CHAPTER 18

______ include(s) all changes in equity during a period except those resulting from investments by owners and distributions to owners.

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1. Net income
2. Distributions to owners
3. Comprehensive income
4. Investments from owners

comprehensive income

Which of the following accurately describes shareholders' equity?

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1. Ownership interests of the shareholders
2. Proceeds from the issuance of bonds
3. Amounts repaid to investors
4. Amounts owed to shareholders

ownership interests of the shareholders

Which of the following accounts are classified as shareholders' equity?

Multiple select question. (#, #, #)

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1. Preferred stock
2. Net unrealized holding gains on investments
3. Additional paid-in capital
4. Investments in securities

1, 2, 3

When investors purchase shares of stock, it is classified as

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1. retained earnings.
2. other comprehensive income.
3. paid-in capital.
4. net income.

paid-in capital

Retained earnings is typically reported on the balance sheet

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1. showing its various components.
2. as a single amount.
3. as a multi-line item.

as a single amount

The change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources is called

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1. assets.
2. comprehensive income.
3. net income.
4. distributions to owners.

comprehensive income

True or false: Treasury stock represents investments in treasury securities of the U.S. government.

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1. True
2. False

false

The ownership interests of the investors in a corporation are referred to as

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1. net income.
2. retained earnings.
3. assets.
4. shareholders equity.

shareholders equity

True or false: The balance sheet should disclose the sources of changes in the stockholders' equity accounts.

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1. True
2. False

false

Which account is a stockholders' equity account?

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1. Bonds payable
2. Investments in common stock
3. Lease obligations
4. Additional paid-in capital

additional paid-in capital

Which of the following may be a source of paid-in capital? (Select all that apply.) (#, #, #)

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1. Company repurchases some of its outstanding common stock
2. Company sells stock to investors
3. Company generates profit from its operations
4. Share-based compensation activities

1, 2, 4

How should cash dividends be reported on the statement of shareholders' equity?

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1. As a reduction of treasury stock.
2. As a reduction of common stock.
3. As a reduction of retained earnings.
4. As a reduction of comprehensive income.

as a reduction of retained earnings

Amounts earned by the corporation on behalf of its shareholders are referred to as

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1. common stock.
2. shareholders' equity.
3. paid-in capital.
4. retained earnings.

retained earnings

Under IFRS, shareholders' equity typically is classified under two categories referred to as: (#, #)

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1. share capital
2. additional contributed capital
3. reserves
4. allowances

1, 3

Shares of stock previously sold by the corporation that are repurchased are called

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1. additional paid-in capital.
2. available for sale securities.
3. treasury stock.
4. investments in securities.

treasury stock

The most important advantage to the corporate form of business is

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1. regulation.
2. ease of formation.
3. limited liability.
4. double taxation.

limited liability

Reports amounts of shareholders' equity at end of reporting periods.

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1. Balance sheet
2. statement of stockholders equity

balance sheet

Reports sources of the changes in stockholders' equity accounts.

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1. Balance sheet
2. statement of stockholders equity

statement of stockholders equity

Corporations raise equity capital by (#, #)

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1. issuing stock.
2. operating at a profit.
3. borrowing money.

1, 2

Which of the following accounts are classified as shareholders' equity? (#, #, #)

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1. common stock
2. additional paid-in capital
3. retained earnings
4. investments in securities

1, 2, 3

Disadvantages of the corporate form of business are (Select all that apply.) (#, #)

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1. government regulation.
2. less paperwork.
3. double taxation.
4. ease of raising capital.

1, 3

A company has available-for-sale debt securities in its portfolio that have increased in value at year-end. How should the unrealized gain on the available-for-sale securities be reported on the statement of shareholders' equity? (Assume the fair value option is not elected.)

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1. As an increase in comprehensive income.
2. As an increase in common stock.
3. As an increase in treasury stock.
4. As an increase in retained earnings.

as an increase in comprehensive income

What type of corporations include churches, hospitals, universities, and charities?

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1. Business
2. Federal
3. Not-for-profit
4. Professional

not-for-profit

Shareholders' equity is classified under IFRS into two categories: share capital and (blank).

reserves

Which of the following has limited liability for its owners, but passes income through to its investors and avoids double taxation?

