard to the amount of dividends declared on
common stock.
152. Which of the following is (are) not true about a stock dividend?
A. Total stockholders' equity does not change when a stock dividend is declared or when it is
distributed.
B. Between the time a stock dividend is declared and when it is distributed, the company's
commitment is presented in the balance sheet as a current liability.
C. Stock dividends do not change the relative portion of the company owned by individual
stockholders.
D. Stock dividends have no impact on the amount of the company's assets.
153. The statement of retained earnings:

A. Includes prior period adjustments, cash dividends, and stock dividends.
B. Indicates the amount of cash available for the payment of dividends.
C. Need not be prepared if a separate statement of stockholders' equity accompanies the
financial statements.
D. Shows revenue, expenses, and dividends for the accounting period.
12-46
Chapter 12 Income and Changes in Retained Earnings Answer Key
True / False Questions
1. An extraordinary item appears on the income statement before the section on discontinued
operations.
FALSE
AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 12-01 Describe how irregular income items; such as discontinued operations and extraordinary items; are presented in
the income statement.
Topic: Reporting the Results of Operations
2. Earnings per share is equal to net income applicable to common stock, divided by the
weighted number of common shares outstanding.
TRUE

AICPA FN: Measurement
Bloom's: Remember
Difficulty: Easy
Learning Objective: 12-02 Compute earnings per share.
3. In determining earnings per share when a preferred stock has dividends in arrears, only the
current year's dividend is deducted to arrive at earnings per share.
TRUE

Bloom's: Remember
Difficulty: Easy
12-47
4. The price earnings ratio is based on expected future earnings, while the earnings per share
ratio is based on historical earnings.
TRUE

Bloom's: Remember
Difficulty: Easy
5. In order to receive a dividend, a stockholder must have owned the stock as of the
declaration date.
FALSE

AICPA BB: Legal
Bloom's: Remember
Difficulty: Easy
Learning Objective: 12-04 Account for cash dividends and stock dividends; and explain the effects of these transactions on a company's
Topic: Other Transactions Affecting Retained Earnings
6. A stock dividend provides a stockholder with more shares of stock, but his or her
percentage of ownership in the company is no larger than before.
TRUE

AICPA BB: Legal
Bloom's: Understand
Difficulty: Medium
12-48
7. When a small (under 10%) stock dividend is declared, the market value of the stock is
transferred from Retained Earnings into other stockholder equity accounts.
TRUE

Bloom's: Remember
Difficulty: Easy
8. A stock split changes the par value of a stock, whereas a stock dividend does not.
TRUE

Bloom's: Remember
Difficulty: Easy
9. Comprehensive income differs from net income in that it includes events that are
recognized but not realized.
TRUE

Bloom's: Understand
Difficulty: Easy
Learning Objective: 12-07 Define comprehensive income; and explain how it differs from net income.
12-49
10. Diluted earnings per share are shown to alert investors that earnings per share could be
increased by the effects of conversions of securities into common stock.
FALSE

Bloom's: Remember
Difficulty: Easy
Learning Objective: 12-03 Distinguish between basic and diluted earnings per share.
Topic: Financial Analysis and Decision Making
11. Comprehensive income is a component of net income.

FALSE

Bloom's: Remember
Difficulty: Easy
12. Recent rulings by the SEC now require all corporations to prepare an expanded version of
the Statement of Retained Earnings showing all equity accounts and their changes for the last
three years.
FALSE

AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 12-08 Describe and prepare a statement of stockholders' equity and the stockholders' equity section of the balance
sheet.
12-50
13. A statement of stockholders' equity is not a required financial statement and need not be
prepared along with a statement of retained earnings.
TRUE

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
sheet.
14. In order for a loss on the disposal of a discontinued operation to be classified on the
income statement as a discontinued operation, it must be unusual in nature.
FALSE

Bloom's: Remember
Difficulty: Easy
15. Extraordinary items and the results of discontinued operations are shown in the income
statement net of any related income tax effects.
TRUE

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
12-51
16. The FASB has not compiled a comprehensive list of what is considered to be an
extraordinary item, thus the determination is a matter of judgment.
TRUE

Bloom's: Remember
Difficulty: Easy
17. The amount of cash dividends paid to common stockholders is part of the computation of
earnings per share.
FALSE

Bloom's: Understand
Difficulty: Easy
18. A prior period adjustment to retained earnings is made when a discovery of a material
error was made to prior years' income.
TRUE

Bloom's: Remember
Difficulty: Easy
Learning Objective: 12-06 Define prior period adjustments: and explain how they are presented in financial statements.
12-52
19. Diluted earnings per share represents a hypothetical case, showing what earnings per share
would be if certain securities were converted into additional shares of common stock.
TRUE

Bloom's: Understand
Difficulty: Medium
20. When a corporation presents both "basic" and "diluted" earnings per share, basic earnings
per share will be the smaller of the two figures.
FALSE

Bloom's: Understand
Difficulty: Medium
21. Stock splits are always in a 2 for 1 ratio.

FALSE

Bloom's: Remember
Difficulty: Easy
12-53
22. "Discontinued operations" is an example of an extraordinary item.

FALSE

Bloom's: Remember
Difficulty: Easy
23. Stock dividends and stock splits do not cause a change in the total amount of stockholders'
equity.
TRUE

Bloom's: Remember
Difficulty: Easy
24. The amount transferred out of retained earnings when a 4% stock dividend is declared is
equal to the prevailing market value per share times the number of dividend shares to be
distributed.
TRUE

Bloom's: Understand
Difficulty: Medium
12-54
25. Large stock dividends tend to keep stock prices down.

TRUE

Bloom's: Understand
Difficulty: Medium
26. Prior period adjustments are shown in the financial statements by adjusting the beginning
balance of retained earnings in the statement of retained earnings.
TRUE

Bloom's: Remember
Difficulty: Easy
27. Prior period adjustments appear in the statement of retained earnings and in the income
statement for the current year.
FALSE

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
12-55
28. Discontinued operations should be shown on the statement of retained earnings net of
taxes.
FALSE

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
29. The expropriation (seizure of) of a multinational company's assets by a government is an

example of a discontinued operation item.
FALSE

Bloom's: Understand
Difficulty: Medium
30. The statement of stockholders' equity discloses the amount of cash dividends as well as
stock dividends declared during the current year.
TRUE

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
sheet.
12-56
31. Comprehensive income may be presented in a statement with net income, in a separate
statement, or as part of stockholders' equity.
TRUE

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
32. In an attempt to appeal to investors, a company may be tempted to overstate net income.
TRUE
AACSB: Ethics
Bloom's: Understand
Difficulty: Medium
Learning Objective: 12-09 Illustrate steps management might take to improve the appearance of the company's net income.
Topic: Ethics, Fraud & Corporate Governance
33. According to the Sarbanes-Oxley Act, lying to an external auditor can create a criminal
penalty as well as a civil penalty.
TRUE
AACSB: Ethics
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Remember
Difficulty: Easy
Learning Objective: 12-09 Illustrate steps management might take to improve the appearance of the company's net income.
Topic: Ethics, Fraud & Corporate Governance
12-57
34. Stock splits:

A. Allow management to conserve cash.
B. Give stockholders more shares.
C. Cause no change in total assets, liabilities, or stockholders' equity.
D. Allow management to conserve cash, give stockholders more shares, and cause no change
in total assets, liabilities, or stockholders' equity.

Bloom's: Understand
Difficulty: Easy
35. It would be reasonable to assume that:

A. Basic earnings per share should exceed diluted earnings per share.
B. Diluted earnings per share should exceed basic earnings per share.
C. Basic earnings per share should be equal to diluted earnings per share.
D. Basic earnings per share would not be presented with diluted earnings per share.

Bloom's: Understand
Difficulty: Medium
36. A small stock dividend is recorded at:

A. Market value.
B. Book value.
C. Par value.
D. No amount, just a memorandum entry is required.

Bloom's: Understand
Difficulty: Medium
12-58
37. Treasury stock appears as:

A. An asset account.
B. A liability account.
C. An expense account.
D. An equity account.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
sheet.
38. Extraordinary items are found on the income statement:

A. Before discontinued operations.
B. After discontinued operations.
C. Before income from continuing operations.
D. After prior period adjustments.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
12-59
35,000 additional shares on March 30. Net income for the year was $594,750. What are
earnings per share?
A. $4.73.
B. $4.58.
C. $3.93.
D. $6.61.
(125,000 x 3/12) + (160,000 x 9/12) = 151,250; $594,750/151,250 = $3.93
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
40. A company failed to make an adjusting entry in the prior year to accrue earned revenue.
To correct this they should:
A. Correct last year's statement by increasing net income.
B. Correct this year's statements with a prior period adjustment increasing beginning retained
earnings.
C. Correct this year's statements with a prior period adjustment decreasing beginning retained
earnings.
D. Correct this year's statements with a prior period adjustment increasing ending retained
earnings.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
12-60
41. A prior period adjustment is a correction made to:

A. Retained earnings of the beginning of the period.
B. Retained earnings at the end of the period.
C. Net income of the current year.
D. Only to last years' financial statements.

Bloom's: Remember
Difficulty: Easy
42. The price-earnings ratio is the:

A. Book value of a share of common stock divided by EPS.
B. Market price of a share of common stock divided by EPS.
C. Par value of a share of common stock divided by EPS.
D. Market price divided by book value of a share of stock.

Bloom's: Remember
Difficulty: Easy
43. Which of the following would have no effect on Retained Earnings?

A. Declaration of a cash dividend.
B. Declaration of a stock dividend.
C. Declaration of a stock split.
D. A prior period adjustment.

Bloom's: Understand
Difficulty: Medium
12-61
44. Doogle Corporation sold a segment of its operations in 2009 and suffered an extraordinary
loss in 2010. Which of the following would be the most useful in attempting to predict
Doogle's performance for 2011?
A. Doogle's income from continuing operations in 2009 and 2010.
B. Doogle's net income in 2009 and 2010.
C. Doogle's total assets at the end of 2010.
D. Doogle's retained earnings at the end of 2010.

Bloom's: Understand
Difficulty: Medium
45. On January 31, 2009, Village Bank had 500,000 shares of $2 par value common stock
was:
$37(500,000 x .14) = $2,590,000
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-62
46. Execucomp Corporation's financial statements in the current year show a loss from
discontinued operations, a prior period adjustment, and an extraordinary gain. If Execucomp's
income statement is prepared according to generally accepted accounting principles (as
illustrated in your text), which of the following four items would appear second in sequence
in the income statement?
A. Prior period adjustment.
B. Income from continuing operations.
C. Loss from discontinued operations.
D. Extraordinary gain.

Bloom's: Remember
Difficulty: Easy
47. Of the items listed, which would appear closest to the bottom of the income statement?
A. Extraordinary items.
B. Prior period adjustment.
C. Income from continuing operations.
D. Discontinued operations.

Bloom's: Remember
Difficulty: Easy
12-63
48. Large stock dividends tend to:

A. Increase stock prices.
B. Have no effect upon stock prices.
C. Keep stock prices down.
D. Describe total assets.

Bloom's: Understand
Difficulty: Medium
49. The purpose of developing the subtotals "Income before Extraordinary Items" and
"Income from Continuing Operations" in an income statement is to:
A. Assist investors in forecasting future operating results.
B. Increase the amount of reported net income.
C. Decrease the amount of income subject to income taxes.
D. Provide investors with the information necessary to compute earnings per share.

Bloom's: Understand
Difficulty: Medium
12-64
50. To qualify as an extraordinary item, a gain or loss must:

A. Affect the income of a prior period.
B. Be larger in amount than any other item in the income statement.
C. Be material in amount, unusual in nature, and not expected to recur.
D. Be associated with a segment of the business that has been discontinued during the current
period.

Bloom's: Understand
Difficulty: Medium
51. Which of the following would be classified as an extraordinary item?

A. A large gift given to the company.
B. A loss from obsolete inventory.
C. A loss from a natural disaster that affects the company at infrequent intervals.
D. A loss from an enacted law that made inventory unsalable.

Bloom's: Apply
Difficulty: Easy
12-65
52. An example of an extraordinary gain or loss is:

A. A large loss arising from inability to collect an account receivable from a bankrupt
customer.
B. A large gain from disposal of a segment of the business.
C. A gain or loss from sale of an expensive machine no longer needed in the business.
D. A loss due to the expropriation of assets by a foreign government.

Bloom's: Apply
Difficulty: Medium
53. In computing earnings per share, the number of shares used is:
A. The year-end number of shares outstanding.
B. The beginning of the year number of shares outstanding.
C. The average of the beginning and the year-end number of shares outstanding.
D. The weighted average of shares outstanding for the year.