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1. S corporation
2. C corporation
3. partnership
4. proprietorship

s corporation

In a corporation, shareholders' liability is

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1. unlimited with responsibility for all corporate losses.
2. limited to the amount of aggregate corporate earnings.
3. limited to the amount of the investment.

limited to the amount of the investment

Who regulates the nature of shares that can be authorized, the issuance and repurchase of those shares, and the distributions to shareholders?

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1. Municipality of origin of the corporation
2. Securities and Exchange Commission
3. Treasury Department
4. The state in which the corporation is incorporated

The state in which the corporation is incorporated

Corporations raise capital by (#, #, #)

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1. issuing debt.
2. repurchasing treasury stock.
3. operating at a profit.
4. issuing stock.

1, 3, 4

A corporation is owned by its (blank)

shareholders

Which of the following is subject to double taxation?

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1. Corporations
2. Sole Proprietorships
3. Partnerships
4. Corporations and partnerships

corporations

When a company issues different classes of shares, it must

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1. distinguish the rights for each class of stock.
2. reduce the additional paid-in capital account for the new class of stock.
3. designate which classes have preference over debt in liquidation.
4. charge more for higher classes of stock.

distinguish the rights for each class of stock

The two types of corporations are

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1. profit and not-for-profit.
2. government and nongovernment.
3. federal and state.
4. investing and financing.

profit and not-for-profit

Which type of stock usually has a high par value and a percentage of par value dividend rate?

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1. Preferred stock
2. Both preferred and common stock
3. Common stock

preferred stock

Owners of (blank) corporations have the limited liability of a corporation, but income and expenses are passed through the owners as in a partnership, avoiding double taxation.

s

If preferred shares must be redeemed by a certain date, they should be classified as

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1. equity.
2. debt.

debt

State laws regulate which of the following corporate activities? (Select all that apply.) (#, #, #)

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1. nature of share authorization
2. acquisition of assets
3. issuance of stock
4. repurchase of stock
5. amount of debt allowed

1, 3, 4

Historically, par value was considered to be (just type the #)

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1. the maximum amount of money the company could borrow.
2. the amount of net assets that were not available for distribution to shareholders.
3. the amount of cash that must be maintained in the corporation for contingencies.
4. the amount of retained earnings that must be appropriated for future dividends.

2

True or false: A corporation is owned by debt and equity holders.

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1. True
2. False

false

When a corporation issues shares of common stock for an amount above par, which of the following entries occur? (Select all that apply.) (#, #)

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1. credit to additional paid-in capital
2. credit to retained earnings
3. credit to revenue
4. credit to common stock

1, 4

If more than one class of shares is authorized, what type of information must be specified? (Select all that apply) (#, #)

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1. specific rights for each class
2. annual dividends per share issued to each class
3. designation to distinguish each class

1, 3

When a company issues its shares of stock for a noncash asset, which of the following may provide evidence of fair value of the transaction? (Select all that apply.) (#, #, #)

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1. the book value of the existing shares
2. the net book value of the asset
3. an independent appraisal of the value of the asset
4. the amount of cash that would be paid to purchase the asset
5. the quoted market price for the shares

3, 4, 5

Preferred stockholders usually have preference over common stockholders with respect to which items? (Select all that apply.) (#, #)

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1. issuance of additional shares
2. dividends
3. distribution of assets in liquidation
4. issuance of additional debt

2, 3

When a corporation issues two securities for a single price, how is the issue price usually allocated? (just type the #)

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1. The cash received is allocated to the security with the highest classification.
2. The cash received is allocated equally to each security.
3. The cash received is allocated based on the relative market value of each security.
4. The cash received is allocated based on the par value of each security.

3

Preferred stock is similar to a bond when it has which of the following features? (#, #)

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1. a mandatory redeemable feature
2. a noncumulative feature
3. a participating feature
4. a dividend rate

1, 4

The effect of share issue costs is to (just type the #)

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1. reduce retained earnings when the stock is issued.
2. reduce paid-in capital in excess of par.
3. reduce net income for the period.
4. increase the common stock account.

2

Historically, par value indicated (select all that apply) (#, #, #)

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1. the amount of net assets that were not available for distribution to shareholders.
2. the real value of shares
3. the issue price of all shares
4. the amount of retained earnings that must be set aside for future dividends.