Bloom's: Understand
Difficulty: Easy
12-66
54. The amount of earnings per share is usually computed:

A. For both preferred and common stock.
B. For common stock by deducting the dividends on preferred stock from net income and
dividing the remaining amount by the weighted average number of common shares
outstanding.
C. By dividing net income by the combined number of preferred and common shares.
D. On the basis of the number of shares outstanding at year-end, regardless of changes in the
number of shares during the year.

Bloom's: Understand
Difficulty: Medium
55. Which of the following statistics is generally computed for both common and preferred
stock?
A. Earnings per share.
B. Price-earnings ratio (p/e ratio).
C. Annual dividend per share.
D. Retained earnings per share.

Bloom's: Remember
Difficulty: Easy
12-67
56. Earnings per share figures are shown in the income statement:
A. For income before extraordinary items and for income from continuing operations, as well
as for net income.
B. For common stock as well as for preferred stock.
C. For all publicly owned, as well as for all privately held, corporations.
D. As an optional disclosure for all corporations, and may be omitted completely or disclosed
in a footnote at the option of the issuing corporation.

Bloom's: Understand
Difficulty: Medium
57. The numerator in calculating earnings per share is reduced for:

A. Preferred dividends.
B. Common dividends.
C. Common stock dividends.
D. Any form of dividend.

Bloom's: Remember
Difficulty: Medium
58. All things being equal, if investors expect earnings to increase substantially from current
levels, the price/earnings ratio will:
A. Be quite low.
B. Be quite high.
C. Not change.
D. Not be affected by income expectations.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
12-68
59. The common stock of Securetech Corporation consistently sells at a market price of 20
times earnings (i.e., at a p/e ratio of 20). What would be the most likely effect of a 10 cent
increase in Securetech's basic EPS?
A. An increase in market price of approximately 10 cents per share.
B. An increase in market price of approximately $2 per share.
C. A reduction in the p/e ratio due to the larger EPS.
D. Nothing, since market price reflects expectations of future earnings.
AACSB: Analytic
Bloom's: Evaluate
Difficulty: Hard
60. Which of the following has no effect on the computation of earnings per share for the
current period?
A. The amount of cash dividends declared or paid to preferred stockholders.
B. The amount of cash dividends declared or paid to common stockholders.
C. Net income.
D. The number of shares of common stock authorized.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
12-69
61. Diluted earnings per share is a hypothetical computation to warn stockholders what could
happen if:
A. Loss contingencies turn out adversely.
B. Convertible securities are converted into shares of common stock.
C. Extraordinary losses were to recur.
D. Consideration was given to the loss from operations discontinued during the current
period.

Bloom's: Understand
Difficulty: Medium
62. To receive the next cash dividend, an investor must purchase the stock before the:
A. Dividend declaration date.
B. Ex-dividend date.
C. Date of record.
D. Payment date announced by the board of directors.

Bloom's: Remember
Difficulty: Easy
63. Dividends become a liability of a corporation:

A. On the date the board of directors declares the dividend.
B. On the date of record.
C. On the date payment is to be made.
D. When cumulative preferred stock dividends are in arrears.

Bloom's: Remember
Difficulty: Easy
12-70
64. When a company reports both diluted earnings per share and basic earnings per share:
A. Basic EPS would be greater than fully diluted EPS.
B. Basic EPS would be less than fully diluted EPS.
C. Basic EPS may be either greater or less than fully diluted EPS.
D. Both should never be shown - only one would be reported.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium

A. Occurs when a corporation distributes shares of its own stock as a dividend, rather than
cash.
B. Occurs whenever a corporation distributes non-cash assets as a dividend to its
stockholders.
C. Represents a distribution of a corporation's profits to the stockholders.
D. Represents a return of invested capital to a corporation's owners, the stockholders.

Bloom's: Understand
Difficulty: Medium
66. Dividends are first recorded and retained earnings are reduced on:
A. The ex-dividend date.
B. The date of record.
C. The date of declaration.
D. The date of payment.

Bloom's: Remember
Difficulty: Easy
12-71
67. As a result of a 5% stock dividend:

A. Total stockholders' equity decreases by 5%.
B. The par value per share decreases by 5%.
C. The number of shares owned by each stockholder increases by 5%, but total stockholders'
equity does not change.
D. Both the number of shares outstanding and the total stockholders' equity increase by 5%.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
68. If a company presents both the basic and diluted earnings per share, the price/earnings
ratio is based on:
A. The basic figure.
B. The diluted figure.
C. The average of the basic and diluted figures.
D. A combination of the basic and diluted figures.

Bloom's: Understand
Difficulty: Medium
69. A large stock dividend and a stock split are similar in that they both cause a:
A. Reduction in total stockholders' equity.
B. Reduction in retained earnings.
C. Reduction in the par value per share.
D. Reduction in the market price per share.

Bloom's: Understand
Difficulty: Medium
12-72
70. Supervox Corporation declared a 3-for-2 common stock split, but this transaction was
A. Retained earnings is understated.
outstanding.
D. The common stock account is understated.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
71. Declaration and distribution of a stock dividend cause each of the following effects
except:
A. An increase in the number of shares of stock outstanding.
B. A decrease in retained earnings.
C. A decrease in total assets of the issuing corporation.
D. An increase in legal capital of the issuing corporation.

Bloom's: Understand
Difficulty: Medium
12-73
72. A 2-for-1 stock split:

A. Is accounted for in the same way as a 100% stock dividend.
B. Increases the number of outstanding shares of common stock, but par value per share
remains the same as before the split.
C. Is recorded by transferring the par value of additional shares from retained earnings to the
common stock account.
D. Should logically cause the market price per share to drop by approximately 50%.

Bloom's: Understand
Difficulty: Medium
73. If a material accounting error was made in a prior year, that error:
A. Should be reflected on the current year's income statement.
B. Should be reflected, net of taxes, on the retained earnings statement.
C. Should be reflected as a change in accounting principle.
D. Should be considered as an extraordinary item, and shown, net of taxes, on the income
statement.

Bloom's: Understand
Difficulty: Medium
12-74
74. When a stock dividend is declared, total stockholders' equity will:

A. Decrease.
B. Increase.
C. Not change.
D. Increase or decrease, depending upon certain variables.

Bloom's: Understand
Difficulty: Medium
75. Comprehensive income can be displayed to users of financial statements in which of the
following way(s):
A. As a second income statement.
B. As a single income statement that includes both the components of net income and the
components of other comprehensive income.
C. As an element in the changes in stockholders' equity displayed as a column in the
statement of stockholders' equity.
D. Either as a second income statement, as a single income statement that includes both the
components of net income and the components of other comprehensive income, or as an
element in the changes in stockholders' equity displayed as a column in the statement of
stockholders' equity.

Bloom's: Understand
Difficulty: Medium
12-75
76. Which of the following would be treated as a prior period adjustment by Gold Corporation
in 2010?
A. In 2010, it was discovered that Gold Corporation recorded the purchase of a warehouse in
2007 as a debit to Repairs Expense.
B. In 2010, Gold Corporation switched from the straight-line method of depreciation to
another method of computing depreciation.
C. In 2010, Gold Corporation's management decided that the estimated useful life of its
computer equipment should be changed from five years to nine years.
D. In 2010, Gold Corporation sold a segment of the business that it has operated since 1996.

Bloom's: Understand
Difficulty: Medium
77. A prior period adjustment appears in:

A. The income statement following the subtotal "Income before Prior Period Adjustments."
B. The statement of retained earnings, as an adjustment to the ending balance of retained
earnings.
C. Footnotes to the financial statements.
D. The statement of retained earnings, as an adjustment to the beginning balance of retained
earnings.

Bloom's: Understand
Difficulty: Medium
12-76
78. After preparing the financial statements for 2011, the accountant for the Dawson
Corporation discovered that a prior period adjustment had been omitted from the 2009
financial statements. Which of the following is most likely to require correction as a result of
this oversight?
A. Earnings per share as originally computed.
B. Net income for 2011 as originally reported.
C. Ending retained earnings at December 31, 2011.
D. Extraordinary items as originally reported.
AACSB: Analytic
Bloom's: Understand
Difficulty: Medium
79. A prior period adjustment appears in the financial statements of the current year when:
A. An error was made in computing the net income of the current period.
B. An error was made in measuring the net income of a previous year or years.
C. An extraordinary loss in a prior year was included among normal results of operations in
the prior year.
D. Earnings per share figures from prior years are restated to reflect the increased number of
shares outstanding due to a stock split or a stock dividend.

Bloom's: Understand
Difficulty: Medium
12-77
80. A restriction of retained earnings:

A. Reduces the dollar amount of retained earnings shown in the balance sheet.
B. Appears in the statement of retained earnings as a reduction of ending retained earnings.
C. Appears in the liability section of the balance sheet.
D. Limits the dollar amount of dividends a corporation may declare.

Bloom's: Understand
Difficulty: Medium
Learning Objective: 12-05 Describe and prepare a statement of retained earnings.
81. Which of the following items would not reduce retained earnings?
A. A common stock dividend.
B. A preferred stock dividend.
C. A cash dividend.
D. Cash payment of a previously declared dividend.

Bloom's: Understand
Difficulty: Medium

A. Occurs only when a company is going out of business.
B. Occurs when a corporation pays a dividend that exceeds the balance in the retained
earnings account.
C. Is an expense to the corporation.
D. Occurs only when the corporation has a loss for the year.

Bloom's: Understand
Difficulty: Medium
12-78
83. The statement of stockholders' equity:

A. Is a required financial statement.
B. May be issued as a substitute for the statement of retained earnings.
C. Shows the changes during the year in all stockholders' equity accounts except retained
earnings.
D. Is a statement sent to each stockholder showing that person's return on equity.

Bloom's: Remember
Difficulty: Easy
sheet.
84. A statement of stockholders' equity discloses each of the following except:

A. The market value of the stockholders' equity at the end of the year.
B. The cost of treasury stock owned at the end of the year.
C. Net income for the current year.
D. The amount of cash dividends declared during the current year.

Bloom's: Understand
Difficulty: Medium
sheet.
85. Which of the following items would be included in comprehensive income but not
reported as a component of net income?
A. A lower-of-cost-or-market write-down of inventory.
B. A material loss due to natural disaster.
C. An unrealized gain on the portfolio of available-for-sale marketable securities.
D. A gain on the sale of a segment of the business.

Bloom's: Understand
Difficulty: Medium
12-79
86. Which of the following items would be included in the discontinued operations section of
the income statement?
A. Income or loss from operating the segment prior to its disposal.
B. The gain or loss on disposal of the segment.
C. Both the income or loss from operating the segment prior to its disposal, and the gain or
loss on disposal of the segment.
D. Only losses and not gains on the disposal of a segment.