1, 2, 3

A company that repurchases its own securities accounts for the shares of stock as

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1. a contra-asset on the balance sheet.
2. retired shares or treasury shares.
3. an expense on the income statement.
4. a reduction of retained earnings.

retired shares or treasury shares

When common stock has a designated par value, and common stock is issued at an amount above par, which entry is recorded?

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1. Credit common stock for the proceeds.
2. Credit common stock for the par amount.
3. Credit common stock for the amount in excess of par.

credit common stock for the par amount

Treasury shares are the same as shares that have never been issued; therefore, treasury shares

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1. must be subtracted from retained earnings.
2. must be accounted for as a trading security.
3. may not be reissued at a later date.
4. may not vote or receive cash dividends.

may not vote or receive cash dividends

If a corporation issues its shares of stock for a noncash asset, at what amount should the transaction be recorded?

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1. The par value of the stock
2. The fair value of the stock
3. The book value of the asset

the fair value of the stock

When a corporation issues two securities for a single price and the market value of only one security is known, how is the cash received allocated? (just type the #)

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1. The cash received is allocated to each security based on the number of shares issued.
2. Each security is valued at par value with the remainder recorded in additional paid-in capital.
3. The cash received is allocated first to common stock based on its prorated par value, and the remainder is allocated to the other security.
4. The cash received is allocated first to the security for which the fair value is known, and the remainder is allocated to the other security.

4

A company originally issues par value common stock at an amount above par. Subsequently, the company reacquires the shares for more than the issue price and immediately retires the shares. The company has no previous transactions for stock repurchases. Which of the following accounts would be reduced for the repurchase and retirement of the shares? (Select all that apply.) (#, #, #)

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1. common stock
2. investment in securities
3. retained earnings
4. other comprehensive income
5. paid-in capital in excess of par

1, 3, 5

The costs for legal, promotional, and accounting services to issue stock should be

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1. treated as an asset and expensed over the life of the stock.
2. subtracted from the proceeds of issuing stock.
3. added to the additional paid-in capital account.
4. treated as an expense on the income statement.

subtracted from the proceeds of issuing stock

When a corporation repurchases its stock as treasury stock, the number of shares authorized

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1. does not change.
2. decreases.
3. increases.

does not change

When a company repurchases its own shares of stock, what are the two acceptable accounting choices for the transaction? (#, #)

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1. The shares can be formally retired.
2. The shares can be called treasury shares.
3. The shares can be treated as an investment security.
4. The shares are a contra-asset.

1, 2

In year 1, Boise purchased 10,000 shares of treasury stock for $5 per share. In year 3, Boise reissued 1,000 shares of treasury stock for $8 per share. The journal entry to record the transaction in year 3 will include (Select all that apply.) (#, #)

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1. credit treasury stock for $8,000.
2. credit treasury stock for $5,000.
3. credit to paid-in capital from treasury stock for $3,000.
4. credit to retained earnings for $3,000.
5. debit to common stock for $2,000.

2, 3

Which of the following are characteristics of treasury stock? (Select all that apply.) (#, #, #)

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1. It is retired when it is purchased.
2. It does not receive a dividend.
3. It is stock that is repurchased by the company.
4. It has no voting rights.

2, 3, 4

A corporation's accumulated income that has not been distributed as dividends to shareholders is referred to as (blank) earnings.

retained

When a company issues its shares of stock for a noncash asset, which of the following may provide evidence of fair value of the transaction? (Select all that apply.) (#, #, #)

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1. the quoted market price for the shares
2. an independent appraisal of the value of the asset
3. the book value of the existing shares
4. the net book value of the asset
5. the amount of cash that would be paid to purchase the asset

1, 2, 5

When a company repurchases its stock and immediately retires the stock, which of the following occurs? (just type the #)

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1. An asset is recorded for the amount of the stock repurchased.
2. Stock expense is recorded for the amount of the repurchase.
3. Retained earnings is reduced for the amount of the repurchase.
4. The equity accounts are reduced for the amount in which the shares were originally sold.

4

When a corporation distributes assets of the company to its investors, it is referred to as a(n)

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1. warrant.
2. expense.
3. dividend.
4. option.

dividend

When a company repurchases shares held as treasury stock, the number of shares outstanding ______.