Bloom's: Understand
Difficulty: Medium
87. Family Fashions Corporation discontinued Kid-Choice, its entire line of children's
clothing, in November of 2009. Prior to the disposal, Kid-Choice generated a loss of $600,000
(net of tax) for the period from January through the sale date. Because of the value of the real
estate and machinery, there was a gain of $850,000 (net of tax) on the actual sale. How should
this situation be reported in the financial statements of Family Fashions for 2009?
A. A $250,000 gain should be included in the 2009 income statement as an extraordinary
item.
B. A $600,000 loss should be included in income from operations and a $850,000 gain should
be reported in the "discontinued operations" section of the income statement.
C. A $250,000 adjustment to beginning retained earnings should be in the statement of
retained earnings.
D. A $250,000 gain should be in the "discontinued operations" section of the income
statement.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
12-80
88. Sovereign Foods suffered a $1,500,000 loss (net of tax) when the FDA prohibited the sale
of food products containing red dye no. 3. On its other products, Sovereign Foods had net
sales of $6,580,000 and costs and other expenses of $6,505,000. Which of the following
statements is not true? (Ignore taxes)
A. Sovereign Foods reports a net loss of $1,425,000 for the current year.
B. Sovereign Foods reports income before extraordinary items of $75,000.
C. Sovereign Foods combines the $1,500,000 loss with its other costs and expenses of
$6,505,000, since this item does not qualify for any special disclosure.
D. Sovereign Foods shows the $1,500,000 loss in a separate section of the income statement
as an extraordinary item.
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
89. Corona Corporation's financial statements for the current year include the following:
A. $1,359,600.
B. $818,400.
C. $1,485,000.
D. $1,234,200.
$818,400 + $541,200 - $125,400 = $1,234,200
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-81
90. During the year 2009, Tosco Corporation suffered an $800,000 loss when its factory was
destroyed in a flood. Assuming the corporate income tax rate is 36%, what amount will Tosco
report as an extraordinary loss on its income statement for 2009? Assume floods are not
common in this area.
A. $800,000.
B. $512,000.
C. $288,000.
$800,000 x (1.00 - .36) = $512,000
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
91. General Corporation was organized on January 1 and issued 500,000 shares of common
A. $7.41.
B. $7.98.
C. $8.41.
D. $8.64.
(500,000 x 6/12) + (700,000 x 6/12) = 600,000; $5,184,000/600,000 = $8.64
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-82
92. On January 1, 2009, Carleton Corporation had 55,000 shares of $6 par value common
stock outstanding. On March 31, 2009, Carleton issued an additional 10,000 shares in
exchange for a building. What number of shares will be used in the computation of basic
earnings per share for the year 2009?
A. 55,000.
B. 65,000.
C. 62,500.
D. 62,000.
(55,000 x 3/12) + (65,000 x 9/12) = 62,500
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
93. Platinum Company reports net income of $520,000 for 2009 and declared a cash dividend
of $1 per share on each of its 100,000 shares of common stock outstanding. What are earnings
per share for 2009?
A. $5.20 per share.
B. $1.00 per share.
C. $1.20 per share.
D. $4.80 per share.
$520,000/100,000 = $5.20
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-83
94. Designs, Inc. had 4,000 shares of $7, $100 par preferred stock and 50,000 shares of
common stock outstanding throughout 2009. During 2009, Designs declared a dividend of $7
per share on its common stock. Compute earnings per share for 2009 if Designs' income
statement showed net income of $630,000.
A. $7.00 per share.
B. $6.00 per share.
C. $12.04 per share.
($630,000 - (4,000 x $7))/50,000 = $12.04
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
95. Unique Corp. had 50,000 shares of $5 preferred stock, $100 par, and 100,000 shares of $1
par common stock outstanding throughout the year. Net income for the year was $780,000,
and Unique declared and distributed a cash dividend of $1 per share on its common stock.
Earnings per share amounted to:
A. $7.80.
B. $1.00.
C. $5.30.
D. $2.30.
$780,000 - ($5 x 50,000) = $530,000/100,000 = $5.30
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-84
96. On January 1, 2010, Edward Corporation had 10,000 shares of $6 par value common
stock and 10,000 shares of 8%, $100 par value convertible preferred stock outstanding. The
preferred shares carried a 3 for 1 conversion privilege. On October 1, 2010, all of the
preferred shares were converted to common. What number of shares must Edward use in
computing basic earnings per share at December 31, 2010?
A. 17,500.
B. 40,000.
C. 7,500.
D. 10,000.
(10,000 x 9/12) + (40,000 x 3/12) = 17,500
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
97. For the current year, Voque Company reported basic earnings per share of $8 and diluted
earnings per share of $3. The difference between these figures is attributable to outstanding
shares of convertible preferred stock. If all this preferred stock had actually been converted
into common stock at the beginning of the current year, Voque Company would have reported
only one earnings per share amount, which would have been:
A. $8.
B. $5.
C. $3.
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-85
98. At the beginning of the current year, Elite Corporation had 200,000 shares of $1 par
after the stock dividend had been distributed.) What was Elite Corporation's retained earnings
at the end of the year?
A. $5,915,000.
B. $5,255,000.
C. $5,311,000.
D. $3,580,000.
$4,800,000 + $1,675,000 - (20,000 x $28) - (220,000 x $3) = $5,255,000
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
The stockholders' equity section of the balance sheet of Caesar Corporation at December 31,
2009, appears as follows: (The company engaged in no treasury stock transactions prior to
2009)
12-86
99. Refer to the information above. What was the original cost of the treasury stock to Caesar
Corporation?
A. $5 per share.
B. $7 per share.
C. $8 per share.
$40,000/5,000 = $8
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
stock?
A. $100.
B. $110.
C. $115.
D. $5.
($800,000/8,000) + ($80,000/8,000) = $110
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-87
A. 100,000.
B. 95000.
C. 75,000.
D. 70,000.
75,000 - 5000 = 70,000
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
102. Refer to the information above. A small stock dividend of 1,000 shares was declared and
distributed during 2009. What was the market price per share on the date of declaration?
A. $8.00 per share.
B. $2 per share.
C. $16 per share.
(1,000 x $2 + $26,000)/1,000 = $28.00
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-88
103. Refer to the information above. If Caesar Corporation had reacquired 7,000 shares of
treasury stock early in 2009, then some treasury stock must have been sold during 2009 for:
A. $8 per share.
B. $12.00 per share.
C. $1.50 per share.
D. $5 per share.
($40,000/5,000) + $8,000/2,000 = $12.00
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
104. Refer to the information above. Assume that all remaining treasury stock is reissued at a
price of $14 per share in January of 2010. What amount should be credited to the account
Additional Paid-In Capital: Treasury Stock Transactions in the journal entry to record this
transaction?
A. $14,000.
B. $30,000.
C. $40,000.
D. $70,000.
(5,000 x $14) - $40,000 = $30,000
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-89
60,000 additional shares on April 30. Net income for the year was $426,750. What are
earnings per share?
A. $1.42.
B. $1.52.
C. $1.78.
D. $7.11.
(240,000 x 4/12) + (300,000 x 8/12) = 280,000; $426,750/280,000 = $1.52
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
106. Colfax Corporation's financial statements for the current year include the following:
A. $1,251,200.
B. $696,400.
C. $570,600.
D. $1,439,600.
$696,400 + $743,200 - $188,400 = $1,251,200
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-90
107. During the year 2011, Torino Corporation suffered a $1,200,000 loss when its factory
was severely damaged in an earthquake. Assuming the corporate income tax rate is 30%, what
amount will Torino report as an extraordinary loss on its income statement for 2010? Assume
earthquakes are not common in this area.
A. $1,200,000.
B. $840,000.
C. $360,000.
$1,200,000 x (1.00 - .30) = $840,000
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
108. National Corporation was organized on January 1 and issued 600,000 shares of common
A. $5.25.
B. $6.13.
C. $4.59.
D. $9.19.
(600,000 x 6/12) + (800,000 x 6/12) = 700,000; $3,675,000/700,000 = $5.25
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-91
109. On January 1, 2011, Ole Corporation had 75,000 shares of $8 par value common stock
outstanding. On July 31, 2011, Ole issued an additional 10,000 shares in exchange for a
building. What number of shares will be used in the computation of basic earnings per share
for the year 2011?
A. 75,000.
B. 80,000.
C. 79,167.
D. 85,000.
(75,000 x 7/12) + (85,000 x 5/12) = 79,167
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
110. On January 1, 2010, Alice Corporation had 20,000 shares of $6 par value common stock
and 10,000 shares of 8%, $100 par value convertible preferred stock outstanding. The
preferred shares carried a 3 for 1 conversion privilege. As of December 31, 2010, none of the
preferred shares had been converted. What number of shares must Alice use in computing
diluted earnings per share at December 31, 2010?
A. 10,000.
B. 20,000.
C. 30,000.
D. 50,000.
20,000 + (10,000 x 3) = 50,000
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-92
111. At the beginning of the current year, Wilson Corporation had 200,000 shares of $1 par
company earned $1,675,000 and paid a year-end cash dividend of $3 per share. What was
Wilson Corporation's retained earnings at the end of the year?
A. $6,275,000.
B. $5,875,000.
C. $6,475,000.
D. $4,800,000.
$4,800,000 + $1,675,000 - (200,000 x $3) = $5,875,000
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
112. On January 31, Village Bank had 500,000 shares of $3 par value common stock
was:
$62(500,000 x .10) = $3,100,000
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-93
The stockholders' equity section of the balance sheet of Crammond Corporation at December
stock?
A. $100.00.
B. $125.71.
C. $175.50.
D. $300.00.
($700,000/7,000) + ($180,000/7,000) = $125.71
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-94
A. 100,000.
B. 80,000.
C. 75,000.
D. 110,000.
$150,000/$2 par = 75,000 shares
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
Essay Questions
12-95
115. Accounting terminology

Listed below are nine technical accounting terms introduced in this chapter:
Each of the following statements may (or may not) describe one of these technical terms. In
the space provided beside each statement, indicate the accounting term described, or answer
"None" if the statement does not correctly describe any of the terms.
____ (a) A financial statement showing the revenue, expenses, and net earnings of a
corporation during the current accounting period.
____ (b) A distribution of cash to stockholders.
____ (c) A distribution to stockholders of additional shares of stock, accompanied by a
proportionate reduction in the par value per share.
____ (d) The market price of a share of preferred stock, divided by the net income of the
corporation.
____ (e) A correction in the amount of net income reported in an earlier accounting period.
____ (f) An event that is material in dollar amount, unusual in nature, and not expected to
recur in the foreseeable future.
____ (g) A subtotal sometimes included in an income statement to assist investors in
forecasting the income of future accounting periods.
(a) None (The statement describes an income statement.),

(b) Cash dividend,
(c) Stock split,
(d) None (A price-earnings ratio is the market price of common stock divided by earnings per
share.),
(e) Prior period adjustment,
(f) Extraordinary item,
(g) Income from continuing operations.

Bloom's: Remember
Difficulty: Easy
Topic: Income and Changes in Retained Earnings
12-96
116. Discontinued operations

The operations of Global Entertainment, Inc., for the current year are summarized below:
Global Entertainment had 400,000 shares of capital stock outstanding. Complete the
following condensed income statement for the year, including the appropriate earnings per
share figures.
12-97
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-98

Shown below is information relating to operations of Broadway Industries for 2009:
In the space provided, complete the income statement for Broadway Industries, including
earnings per share figures. Broadway Industries has 100,000 shares of a single class of
common stock outstanding throughout the year.
12-99
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-100

Shown below is information relating to operations of Laconia, Inc., for 2009:
In the space provided, complete the income statement for Laconia, Inc., including earnings-
per-share figures. Laconia has 100,000 shares of a single class of common stock outstanding
throughout the year.
12-101
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-102

Greenwich Corporation had net income of $1,712,500 in 2009. The company had 300,000
into four shares of common stock. Compute the following for 2009:
(a) Basic earnings per share: ($1,712,500 - $200,000) ÷ 300,000 shares = $5.04 per share
(b) Number of shares diluted: 300,000 common outstanding + 100,000 from assumed
conversion of convertible preferred stock = 400,000 shares
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium

Stainless Corporation had net income of $7,800,000 in 2010. The company had 500,000
into two shares of common stock. Compute the following for 2010:
(a) 500,000
(b) 500,000 + (2 x 70,000) = 640,000
(c) [$7,800,000 - (70,000 x $100 x 8%)] ÷ 500,000 = $14.48
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-103
121. Stock dividend-effect on book value

Olympic Corporation has 75,000 shares of $1 par value stock outstanding. The largest single
stockholder is Lou Cheng, who owns 6,000 shares. On December 31, the total assets of the
company amount to $4,360,000 and total liabilities to $2,230,000. On that date, the board of
directors declared a stock dividend of one new share for each five shares outstanding.
Compute the following:
(a) $28.40 per share

(b) $23.67 per share
(c) $170,400
(d) $170,400
Feedback:
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-104
122. Stock dividends and stock split-journal entries

Eagle Corporation has 250,000 shares of $6 par value capital stock outstanding. Prepare
journal entries in the space provided to record the following transactions during the current
year:
12-105
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
12-106
123. Equity transactions-journal entries

A partial list of the ledger accounts of Soundview Corporation is shown below, followed by a
list of transactions. Indicate the accounts that would be debited and credited in recording each
transaction by placing the appropriate account number(s) in the space provided. If no journal
entry is required for a particular transaction, use "None."
12-107
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
12-108
124. Retained earnings

At the beginning of 2009, Falcon Corporation had 2 million shares of $2 par value common
stock outstanding and retained earnings of $17 million. During 2009, Falcon earned $12
million, declared a 5% stock dividend when the price of the stock was $19 per share, and paid
a year-end cash dividend of $2.50 per share. (The cash dividend was declared after the stock
dividend had been distributed.) At the end of 2009, what are the company's retained
earnings?
Ending retained earnings: $21,850,000

Feedback:
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-109
125. Stock dividend and treasury stock

At the beginning of the current year, King Cole, Inc. had 300,000 shares of capital stock
outstanding and total stockholders' equity of $1,200,000. During the year, the company earned
net income of $325,000, declared cash dividends of $150,000, distributed a 5% stock dividend
of 15,000 shares when the market price of the stock was $16 per share, and purchased 3,000
shares of treasury stock at a cost of $13 per share. Compute the following at the end of the
current year:
(a) Total stockholders' equity:
(b) Number of shares of stock outstanding:
(c) Book value per share:
(a)Total stockholders' equity:

$1,200,000 + $325,000 - $150,000 - $39,000 = $1,336,000
(b)Shares outstanding:
300,000 + 15,000 - 3,000 = 312,000
(c)Book value per share:
$1,336,000 (part a)/312,000 shares (part b) = $4.28 per share
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
12-110