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1. decreases
2. remains the same
3. increases

decreases

A liquidating dividend means that

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1. net income exceeds dividends.
2. dividends exceed retained earnings.
3. dividends exceed net income for the period.
4. dividends are paid on treasury stock.

dividends exceed retained earnings

In year 1, Clark purchased 1,000 shares of treasury stock for $10 per share. In year 2, Clark reissued 200 shares of treasury stock for $14 per share. The journal entry to record the transaction in year 2 will include a credit to (just type the #)

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1. treasury stock for $2,800.
2. common stock for $2,000.
3. retained earnings for $800.
4. treasury stock for $2,000.

4

A corporation's accumulated, undistributed net income or loss is referred as

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1. comprehensive income.
2. accumulated comprehensive income.
3. retained earnings.
4. corporate dividends.

retained earnings

A restriction of retained earnings (select all that apply) (#, #)

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1. indicates management's intention to withhold assets for a specified purpose.
2. indicates that cash has been set aside for future dividends.
3. signifies cash may not be used for stock repurchases.
4. communicates the portion of retained earnings not available for dividends.

1, 4

When does a dividend become a liability to a corporation?

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1. When it is declared by the board of directors
2. On the last day of the fiscal year
3. At the end of each quarter
4. On the ex-dividend date

when it is declared by the board of directors

A distribution of assets to shareholders is referred to as a(n) (blank)

dividend

A company that is distributing liquidating dividends tends to be in the process of:

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1. reorganizing
2. dissolving
3. starting up

dissolving

The date on which the board of directors announces that a dividend will be paid is referred to as the

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1. declaration date.
2. ex-dividend date.
3. record date.
4. payment date.

declaration date

The ex-dividend date is usually 1 day

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1. before the payment date.
2. after the declaration date.
3. before the date of record.
4. before the declaration date.

before the date of record

A restriction of retained earnings signifies that (type the #)

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1. a portion of retained earnings is not available for dividends.
2. cash may not be used for stock repurchases.
3. retained earnings is negative.
4. no cash is available for investment purchases.

1

A nonreciprocal transfer to owners is referred to as a

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1. property dividend.
2. stock dividend.
3. stock split.
4. treasury stock.

property dividend

The date on which a cash dividend becomes a liability to a corporation is the

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1. payment date.
2. ex-dividend date.
3. declaration date.
4. record date.

declaration date

Distributions of stock to current shareholders of a corporation are called what type of distribution?

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1. cash dividend
2. stock dividend
3. treasury stock
4. property dividend

stock dividend

When a corporation distributes assets of the company to its investors, it is referred to as a(n)

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1. dividend.
2. warrant.
3. expense.
4. option.

dividend

Which of the following dividends has no effect on total owners' equity?

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1. stock dividend
2. property dividend
3. cash dividend

stock dividend

The date on which a company determines the registered owners of the stock who will receive a dividend is referred to as the

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1. declaration date.
2. record date.
3. payment date.
4. ex-dividend date.

record date

A 2-for-1 stock split increases the marketability of the stock because

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1. shareholders receive cash.
2. the market price per share decreases.
3. the new shares are restricted.
4. investors have twice as many shares to sell.

the market price per share decreases

In order to receive a dividend, investors must purchase shares of stock before the

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1. ex dividend date.
2. treasury date.
3. payment date.

ex dividend date

Royce has 100,000 shares of $10 par issued and outstanding. Royce declares a 2-for-1 stock split in the form of a stock dividend. Which of the following are true? (Select all that apply) (#, #)

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1. The number of shares outstanding increases.
2. Treasury stock increases.
3. A loss is recorded for the amount of the stock dividend.
4. The par value will not change.

1, 4

A property dividend (Select all that apply.) (#, #)

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1. reduces retained earnings.
2. is a noncash distribution to owners.
3. is the issuance of common stock to investors.
4. reduces the common stock account.

1, 2

Miles Corp. declares and distributes a 3-for-1 stock split effected in the form of a 200% stock dividend. Miles had 10,000 shares of $1 par value common stock valued at $8 per share before the stock split. If Miles wishes to capitalize retained earnings, the journal entry required to record the stock split would include a debit to (type the #)

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1. retained earnings $30,000.
2. paid-in capital in excess of par $20,000.
3. common stock $20,000.
4. retained earnings $20,000.
5. stock investment $30,000.

4

Which of the following transactions are classified as a stock dividend? (type the #)

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1. A distribution of stock to corporate executives as an inducement to extend their contract with the corporation.
2. A distribution of stock options to current employees as incentive compensation.
3. A distribution of shares of stock held as an investment to stockholders of the corporation.
4. A distribution of additional shares of a corporation's stock to current shareholders of the corporation.

4

The journal entry to record a stock split effected in the form of dividends may include which of the following? (Select all that apply.) (#, #, #)

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1. credit to paid-in-capital
2. debit to paid-in-capital
3. debit to common stock
4. credit to common stock
5. debit to retained earnings

2, 4, 5

Which type of dividend does not reduce the assets of the firm or create a liability?

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1. cash dividend
2. property dividend
3. stock dividend

stock dividend

Mueller Company issues one share in exchange for two outstanding shares of common shares. Mueller must have had a:

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1. initial public offering
2. stock split
3. reverse stock split
4. large stock dividend

reverse stock split

A frequent reason for a stock split is to (type the #)

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1. shift amounts from retained earnings to other equity accounts.
2. give the investors an extra dividend for the year.
3. cause the market price per share to decline.
4. issue more shares of stock so investors have more value.

3

The most likely reason for a company to declare a reverse stock split is to (type the #)

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1. increase the number of shares outstanding.
2. decrease the par value of the shares.
3. decrease the future price of the stock.
4. increase the market value of the shares.

increase the market value of the shares

A stock split effected in the form of a large stock dividend (select all that apply) (#, #)

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1. reduces paid in capital - excess of par.
2. increases retained earnings by the fair value of the dividend.
3. decreases the par value of the stock.
4. has no effect on the par value of the stock.

1, 4

When stock splits or stock dividends result in fractional shares, the situation is handled by (type the #)

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1. issuing the fractional shares as redeemable preferred stock.
2. retiring the stock in proportion to the amount not distributed.
3. issuing cash payments for the fractional shares.
4. issuing an additional share of stock.

3

Miles Corp. declares and distributes a 3-for-1 stock split effected in the form of a 200% stock dividend. Miles had 10,000 shares of $1 par value common stock valued at $8 per share before the stock split. If Miles **does not capitalize retained earnings**, the journal entry required to record the split would include a debit to (type the #)

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1. retained earnings $30,000.
2. stock investment $30,000.
3. paid-in capital in excess of par $20,000.
4. common stock $20,000.

3

True or false: The return on shareholders' equity ratio is calculated as net income divided by common stock.

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1. True
2. False

false

Which of the following describe the ways in which companies may record stock splits effected in the form of dividends? (Select all that apply.) (#, #)

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1. Reduce the paid-in capital in excess of par account.
2. Increase the treasury stock account.
3. Record the stock dividend at fair value and recognize a gain.
4. Capitalize retained earnings.

1, 4

The return to common shareholders' equity is calculated by subtracting ______ from net income and dividing that amount by average ______. (type the #)

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1. preferred dividends; long-term debt outstanding
2. common dividends; shareholders' equity attributed to common shareholders
3. common dividends; net assets
4. preferred dividends; shareholders' equity attributed to common shareholders

4

When a company decreases its outstanding shares of stock by exchanging 1 share of stock for 10 shares, this is referred to as a(n)

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1. equity revaluation.
2. treasury stock repurchase.
3. reverse dividend.
4. reverse stock split.

reverse stock split

A limitation of the return on shareholders' equity ratio is that (type the #)

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1. net income reflects accrual accounting estimates
2. it is based on the market value of equity
3. it requires estimating fair value
4. it uses the book value of equity

it uses the book value of equity

If a company wishes to increase its stock price, it might declare a(n) (blank) stock split.

reverse

A quasi-reorganization allows a firm that is undergoing financial difficulties to (type the #)

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1. increase the market value of its common shares outstanding
2. increase depressed asset values and reduce a retained deficit
3. write-down inflated assets and reduce an accumulated deficit

3

When stock splits or stock dividends result in fractional shares, companies issue (blank) payments along with the additional shares to compensate for the fractions.

cash