The stockholders' equity section of the balance sheet of Nautilus Corporation at December 31,
Answer the following questions based on the stockholders' equity section given above. Each
question is a separate situation, unless otherwise indicated.
(a). What is the total dollar amount paid annually as dividends to preferred stockholders?
(b). What was the average issue price per share of preferred stock?
(c). What was the average issue price per share of common stock?
(d). How many shares of common stock are outstanding?
(e). What is the book value per share of the common stock?
(f). If all the treasury stock is reissued at a price of $45 per share, what amount will be
credited to the account Additional Paid-In Capital: Treasury Stock Transactions?
(a) $100 par x 8% x 14,000 shares = $112,000

(b) ($1,400,000 + $344,000) ÷ 14,000 shares = $124.57 per share
(c) ($1,000,000 + $2,835,000) ÷ 100,000 shares issued = $38.35 per share
(d) 100,000 shares issued - 4,000 shares held in treasury = 96,000 shares
(e) ($6,699,000 - $112,000) = $6,587,000 ÷ 96,000 shares outstanding = $68.61 per share
(f) ($45 x 4,000 shares) - $160,000 = $20,000
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
sheet.
12-111

The stockholders' equity section of the balance sheet of Creative Corporation at December 31,
company had no treasury stock transactions before 2009.
(a) What is the average price per share of preferred stock?
(b) How many shares of common stock are outstanding?
(c) A small stock dividend of 5,000 shares was declared and distributed during 2009. What
(d) If Creative Corporation had reacquired 7,000 shares of treasury stock early in 2009,
(e) Assume all remaining treasury stock is reissued at a price of $12 per share in January of
2010.
Give the journal entry to record this transaction.
(a) ($800,000 + $160,000) 8,000 shares - $120 per share.

(b) 50,000 shares issued - 5,000 held in treasury = 45,000 shares.
(c) Market price per share on stock dividend declaration date = $130,000 5,000 shares =
$26 market value in excess of par.
(d) Treasury stock reissued at $11 share.
2,000 shares treasury stock reissued (7,000 - 5,000 remaining) $6,000 2,000 shares =
$3.00 per share in excess of cost, received when the shares were reissued.
12-112
AACSB: Analytic
Bloom's: Analyze
Difficulty: Medium
sheet.
128. Special sections in an income statement What is the purpose of arranging an income
statement to show subtotals for Income from Continuing Operations and for Income before
Extraordinary Items?
The purpose of developing subtotals such as Income from Continuing Operations or Income
before Extraordinary Items is to assist users of the income statement in making forecasts of
future earnings. By excluding the operating results of discontinued operations or the effects of
unusual and nonrecurring transactions, these subtotals indicate the amount of income derived
from the company's ongoing, normal operations.
AACSB: Communications
Bloom's: Understand
Difficulty: Medium
129. Accounting changes and prior period adjustment

Prior period adjustments affect the income of past accounting periods. Explain how prior
period adjustments are shown in the financial statements.
A prior period adjustment represents a correction of an error in the amount of income

reported in a prior period. Prior period adjustments are shown in the statement of retained
earnings as an adjustment to the balance of retained earnings at the beginning of the period in
which the error was discovered.
AACSB: Communications
Bloom's: Understand
Difficulty: Medium
12-113
130. Stock dividends

What is the effect of a stock dividend?
Stock dividends do not change total assets. The number of shares outstanding increase, but
total stockholders' equity does not change. They are popular with stockholders because the
dividend is not subject to income taxation until the shares received are sold.
AACSB: Analytic
Bloom's: Understand
Difficulty: Easy
131. MRB Company purchased 1,000 shares of its own outstanding $12 par value common
stock for $16 per share and then sold 400 shares six months later for $19 a share. Prepare the
journal entries for the purchase of the stock and for the sale.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
sheet.
12-114
132. Baron Corporation was authorized by its charter to issue 80,000 shares of 12%, $100 par
cumulative preferred stock and 200,000 shares of $1 par value common stock. In its first year
of operations, Baron had the following transactions.
(1) Sold 50,000 shares of common stock for $300,000 on January 1.
(2) Sold 3,000 shares of preferred stock for $360,000 on January 1.
(3) Earned $185,000 for the sale of their merchandise of which $135,000 was on credit.
(4) Had expenses of $122,500 in connection with selling the merchandise. All expenses were
paid in cash.
(5) Purchased 5,000 shares of outstanding common stock for $8.00 per share for the treasury.
(6) Declared a dividend of $.20 per share of common stock and for the amount due the
preferred stock.
(7) Paid the required dividends.
Required:
(a). Prepare the necessary journal entries.
(b). Prepare the stockholders' equity section of the balance sheet.
12-115
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
sheet.
12-116
133. Beck Corporation declared a 2-for-1 common stock split, but this transaction was
A. The common stock account is overstated.
outstanding.
D. The par value per share is understated.
134. Fuller Mfg.'s financial statements for the current year include the following:
Income from continuing operations $663,200
Prior period adjustment (increase in prior-year net income, net of taxes) 180,000
Cash dividends paid to preferred stockholders 196,800
Gain from discontinued operations (net of taxes) 433,600
Extraordinary loss (net of tax benefit) 174,400
A. $488,800.
B. $922,400.
C. $725,600.
D. $1,102,400.
135. The following two items are disclosed in the stockholders' equity section of Cort
Corporation's December 31, 2010, balance sheet:
Treasury stock (500 shares, at cost) $50,000
Additional paid-in capital: treasury stock transactions 22,500
If the company had reacquired 3,000 shares of treasury stock in February of 2010 then some
of the treasury stock must have been sold during 2010 for:
A. $9 per share above its par value.
B. $9 per share.
C. $109 per share.
D. $109 per share above its cost.
12-117
136. At the beginning of the current year, Bard Corporation had 400,000 shares of $1 par
after the stock dividend had been distributed.) Bard Corporation's retained earnings at the end
of the year amount to:
A. $16,000,000.
B. $14,660,000.
C. $14,320,000.
D. $14,700,000.
137. Donnell Corp. had 100,000 shares of 8% preferred stock, $100 par, and 500,000 shares
of $1 par common stock outstanding throughout the year. Net income for the year was
$4,800,000, and Donnell declared and distributed a cash dividend of $4 per share on its
common stock. Earnings per share amounted to:
A. $8.80.
B. $4.00.
C. $8.00.
D. $2.00.
12-118
The stockholders' equity section of the balance sheet of Global Publishing at December 31,
company had no treasury stock purchases before 2009.
A. $80.
B. $100.
C. $124.
D. $148.

A. 140,000.
B. 126,000.
C. 500,000.
D. 120,000.
12-119
A. $82 per share.
B. $80 per share.
C. $2 per share.
D. $78 per share.
141. If Global Publishing had reacquired 16,000 shares of treasury stock early in 2009, then
some treasury stock must have been sold during 2009 for:
A. $5 per share.
B. $8 per share.
C. $6 per share.
D. $16 per share.
142. Assume that all remaining treasury stock is reissued at a price of $18 per share in
January of 2010. What amount should be credited to the account Additional Paid-in Capital:
Treasury Stock Transactions in the journal entry to record this transaction?
A. $96,000.
B. $140,000.
C. $112,000.
D. $288,000.
Short Answer Questions
12-120
The stockholders' equity section of the balance sheet of Xanadu Fashions, Inc., at December
31, 2010 appears as follows:
company purchased no treasury stock before 2010.
Average issue price per share of preferred stock: $116 per share ($4,000,000 +
$640,000)/40,000 shares = $116 per share
420,000 shares of common stock outstanding: 450,000 shares issued - 30,000 held in treasury
= 420,000 shares
12-121
Market price per share on stock dividend declaration date: $24.50. $450,000/20,000 shares =
$22.50 market value in excess of par $2 par value + $22.50 excess over par (above) = $24.50
per share
146. If Xanadu Fashions had reacquired 35,000 shares of treasury stock early in 2010,
5,000 shares of treasury stock reissued at $20 per share 5.,000 shares treasury stock reissued
(35,000 - 30,000 remaining) $60,000/5,000 shares = $12 per share in excess of cost was
received when the shares were reissued. $240,000/30,000 shares left = $8 cost + $12 (above)
=$20 reissue price
147. Assume all remaining treasury stock is reissued at a price of $24 per share in January of
2011. Prepare the journal entry to record this transaction:
Cash (30,000 shares x $24 per share) 720,000 Treasury Stock 240,000 Additional Paid-In
Capital: Treasury Stock Transactions 480,000
Essay Questions
12-122
148. Shown below is information relating to operations of R. Brook, Inc for the current year:
Continuing operations:
In the space provided, complete the income statement for R. Brook, Inc., including earnings
per share figures. R. Brook, Inc. has 100,000 shares of a single class of common stock
outstanding throughout the year.
R. BROOK, INC.
Condensed Income Statement
For the Year Ended December 31, 2009
12-123
149. The primary purpose of showing special types of events separately in the income
statement is to:
A. Increase earnings per share.
B. Assist users of the income statement in evaluating the profitability of normal, ongoing
operations.
C. Minimize the income taxes paid on the results of ongoing operations.
D. Prevent unusual losses from recurring.
12-124
150. Which of the following situations would not be presented in a separate section of the
current year's income statement of Hamilton Corporation? (More than one answer may be
correct.) During the current year:
A. Hamilton's St. Louis headquarters are destroyed by a tornado.
B. Hamilton sells its entire juvenile furniture operations and concentrates upon its remaining
children's clothing segment.
C. Hamilton's accountant discovers that the entire price paid several years ago to purchase
company offices in Texas had been charged to a Land account; consequently, no depreciation
has ever been taken on these buildings.
D. As a result of labor union contract changes, Hamilton paid increased compensation
expense during the year.
151. When a corporation has outstanding both common and preferred stock:
A. Basic and diluted earnings per share are reported only if the preferred stock is cumulative.
B. Earnings per share are reported for each type of stock outstanding.
C. Earnings per share are computed without regard to the amount of dividends declared on
preferred stock.
D. Earnings per share are computed without regard to the amount of dividends declared on
common stock.
152. Which of the following is (are) not true about a stock dividend?
A. Total stockholders' equity does not change when a stock dividend is declared or when it is
distributed.
B. Between the time a stock dividend is declared and when it is distributed, the company's
commitment is presented in the balance sheet as a current liability.
C. Stock dividends do not change the relative portion of the company owned by individual
stockholders.
D. Stock dividends have no impact on the amount of the company's assets.
153. The statement of retained earnings:

A. Includes prior period adjustments, cash dividends, and stock dividends.
B. Indicates the amount of cash available for the payment of dividends.
C. Need not be prepared if a separate statement of stockholders' equity accompanies the
D. Shows revenue, expenses, and dividends for the accounting period.
12-125

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Chap012 2

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Chapter 12 - Income and Changes in Retained Earnings

True / False Questions

11. Comprehensive income is a component of net income.

21. Stock splits are always in a 2 for 1 ratio.

22. "Discontinued operations" is an example of an extraordinary item.

25. Large stock dividends tend to keep stock prices down.

29. The expropriation (seizure of) of a multinational company's assets by a government is an

Multiple Choice Questions

34. Stock splits:

35. It would be reasonable to assume that:

36. A small stock dividend is recorded at:

37. Treasury stock appears as:

38. Extraordinary items are found on the income statement:

41. A prior period adjustment is a correction made to:

42. The price-earnings ratio is the:

43. Which of the following would have no effect on Retained Earnings?

48. Large stock dividends tend to:

50. To qualify as an extraordinary item, a gain or loss must:

51. Which of the following would be classified as an extraordinary item?

52. An example of an extraordinary gain or loss is:

54. The amount of earnings per share is usually computed:

57. The numerator in calculating earnings per share is reduced for:

63. Dividends become a liability of a corporation:

65. A liquidating dividend:

67. As a result of a 5% stock dividend:

72. A 2-for-1 stock split:

74. When a stock dividend is declared, total stockholders' equity will:

77. A prior period adjustment appears in:

80. A restriction of retained earnings:

82. A liquidating dividend:

83. The statement of stockholders' equity:

84. A statement of stockholders' equity discloses each of the following except:

115. Accounting terminology

116. Discontinued operations

117. Income statement and earnings per share

118. Income statement and earnings per share

119. Earnings per share-basic and diluted

120. Earnings per share-basic and diluted

121. Stock dividend-effect on book value

122. Stock dividends and stock split-journal entries

123. Equity transactions-journal entries

124. Retained earnings

125. Stock dividend and treasury stock

126. Stockholders' equity

127. Stockholders' equity

129. Accounting changes and prior period adjustment

130. Stock dividends

Multiple Choice Questions

139. How many shares of common stock are outstanding?

Short Answer Questions

144. How many shares of common stock are outstanding?

Multiple Choice Questions

153. The statement of retained earnings:

Chapter 12 Income and Changes in Retained Earnings Answer Key

True / False Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking