Acctg 104 Equity Financing

 CHAPTER 11 
Equity Financing
MULTIPLE CHOICE QUESTIONS
Theory/Definitional Questions
1 Preferred stock and basic shareholder rights

2 Features of preferred stock as perceived by common shareholders
3 Basic shareholder rights
4 Determining compensation expense under the intrinsic value method
5 Accounting for stock options under the fair value method
6 Accounting for stock options under the intrinsic value method
7 Disclosures--fair value method vs. intrinsic value method
8 Adjustment to retained earnings on stock conversions
9 Equity transactions effecting retained earnings
10 State laws and their effect on dividend payments
11 Components of comprehensive income
12 Use of equity reserves under international accounting standards
13 Definition of par value of common stock
14 Entry to record fully paid stock subscription
15 Treatment of dividends not declared or paid on cumulative preferred stock
16 Presentation of treasury stock
17 Treatment of gains/losses on treasury stock sale/purchase
18 Determine credit amount per share to common stock (stock rights)
19 Journalize exercise of stock rights
20 Effect of preferred stock issuance on preferred stock outstanding
21 Effect of stock split on assets, equity, and paid-in capital
22 Effect of subscription sale on additional paid-in capital
23 Classification of stock warrants outstanding
24 When common stock shares issued are greater than shares outstanding
25 Cost/par value method of accounting for treasury stock
26 Cost/par value method of accounting for treasury stock
27 Effect of cost method of accounting on retained earnings
28 Effect of par value method on additional paid-in capital and retained
earnings
29 Definition of stock rights
30 Entry for lapse in stock rights
31 Appropriations of retained earnings
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150 Chapter 11  Equity
Financing
32 Valuation of property dividend

33 Distribution of a property dividend
34 Definition of liquidating a dividend
35 Treatment of excess on property dividend
36 Effect of dividend on retained earnings and stockholders' equity
37 Effect of a stock dividend
38 Transactions causing an increase in retained earnings
39 Reporting undistributed stock dividends
40 Appropriation of retained earnings/treasury stock purchases
41 Implementation of a quasi-reorganization
42 Effect of quasi-reorganization on capital and retained earnings
43 Effect of dividend distribution on additional paid-in capital and retained
earnings
44 Reasons for journalizing stock dividend
45 Effect of cash dividend declaration on retained earnings
46 Declaration of liquidating dividend
47 Valuation of property dividend
48 Effect of stock split or dividend on retained earnings
49 Effect of stock dividend on retained earnings and total stockholders' equity
Computational Questions
50 Computation of total contributed capital
51 Computation of increase in additional paid-in capital
52 Journalize acquisition of treasury stock
53 Calculate stockholders' equity using cost method
54 Journalize sale of treasury stock
55 Stock warrants—determine amount credited to paid-in capital
56 Computation of compensation expense
57 Computation of par value of stock after split
58 Computation of outstanding shares after split
59 Computation of proceeds allocated to common stock
60 Computation of balance of paid-in capital from treasury stock account
61 Computation of balances of paid-in capital and retained earnings
62 Computation of credit amount to stock account
63 Computation of stockholders' equity using cost method
64 Computation of gain from sale of stock warrants
65 Computation of paid-in capital balance after reverse stock split
66 Journalize declaration of property dividend
67 Computation of Dividends Payable balance
68 Journalize declaration of property dividend
69 Computation of common stock amount after quasi-reorganization
70 Journal entry for a large stock dividend
71 Computation of a small stock dividend
72 Computation of dividends payable on common and preferred stock
73 Computation of increase/decrease in total stockholders' equity from stock
dividend
74 Computation of amount of liquidating dividend
75 Determination of paid-in capital from quasi-reorganization
76 Effect of revaluation on retained earnings
77 Computation of retained earnings balance--stock dividend
78 Computation of effect of stock dividend on common stock, retained
earnings
79 Effect of a stock dividend
80 Journalize distribution of stock dividend
81 Computation of net income given stock and cash dividend amounts
82 Computation of income on receipt of stock dividend
83 Computation of balance of retained earnings
84 Computation of reduction in common stock for quasi-reorganization
85 Accounting for stock appreciation rights
PROBLEMS
1 Computation of balances for all equity accounts
2 Journalize equity transactions
3 Journalize reacquisition, sale of stock under cost and par value
4 Journalize treasury stock transactions under cost method
5 Journalize stock warrant transactions
6 Computation of cash dividends to be received by common stockholders
7 Journalize declaration and payment of stock dividends
8 Journalize declaration and payment of stock dividends
9 Journalize capital stock transactions
10 Computation of equity balances and shares outstanding
11 Prepare statement of retained earnings
12 Journalize recapitalization of assets and elimination of deficit
13 Journalize events of reorganization plan
14 Journalize declaration and payment of cash dividend
15 Describe effects of various equity transactions on statement of cash flows
16 Accounting for a stock option plan
17 Prepare statement of changes in stockholders’ equity
18 Accounting for performance-based stock option plans using fair value and
intrinsic value methods
19 Evaluation of use of Black-Scholes model for stock compensation plans
151
MULTIPLE CHOICE QUESTIONS
c 1. Which of the following shareholder rights is most commonly enhanced in an
LO1 issue of preferred stock?
a. The right to vote for the board of directors.
b. The right to maintain one’s proportional interest in the corporation.
c. The right to receive a full cash dividend before dividends are paid to
other classes of stock.
d. The right to vote on major corporate issues.
d 2. Which of the following features of preferred stock would most likely be

LO1 opposed by common shareholders?
a. Par or stated value.
b. Callable.
c. Redeemable.
d. Participating.
d 3. Which of the following is not one of the basic shareholders rights?

LO1 a. The right to participate in earnings.
b. The right to maintain one’s proportional interest in the corporation.
c. The right to participate in the proceeds of the sale of corporate assets
upon liquidation of the corporation.
d. The right to inspect the accounting records of the corporation.
b 4. The full amount of compensation expense incurred in a compensatory stock

LO5 option plan under the intrinsic value method is known at
a. the grant date.
b. the measurement date.
c. the plan adoption date.
d. the date the options expire.
a 5. The exercise price and market price of stock under a fixed compensatory
stock
LO5 option plan are equal on the grant date. The fair value of the options is
greater
than the option price. Under the fair value method
a. Compensation expense will be recognized in connection with the option
plan.
b. No compensation expense will be recognized in connection with the
option plan.
c. Deferred compensation will be recognized.
d. No paid-in capital from stock options will be recognized.
b 6. The exercise price and market price of stock under a fixed compensatory
stock
LO5 option plan are equal on the grant date. The fair value of the options is
greater
than the option price. Under the intrinsic value method
a. Compensation expense will be recognized in connection with the option
plan.
b. No compensation expense will be recognized in connection with the
option plan.
c. Deferred compensation will be recognized.
d. Paid-in capital from stock options will be recognized.
c 7. Current financial accounting standards require

LO5 a. the use of the fair value method, but not the intrinsic value method.
b. the use of the fair value method and the intrinsic value method to
account for each plan.
c. disclosure in the notes to the financial statements of compensation
expense under the fair value method if the intrinsic value method is
used.
d. disclosure in the notes to the financial statements of compensation
expense under the intrinsic value method if the fair value method is
used.
c 8. An adjustment to retained earnings as a result of a conversion of preferred

LO6 stock to common stock most likely would occur when
a. par value of the preferred stock is high relative to fair value of the
common
stock.
b. par value of the common stock is less than the book value of the
preferred stock.
c. par value of the common stock exceeds the book value of the preferred
stock.
d. par value of the preferred stock is low relative to fair value of the
common.
b 9. Which of the following is least likely to affect the retained earnings

balance?
LO7 a. Conversion of preferred stock into common stock.
b. Stock splits.
c. Treasury stock transactions.
d. Stock dividends.
b 10. Which of the following is most likely to be found in state laws regarding
LO7 payment of dividends?
a. Dividends may be paid from legal capital.
b. Retained earnings are available for dividends unless restricted by
contract or by statute.
c. Unrealized capital is available for any type of dividend.
d. Capital from donated assets is available for dividends.
a 11. Which of the following is not a component of comprehensive income?
LO9 a. Asset revaluation reserve.
b. Net income.
c. Foreign currency translation adjustment.
d. Minimum pension liability adjustment.
b 12. The use of equity reserves under international accounting standards

LO9 a. is strictly voluntary on the part of the management of a company.
b. is based on whether a reserve is part of distributable or nondistributable
equity.
c. is primarily for the benefit of shareholders rather than creditors.
d. results in the elimination of the retained earnings category from the
total equity of a company.
c 13. The par value of common stock represents

LO2 a. the liquidation value of the stock.
b. the book value of the stock.
c. the legal nominal value assigned to the stock.
d. the amount received by the corporation when the stock was originally
issued.
d 14. The entry to record the issuance of common stock for fully paid stock
LO2 subscriptions is
a. a memorandum entry.
b. Common Stock Subscribed
Common Stock
Additional Paid-In Capital
c. Common Stock Subscribed
Subscriptions Receivable
d. Common Stock Subscribed
Common Stock
a 15. Farnon Company has not declared or paid dividends on its cumulative
LO8 preferred stock in the last three years. These dividends should be reported
a. in a note to the financial statements.
b. as a reduction in stockholders’ equity.
c. as a current liability.
d. as a noncurrent liability.
b 16. Which of the following is an appropriate presentation of treasury stock?
LO3 a. As a marketable security
b. As a deduction at cost from total stockholders’ equity
c. As a deduction at cost from total contingent liabilities
d. As a deduction at par from total stockholders’ equity
b 17. Gains and losses on the purchase and resale of treasury stock may be
LO3 reflected only in
a. paid-in capital accounts.
b. paid-in capital and retained earnings accounts.
c. income, paid-in capital, and retaining earnings accounts.
d. income and paid-in capital accounts.
c 18. A company issued rights to its existing shareholders to acquire, at $15 per
LO4 share, 5,000 unissued shares of common stock with a par value of $10 per
share. Common Stock will be credited at
a. $15 per share when the rights are exercised.
b. $15 per share when the rights are issued.
c. $10 per share when the rights are exercised.
d. $10 per share when the rights are issued.
d 19. A company issued rights to its existing shareholders to purchase for par
LO4 unissued shares of common stock with a par value of $10 per share. When
the market value of the common stock was $12 per share, the rights were
exercised. Common Stock should be credited at $10 per share and
a. Paid-In Capital from Stock Rights credited at $2 per share.
b. Additional Paid-In Capital credited at $2 per share.
c. Retained Earnings credited at $2 per share.
d. no credit made to Additional Paid-In Capital or Retained Earnings.
a 20. The issuance of shares of preferred stock to shareholders

LO2 a. increases preferred stock outstanding.
b. has no effect on preferred stock outstanding.
c. increases preferred stock authorized.
d. decreases preferred stock authorized.
b 21. How would a stock split affect each of the following?
LO8
Total
Stockholders' Additional
Assets Equity Paid-In Capital
a. Increase Increase No effect
b. No effect No effect No effect
c. No effect No effect Increase
d. Decrease Decrease Decrease
c 22. On February 1, authorized common stock was sold on a subscription basis
at
LO2 a price in excess of par value, and 20 percent of the subscription price was
collected. On May 1, the remaining 80 percent of the subscription price
was collected. Additional Paid-In Capital would increase on
February 1 May 1
a. No Yes
b. No No
c. Yes No
d. Yes Yes
d 23. Stock warrants outstanding should be classified as

LO4 a. liabilities.
b. reductions of capital contributed in excess of par value.
c. capital stock.
d. additions to contributed capital.
c 24. At the date of the financial statements, common stock shares issued would
LO2 exceed common stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.
c 25. When treasury stock is purchased for more than its par value, Treasury
Stock
LO3 is debited for the purchase price under which of the following methods?
Cost Method Par Value Method
a. No No
b. No Yes
c. Yes No
d. Yes Yes
d 26. When treasury stock is purchased for cash at more than its par value, what
is
LO3 the effect on total stockholders’ equity under each of the following
methods?
Cost Method Par Value Method
a. No effect Decrease
b. Decrease No effect
c. Increase Increase
d. Decrease Decrease
c 27. Treasury stock was acquired for cash at a price in excess of its par value.
The
LO3 treasury stock was subsequently reissued for cash at a price in excess of
its acquisition price. Assuming that the cost method of accounting for
treasury stock transactions is used, what is the effect on retained earnings?
Acquisition of Reissuance of
Treasury Stock Treasury Stock
a. No effect Increase
b. Increase No effect
c. No effect No effect
d. Increase Decrease
d 28. Five thousand shares of common stock with a par value of $10 per share
were
LO3 issued initially at $12 per share. Subsequently, 1,000 of these shares were
acquired as treasury stock at $15 per share. Assuming that the par value
method of accounting for treasury stock transactions is used, what is the
effect of the acquisition of the treasury stock on each of the following?
Additional Retained
Paid-In Capital Earnings
a. Increase No effect
b. Increase Decrease
c. Decrease Increase
b 29. Which of the following is issued to shareholders by a corporation as

evidence
LO4 of the ownership of rights to acquire its unissued or treasury stock?
a. Stock options
b. Stock rights
c. Stock dividends
d. Stock subscriptions
d 30. A company issued rights to its existing shareholders to purchase, for $30
per
LO4 share, unissued shares of $15 par value common stock. When the rights
lapse,
a. Additional Paid-In Capital will be credited.
b. Stock Rights Outstanding will be debited.
c. Gain on Lapse of Stock Rights will be credited.
d. no entry will be made.
b 31. Select the statement that is incorrect concerning the appropriations of

retained
LO7 earnings.
a. Appropriations of retained earnings do not change the total amount of
stockholders’ equity.
b. Appropriations of retained earnings reflect funds set aside for a
designated purpose, such as plant expansion.
c. Appropriations of retained earnings can be made as a result of
contractual requirements.
d. Appropriations of retained earnings can be made at the discretion of the
board of directors.
d 32. When a property dividend is declared and the book value of the property
LO8 exceeds its market value, the dividend is recorded at the
a. market value of the property at the date of distribution.
b. book value of the property at the date of declaration.
c. book value of the property at the date of distribution if it still exceeds the
market value of the property at the date of declaration.
d. market value of the property at the date of declaration.
c 33. On July 31, 2001, Lakers Corporation purchased 500,000 shares of Celtic
LO8 Corporation. On December 31, 2002, Lakers distributed 250,000 shares of
Celtic stock as a dividend to Lakers' stockholders. This is an example of a
a. liquidating dividend.
b. investment dividend.
c. property dividend.
d. stock dividend.
b 34. When a portion of stockholders’ original investment is returned in the form

of
LO8 a dividend, it is called a
a. compensating dividend.
b. liquidating dividend.
c. property dividend.
d. equity dividend.
a 35. When a property dividend is declared and the market value of the property
LO8 exceeds its book value, the excess is credited to
a. Gain on Distribution of Property Dividends.
b. Retained Earnings.
c. Additional Paid-In Capital.
d. the related asset account.
b 36. How would the declaration of a 20 percent stock dividend by Jets

Corporation
LO8 affect each of the following accounts on Jets' balance sheet?
Retained Total Stock-
Earnings holders’ Equity
a. Decrease Decrease
c. No effect Decrease
d. No effect No effect
a 37. When a dividend is declared and paid in stock,

LO8 a. stockholders' equity does not change.
b. total stockholders' equity decreases.
c. the current ratio increases.
d. the amount of working capital decreases.
d 38. Which of the following actions or events does not result in an addition to
LO7 retained earnings?
a. A quasi-reorganization
b. Earning of net income for the period
c. Correction of an error in which ending inventory was understated in a
previous year
d. Issuance of a 3-for-1 stock split
b 39. Undistributed stock dividends should be reported as

LO8 a. a current liability.
b. an addition to capital stock outstanding.
c. a reduction in total stockholders’ equity.
d. a note to the financial statements.
c 40. A restriction of retained earnings is most likely to be required by

LO7 a. incurring a net loss in the current year.
b. incurring a net loss in the prior year.
c. purchasing treasury stock.
d. reissuing treasury stock.
a 41. A quasi-reorganization usually results in a net
LO11 a. write-down of assets and the elimination of a deficit.
b. write-down of assets and the continuation of a deficit.
c. write-up of assets and a net write-down of retained earnings.
d. write-down of assets and a net write-down of retained earnings.
d 42. A company with a substantial deficit undertakes a quasi-reorganization.

LO11 Certain assets will be written down to their present fair market values.
Liabilities will remain the same. How would the entries to record the quasi-
reorganization affect each of the following?
Contributed Capital Retained Earnings
a. Decrease No effect
b. Increase No effect
c. No effect Increase
d. Decrease Increase
d 43. If 40 percent of the recent dividend paid by Packers Corporation was

correctly
LO8 considered to be a liquidating dividend, how would this distribution affect
each of the following accounts?
Additional Retained
Paid-In Capital Earnings
b. No effect No effect
c. Decrease No effect
d 44. Unlike a stock split, a stock dividend requires a formal journal entry in the
LO8 financial accounting records because
a. stock dividends increase the relative book value of an individual’s stock
holdings.
b. stock dividends increase the stockholders’ equity in the issuing firm.
c. stock dividends are payable on the date they are declared.
d. stock dividends represent a transfer from Retained Earnings to Capital
Stock.
c 45. A company declared a cash dividend on its common stock in December

1999,
LO8 payable in January 2000. Retained Earnings would
a. increase on the date of declaration.
b. not be affected on the date of declaration.
c. not be affected on the date of payment.
d. decrease on the date of payment.
d 46. How would the declaration of a liquidating dividend by a corporation affect
LO8 each of the following?
Contributed Total Stock-
Capital holders' Equity
a 47. An investment in marketable securities was accounted for by the cost

method.
LO8 These securities were distributed to stockholders as a property dividend in
a nonreciprocal transfer. The dividend should be reported at the
a. fair value of the asset transferred.
b. fair value of the asset transferred or the recorded amount of the asset
transferred, whichever is higher.
c. fair value of the asset transferred or the recorded amount of the asset
transferred, whichever is lower.
d. recorded amount of the asset transferred.
d 48. How would retained earnings be affected by the declaration of each of the
LO8 following?
Stock Dividend Stock Split
a. Decrease Decrease
b. No effect Decrease
d. Decrease No effect
a 49. How would the declaration of a 10 percent stock dividend by a corporation

LO8 affect each of the following on its books?
Retained Total Stock-
Earnings holders’ Equity
a. Decrease No effect
b. Decrease Decrease
c. No effect Decrease
d. No effect No effect
d 50. The Amelia Corporation was incorporated on January 1, 2002, with the
LO2 following authorized capitalization:
 40,000 shares of common stock, no par value, stated value $40 per
share
 10,000 shares of 5 percent cumulative preferred stock, par value $10
per share
During 2002, Amelia issued 24,000 shares of common stock for a total of
$1,200,000 and 6,000 shares of preferred stock at $16 per share. In
addition, on December 20, 2002, subscriptions for 2,000 shares of
preferred stock were taken at a purchase price of $17. These subscribed
shares were paid for on January 2, 2003. What should Amelia report as
total contributed capital on its December 31, 2002, balance sheet?
a. $1,040,000
b. $1,262,000
c. $1,296,000
d. $1,330,000
b 51. On June 1, Mason Company issued 8,000 shares of its $10 par common
stock
LO2 to Dixon for a tract of land. The stock had a fair market value of $18 per
share on this date. On Dixon’s last property tax bill, the land was assessed
at $96,000. Mason should record an increase in Additional Paid-In Capital
of
a. $96,000.
b. $64,000.
c. $40,000.
d. $16,000.
d 52. On August 1, 2002, B. Doran Company reacquired 4,000 shares of its $15
par
LO3 value common stock for $18 per share. Doran uses the cost method to
account for treasury stock. What journal entry should Doran make to
record the acquisition of treasury stock?
a. Treasury Stock...................................................... 60,000
Additional Paid-In Capital..................................... 12,000
Cash................................................................. 72,000
b. Treasury Stock...................................................... 60,000
Retained Earnings................................................ 12,000
Cash................................................................. 72,000
c. Retained Earnings................................................ 72,000
Cash................................................................. 72,000
d. Treasury Stock...................................................... 72,000
Cash................................................................. 72,000
b 53. Harbottle Corporation was organized on January 3, 2002, with authorized
LO3 capital of 100,000 shares of $10 par common stock. During 2002,
Harbottle had the following transactions affecting stockholders’ equity:
 January 7--Issued 40,000 shares at $12 per share
 December 2--Purchased 6,000 shares of treasury stock at $13 per
share
The cost method was used to record the treasury stock transaction.
Harbottle’s net income for 2002 is $300,000. What is the amount of
stockholders’ equity at December 31, 2002?
a. $640,000
b. $702,000
c. $708,000
d. $720,000
a 54. Thorpe Corporation holds 10,000 shares of its $10 par common stock as
LO3 treasury stock, which was purchased in 1999 at a cost of $120,000. On
December 10, 2000, Thorpe sold all 10,000 shares for $210,000. Assuming
that Thorpe used the cost method of accounting for treasury stock, this sale
would result in a credit to
a. Paid-In Capital from Treasury Stock of $90,000.
b. Paid-In Capital from Treasury Stock of $110,000.
c. Gain on Sale of Treasury Stock of $90,000.
d. Retained Earnings of $90,000.
c 55. On March 2, 2002, Ross Corporation issued 4,000 shares of 6 percent

LO4 cumulative $100 par value preferred stock for $434,000. Each preferred
share carried one nondetachable stock warrant which entitled the holder to
acquire, at $17, one share of Ross $10 par common stock. On March 2,
2002, the market price of the preferred stock (without warrants) was $90
per share and the market price of the stock warrants was $15 per warrant.
The amount credited to Paid-In Capital in Excess of Par-Preferred by Ross
on the issuance of the stock was
a. $0.
b. $8,000.
c. $34,000.
d. $62,000.
b 56. On January 2, 2002, Stoner Corporation granted stock options to key
LO5 employees for the purchase of 60,000 shares of the company’s common
stock at $25 per share. The options are intended to compensate
employees for the next two years. The options are exercisable within a
four-year period beginning January 1, 2004, by grantees still in the employ
of the company. The market price of Stoner’s common stock was $32 per
share at the date of grant. Stoner plans to distribute up to 60,000 shares of
treasury stock when options are exercised. The treasury stock was
acquired by Stoner at a cost of $28 per share and was recorded under the
cost method. Assume that no stock options were terminated during the
year. How much should Stoner charge to Compensation Expense for the
year ended December 31, 2002?
a. $420,000
b. $210,000
c. $180,000
d. $90,000
b 57. On December 10, Daniel Co. split its stock 5-for-2 when the market value
was
LO8 $65 per share. Prior to the split, Daniel had 200,000 shares of $15 par
value stock. After the split, the par value of the stock was
a. $3.00.
b. $6.00.
c. $15.00.
d. $26.00.
d 58. On December 10, Daniel Co. split its stock 5-for-2 when the market value
was
LO8 $65 per share. Prior to the split, Daniel had 200,000 shares of $15 par
value stock. After the split, Daniel’s outstanding shares would be
a. 1,000,000.
b. 200,000.
c. 300,000.
d. 500,000.
b 59. On July 1, Rainbow Corporation issued 2,000 shares of its $10 par
common
LO2 and 4,000 shares of its $10 par preferred stock for a lump sum of $80,000.
At this date, Rainbow’s common stock was selling for $18 per share and the
preferred stock for $13.50 per share. The amount of proceeds allocated to
Rainbow’s preferred stock should be
a. $40,000.
b. $48,000.
c. $54,000.
d. $60,000.
c 60. Victor Corporation was organized on January 2 with 100,000 authorized
LO3 shares of $10 par value common stock. During the year, Victor had the
following capital transactions:
 January 5 -- issued 75,000 shares at $14 per share
 December 27 -- purchased 5,000 shares at $11 per share
Victor used the par value method to record the purchase of the treasury
shares.
What would be the balance in the paid-in capital from treasury stock
account at December 31?
a. $0
b. $5,000
c. $15,000
d. $20,000
d 61. The stockholders’ equity section of Hall Corporation’s balance sheet at

LO3 December 31, 2002, was as follows:
Common stock ($10 par value, authorized
1,000,000 shares, issued and outstanding
900,000 shares)............................................... $ 9,000,000
Paid-In capital in excess of par............................. 2,700,000
Retained earnings................................................. 1,300,000
Total stockholders’ equity...................................... $13,000,000
On January 2, 2003, Hall purchased and retired 100,000 shares of its stock
for $1,800,000. Hall records treasury stock using the par value method.
Immediately after retirement of these 100,000 shares, the balances in the
additional paid-in capital and retained earnings accounts should be
Paid-In Capital Retained
in Excess of Par Earnings
a. $900,000 $1,300,000
b. $1,400,000 $800,000
c. $1,900,000 $1,300,000
d. $2,400,000 $800,000
a 62. In 2002, Wyatt Corporation issued for $110 per share, 15,000 shares of
$100
LO6 par value convertible preferred stock. One share of preferred stock may be
converted into three shares of Wyatt’s $25 par value common stock at the
option of the preferred shareholder. On December 31, 2003, all of the
preferred stock was converted into common stock. The market value of the
common stock at the conversion date was $40 per share. What amount
should be credited to the common stock account on December 31, 2003?
a. $1,125,000
b. $1,500,000
c. $1,650,000
d. $1,800,000
d 63. Cox Corporation was organized on January 1, 2001, at which date it issued
LO3 100,000 shares of $10 par common stock at $15 per share. During the
period January 1, 2001, through December 31, 2003, Cox reported net
income of $450,000 and paid cash dividends of $230,000. On January 10,
2003, Cox purchased 6,000 shares of its common stock at $12 per share.
On December 31, 2003, Cox sold 4,000 treasury shares at $8 per share.
Cox uses the cost method of accounting for treasury shares. What is Cox’s
total stockholders’ equity on December 31, 2003?
a. $1,720,000
b. $1,704,000
c. $1,688,000
d. $1,680,000
d 64. On February 24, BMC Company purchased 4,000 shares of Winn Corp.’s
LO4 newly issued 6 percent cumulative $75 par preferred stock for $304,000.
Each share carried one detachable stock warrant entitling the holder to
acquire at $10 one share of Winn no-par common stock. On February 25,
the market price of the preferred stock ex-warrants was $72 per share, and
the market price of the stock warrants was $8 per warrant. On December
29, BMC sold all the stock warrants for $41,000. The gain on the sale of
the stock warrants was
a. $0.
b. $1,000.
c. $9,000.
d. $10,600.
b 65. On July 1, Black Corporation had 200,000 shares of $10 par common stock
LO8 outstanding. The market price of the stock was $12 per share. On the
same date, Black declared a 1-for-2 reverse stock split. The par value of
the stock was increased from $10 to $20, and one new $20 par share was
issued for each two $10 par shares outstanding. Immediately before the 1-
for-2 reverse stock split, Black’s additional paid-in capital was $650,000.
What should be the balance in Black’s additional paid-in capital account
immediately after the reverse stock split?
a. $450,000
b. $650,000
c. $850,000
d. $1,050,000
b 66. Clayton Co. owned 30,000 common shares of Dayton Corporation
purchased
LO8 in 1999 for $540,000. On September 20, 2002, Clayton declared a
property dividend of 1 share of Dayton for every 5 shares of Clayton stock
held by a stockholder. On that date, there were 50,000 common shares of
Clayton outstanding, and the market value of Dayton shares was $30 per
share. The entry to record the declaration of the property dividend would
include a debit to Retained Earnings of
a. $0.
b. $300,000.
c. $360,000.
d. $540,000.
d 67. Beldon Co. was organized on January 2, 2002, with the following capital
LO8 structure:
10 percent cumulative preferred stock, par value
$100, and liquidation value $105; issued and
outstanding 2,000 shares................................................ $200,000
Common stock, par value $25; authorized 100,000
shares; issued and outstanding 20,000 shares............... 500,000
Beldon’s net income for the year ended December 31, 2002, was $900,000,
but no dividends were declared. Beldon’s balance sheet would report
Dividends Payable at December 31, 2002, of
a. $90,000.
b. $20,000.
c. $2,000.
d. $0.
b 68. On September 20, 2002, Nozzle Corporation declared the distribution of the
LO8 following dividend to its stockholders of record as of September 30, 2002:
 Investment in 100,000 shares of Astro Corporation stock, carrying
value $600,000; fair market value on September 20, $1,450,000; fair
market value on September 30, $1,575,000.
The entry to record the declaration of the property dividend would include a
debit to Retained Earnings of
a. $1,575,000.
b. $1,450,000.
c. $850,000.
d. $600,000.
b 69. The board of directors of Overeager Co. decided that the company should
LO11 undergo a quasi-reorganization effective on December 31, 2002. On that
date, the company determined the following asset values.
Book Value Market Value

Inventory............................................... $ 100,000 $ 110,000
Building................................................. 800,000 400,000
Equipment............................................. 180,000 140,000
$1,080,000 $ 650,000
The stockholders’ equity section at December 31, 2002, is presented below.

Common stock, $20 par, 80,000 shares issued and
outstanding......................................................... $1,600,000
Additional paid-in capital................................................. 800,000
Retained earnings (deficit)............................................... (700,000)
Total.................................................................................. $1,700,000
The quasi-reorganization is to be accomplished by reducing the par value

of the stock to $15 per share. Immediately after the quasi-reorganization,
the common stock amount would be
a. $1,600,000.
b. $1,200,000.
c. $800,000.
d. $400,000.
c 70. On June 1, 2001, Patriot Corporation declared a stock dividend entitling its
LO8 stockholders to one additional share for each share held. At the time the
dividend was declared, the market value of the stock was $10 per share
and the par value was $5 per share. On this date Patriot had 1,000,000
shares of common stock authorized of which 600,000 shares were
outstanding. Assuming the par value of the stock was not changed, what
entry should Patriot make to record this transaction?
a. Retained Earnings.............................................. 6,000,000
Common Stock Dividend Distributable......... 3,000,000
Capital in Excess of Par................................ 3,000,000
b. Stock Dividend Payable..................................... 6,000,000
Capital in Excess of Par................................ 3,000,000
c. Retained Earnings.............................................. 3,000,000
d. No entry
a 71. The stockholders' equity section of Dolphin Corporation as of December
31,
LO8 2002, contained the following accounts:
Common stock, 25,000 shares authorized; 10,000 shares
issued and outstanding ................................................... $ 30,000
Capital contributed in excess of par...................................... 40,000
Retained earnings................................................................. 80,000
$150,000
Dolphin’s board of directors declared a 10 percent stock dividend on April 1,

2003, when the market value of the stock was $7 per share. Accordingly,
1,000 new shares were issued. All of Dolphin's stock has a par value of
$3 per share. Assuming Dolphin sustained a net loss of $12,000 for the
quarter ended March 31, 2003, what amount should Dolphin report as
retained earnings as of April 1, 2003?
a. $61,000
b. $64,000
c. $68,000
d. $73,000
b 72. The Gradison Corporation had the following classes of stock outstanding
as
LO8 of December 31, 2002:
Common stock, $20 par value, 20,000 shares outstanding
Preferred stock, 6 percent, $100 par value, cumulative, 2,000 shares
outstanding
No dividends were paid on preferred stock for 2000 and 2001. On

December 31, 2002, a total cash dividend of $200,000 was declared. What
are the amounts of dividends payable on both the common and preferred
stock, respectively?
a. $0 and $200,000
b. $164,000 and $36,000
c. $176,000 and $24,000
d. $188,000 and $12,000
a 73. On June 30, 2002, O’Hara Co. declared and issued a 10 percent stock
LO8 dividend. Prior to this dividend, O’Hara had 60,000 shares of $10 par value
common stock issued and outstanding. The market value of O’Hara Co.’s
common stock on June 30, 2002, was $24 per share. As a result of this
stock dividend, by what amount would O’Hara’s total stockholders’ equity
increase (decrease)?
a. $0
b. $60,000
c. $84,000
d. $(84,000)
b 74. On January 2, 2000, the board of directors of Gimli Mining Corporation

LO8 declared a cash dividend of $1,200,000 to stockholders of record on
January 18, 2000, and payable on February 10, 2000. The dividend is
permissible by law in Gimli’s state of incorporation. Selected data from
Gimli’s December 31, 1999, balance sheet follow:
Accumulated depletion.......................................................... $ 200,000
Capital stock.......................................................................... 1,100,000
Additional paid-in capital....................................................... 800,000
The $1,200,000 dividend includes a liquidating dividend of

a. $800,000.
b. $700,000.
c. $600,000.
d. $200,000.
b 75. Cardinal Company's balance sheet at December 31, 2001, contained the
LO11 following accounts:
Common stock, $20 par, 100,000 authorized,
60,000 outstanding.......................................................... $1,200,000
Paid-In capital in excess of par............................................. 150,000
Retained earnings (deficit)....................................................
(540,000)
Cardinal's new management suggested, and received approval for a quasi-

reorganization. The new par value is to be $10 a share, Equipment is to be
written down $152,000, and Inventory is to be increased $8,000. How
much Additional Paid-In Capital from Reorganization will initially be
recorded with the entry to reduce the par value of the common stock?
a. $540,000
b. $600,000
c. $690,100
d. $1,000,000
b 76. Cardinal Company's balance sheet at December 31, 2001, contained the
LO11 following accounts:
Common stock, $20 par, 100,000 authorized, 60,000
outstanding....................................................................... $1,200,000
(540,000)
Cardinal's new management suggested, and received approval for a quasi-

reorganization. The new par value is to be $10 a share, Equipment is to be
written down $152,000, and Inventory is to be increased $8,000. What is
the net increase in the deficit from revaluation of assets?
a. $0
b. $144,000
c. $152,000
d. $540,000
a 77. On December 31, 2002, the stockholders’ equity section of Addyson Co.
was
LO8 as follows:
Common stock, par value $10; authorized, 60,000
shares; issued and outstanding, 18,000 shares.............. $180,000
Total stockholders’ equity...................................................... $604,000
On March 31, 2003, Addyson declared a 10 percent stock dividend, and

accordingly 1,800 additional shares were issued, when the fair market
value of the stock was $16 per share. For the three months ended March
31, 2003, Addyson sustained a net loss of $64,000. The balance of
Addyson’s Retained Earnings as of March 31, 2003, should be
a. $99,200.
b. $110,000.
c. $112,000.
d. $128,000.
b 78. Cash dividends on the $10 par value common stock of Sackville Company
LO8 were as follows:
1st quarter of 2002................................................................ $400,000
2nd quarter of 2002............................................................... 450,000
3rd quarter of 2002................................................................ 500,000
4th quarter of 2002................................................................ 550,000
 The 4th quarter cash dividend was declared on December 20, 2002,
to stockholders of record on December 31, 2002. Payment of the
4th quarter dividend was made on January 9, 2003.
 In addition, Sackville declared a 5 percent stock dividend on its $10
par value common stock on December 1, 2002, when there were
150,000 shares issued and outstanding and the market value of the
common stock was $20 per share. The shares were issued on
December 1, 2002.
What was the effect on Sackville’s stockholders’ equity accounts as a result

of the 2002 dividend transactions?
Additional
Common Stock Paid-In Capital Retained Earnings
a. $75,000 credit $0 $1,975,000 debit
b. $75,000 credit $75,000 credit $2,050,000 debit
c. $150,000 credit $150,000 credit $1,900,000 debit
d. $150,000 credit $75,000 credit $2,050,000 debit
d 79. On September 1, 2002, Steelers Corporation declared and issued a 20

percent
LO8 common stock dividend. Prior to this date, Steelers had 20,000 shares of
$2 par value common stock that were both issued and outstanding. The
market value of Steelers' stock was $20 per share at the time the dividend
was issued. As a result of this stock dividend, Steelers' total stockholders'
equity
a. decreased by $40,000.
b. decreased by $400,000.
c. increased by $400,000.
d. did not change.
b 80. Ellis Company has 1,000,000 shares of common stock authorized with a
par
LO8 value of $3 per share of which 600,000 shares are outstanding. Ellis
authorized a stock dividend when the market value was $8 per share,
entitling its stockholders to one additional share for each share held. The
par value of the stock was not changed. Assuming the declaration is not
recorded separately, what entry, if any, should Ellis make to record
distribution of the stock dividend?
a. Retained Earnings........................................... 4,800,000
Common Stock........................................... 1,800,000
Gain on Stock Dividends............................ 3,000,000
b. Retained Earnings........................................... 1,800,000
Common Stock........................................... 1,800,000
c. Retained Earnings........................................... 4,800,000
Common Stock........................................... 1,800,000
Paid-In Capital from Stock Dividends........ 3,000,000
d. Memorandum entry noting the number of additional shares issued as a
dividend
d 81. The following data are extracted from the stockholders’ equity section of the
LO8 balance sheet of Guthrie Corporation:
12/31/01 12/31/02
Common stock ($1 par value)............................... $50,000 $51,000
Paid-In capital in excess of par............................. 25,000 29,000
Retained earnings................................................. 50,000 52,300
During 2002, the corporation declared and paid cash dividends of $7,500
and also declared and issued a stock dividend. There were no other
changes in stock issued and outstanding during 2002. Net income for 2002
was
a. $2,300.
b. $9,800.
c. $10,800.
d. $14,800.
a 82. Cohen Corporation owns 1,000 shares of common stock of Berg, Inc., a
large
LO8 publicly traded company listed on a major stock exchange. If Berg issues a
20 percent stock dividend when the par value is $10 per share and the
market value is $70 per share, how much and what type of income should
Cohen report?
a. $0
b. $2,000 ordinary income
c. $14,000 ordinary income
d. $2,000 ordinary income and $12,000 extraordinary income
a 83. The following was abstracted from the accounts of the Oak Corp. at year-
end:
LO6 Total income since incorporation........................................... $420,000
Total cash dividends paid...................................................... 130,000
Proceeds from sale of donated stock.................................... 45,000
Total value of stock dividends distributed............................. 30,000
Excess of proceeds over cost of treasury stock sold............ 70,000
What should be the current balance of Retained Earnings?

a. $260,000
b. $290,000
c. $305,000
d. $335,000
d 84. Stanley Corp. has incurred losses from operations for several years. At the
LO11 recommendation of the new president, the board of directors voted to
implement a quasi-reorganization, subject to stockholder approval.
Immediately prior to the restatement, on June 30, Stanley’s balance sheet
was as follows:
Current assets....................................................................... $ 550,000
Property, plant and equipment (net)...................................... 1,350,000
Other assets.......................................................................... 200,000
$2,100,000
Total liabilities........................................................................ $ 600,000
Common stock....................................................................... 1,600,000
(400,000)
$2,100,000
The stockholders approved the quasi-reorganization effective July 1, to be

accomplished by a reduction in other assets of $150,000, a reduction in
property, plant and equipment (net) of $350,000, and appropriate
adjustment to the capital structure. To implement the quasi-reorganization,
Stanley should reduce the common stock account in the amount of
a. $0.
b. $100,000.
c. $400,000.
d. $600,000.
a 85. On January 1, 2002, Adams Company offered its top management stock
LO12 appreciation rights with the following terms:
Option price (predetermined)...............................................$20 per share
Number of shares.............................................................................10,000
Holding period................................................................................2 years
Expiration period...................................................................Dec. 31,

2002
The stock appreciation is to be paid in cash upon exercise. The market
value
of Adam’s common was as follows:
Jan.1, 2002............................................................................$20 per
share Dec. 31, 2002...................................................................$24 per
share
Dec. 31, 2003 .......................................................................$28 per
share
How much should Adams disclose on the December 31, 2003, balance
sheet as the liability for stock appreciation rights?
a. $80,000
b. $60,000
c. $40,000
d. $25,000
PROBLEMS
Problem 1
Barker Corp. received a charter authorizing 120,000 shares of common stock at
$15 par value per share. During the first year of operations, 40,000 shares were
sold at $28 per share. 600 shares were issued in payment of a current operating
debt of $18,600. In the first year, the net income was $142,000.
During the year, dividends of $36,000 were paid to stockholders. At the end of the
year, total liabilities were $82,000. Use the given data to compute the following
items at the end of the first year (show all computations):
(1) Total liabilities and stockholders’ equity

(2) Stockholders’ equity
(3) Contributed capital
(4) Issued capital stock (par)
(5) Outstanding capital stock (par)
(6) Unissued capital stock (number of shares)
(7) Paid-In capital in excess of par value
Solution 1
LO2
(1) Shares sold (40,000 x $28)........................................................... $1,120,000
Shares issued in payment of debt (600 x $31)............................ 18,600
Net income............................................................................... 142,000
Total liabilities........................................................................... 82,000
$1,362,600
Less dividends......................................................................... 36,000
Total liabilities & stockholders’ equity...................................... $1,326,600
(2) $1,326,600 - $82,000 = $1,244,600
(3) $1,120,000 + $18,600 = $1,138,600
(4) 40,600 shares x $15 = $609,000
(5) 40,600 shares x $15 = $609,000
(6) 120,000 - 40,600 = 79,400 shares
(7) $1,138,600 - $609,000 = $529,600

Problem 2
* Note to the instructor: Problem 2 can be shortened by eliminating the subscription
of preferred shares (entries e - f).
The following transactions relate to the stockholders’ equity transactions of Lindsay

Corporation for its initial year of existence.
(a) Jan. 7 Articles of incorporation are filed with the state. The state authorized
the issuance of 10,000 shares of $50 par value preferred stock and
200,000 shares of $10 par value common stock.
(b) Jan. 28 40,000 shares of common stock are issued for $14 per share.
(c) Feb. 3 80,000 shares of common stock are issued in exchange for land and
buildings that have an appraised value of $250,000 and $1,000,000,
respectively. The stock traded at $15 per share on that date on the
over-the-counter market.
(d) Feb. 24 2,000 shares of common stock are issued to Shane and Winston,
Attorneys-at-Law, in payment for legal services rendered in
connection with incorporation. The company charged the amount to
organization costs. The market value of the stock was $16 per
share.
(e) Sep. 12 Received subscriptions for 10,000 shares of preferred stock at $53
per share. A 40 percent down payment accompanied the
subscriptions. The balance is due on October 1.
(f) Oct. 1 Received the final payment for 10,000 shares.
Prepare journal entries to record the foregoing transactions. Identify the entries by
letter (a - f).
Solution 2
LO2
(a) No entry is required for the authorization of shares.
(b) Cash (40,000 x $14).............................................................. 560,000

Common Stock (40,000 x $10)..................................... 400,000
Paid-In Capital in Excess of Par--Common............. 160,000
(c) Land ................................................................................. 240,000

Buildings........................................................................... 960,000
Common Stock (80,000 x $10)..................................... 800,000
Paid-In Capital in Excess of Par--Common............. 400,000
Note: The fair market value of the stock is more readily determinable than the
value of the real property because it was traded on the over-the-counter
market on the transaction date. The value of the stock should be assigned
to the land and buildings in proportion to their appraised values.
Cost of Land = $250,000/($250,000 + $1,000,000) x $1,200,000 = $240,000
Cost of Building = $1,000,000/($250,000 + $1,000,000) x $1,200,000 =
$960,000
(d) Organization Costs (2,000 x $16)........................................ 32,000

Common Stock (2,000 x $10)........................................... 20,000
Paid-In Capital in Excess of Par--Common................. 12,000
(e) Cash (10,000 x $53 x 40%)..................................................... 212,000

Subscriptions Receivable................................................ 318,000
Preferred Stock Subscribed (10,000 x $50)..................... 500,000
Paid-In Capital in Excess of Par--Preferred................ 30,000
(f) Cash (10,000 x $53 x 60%)..................................................... 318,000

Subscriptions Receivable............................................ 318,000
Preferred Stock Subscribed............................................. 500,000

Preferred Stock............................................................ 500,000
Problem 3
On August 10, Jameson Corporation reacquired 8,000 shares of its $100 par value
common stock at $134. The stock was originally issued at $110. The shares were
resold on November 21 at $145.
Provide the entries required to record the reacquisition and the subsequent resale
of the stock using the:
(1) Par value method of accounting for treasury stock.
(2) Cost method of accounting for treasury stock.
Solution 3
LO3
(1) Aug. 10 Treasury Stock (8,000 x $100)............................. 800,000
Paid-In Capital in Excess of Par (8,000 x $10)... 80,000
Retained Earnings (8,000 x $24)......................... 192,000
Cash (8,000 x $134)........................................ 1,072,000
Nov. 21 Cash (8,000 x $145)............................................. 1,160,000

Treasury Stock........................................... 800,000
Paid-In Capital in Excess of Par................ 360,000
(2) Aug. 10 Treasury Stock................................................. 1,072,000
Cash........................................................... 1,072,000
Nov. 21 Cash (8,000 x $145)............................................. 1,160,000
Treasury Stock........................................... 1,072,000
Paid-In Capital from Sale of Treasury
Stock (8,000 x $11).................................... 88,000
Problem 4
The data below are from the December 31, 2002, balance sheet of the Handi
Corner Corporation:
Common stock, $50 par, 3,000 shares issued and

outstanding.............................................................. $150,000
Paid-in capital in excess of par........................................ 45,000
Retained earnings............................................................ 75,000
During 2003, the following transactions affecting corporate capital were recorded:
Aug. 16 Purchased 400 shares of treasury stock at $78 per share.

Oct. 23 Purchased 225 shares of stock at $71 per share and immediately
retired the stock.
Nov. 3 Sold 150 shares of the treasury stock purchased on Aug. 16 at $81
per share.
Assuming the cost method is used for treasury stock and that retained earnings are
to be reduced minimally in stock reacquisition transactions, provide the entries
required to record the above transactions.
Solution 4
LO3
Aug. 16 Treasury Stock......................................................... 31,200
Cash (400 x $78)................................................. 31,200
Oct. 23 Common Stock (225 x $50)......................................... 11,250

Paid-In Capital in Excess of Par (225 x $15).............. 3,375
Retained Earnings (225 x $6)..................................... 1,350
Cash (225 x $71)................................................. 15,975
Nov. 3 Cash (150 x $81)......................................................... 12,150

Treasury Stock (150 x $78)................................. 11,700
Paid-In Capital from Sale of Treasury
Stock (150 x $3).................................................. 450
Problem 5
The Perry Company wants to raise additional equity capital. The company decides
to issue 5,000 shares of $25 par preferred stock with detachable warrants. The
package of the stock and warrants sells for $105. Each warrant enables the holder
to purchase two shares of $10 par common stock at $30 per share. Immediately
following the issuance of the stock, the stock warrants are selling at $14 each. The
market value of the preferred stock without the warrants is $96.
(1) Prepare a journal entry for Perry Company to record the issuance of the
preferred stock and the detachable warrants.
(2) Assuming that all the warrants are exercised, prepare a journal entry for Perry
to record the exercise of the warrants.
(3) Assuming that only 70 percent of the warrants are exercised, prepare a journal
entry for Perry to record the exercise and expiration of the warrants.
Solution 5
LO4
(1) Cash (5,000 x $105).............................................................. 525,000
Common Stock Warrants......................................... 66,818
Preferred Stock (5,000 x $25)...................................... 125,000
Paid-In Capital in Excess of Par—Preferred Stock. 333,182
Value assigned to warrants:

14/110 x $105 x 5,000 = $ 66,818
Value assigned to preferred stock:

96/110 x $105 x 5,000 = $458,182
(2) Common Stock Warrants................................................. 66,818

Cash (10,000 x $30).............................................................. 300,000
Common Stock (10,000 x $10)..................................... 100,000
Paid-In Capital in Excess of Par—Common Stock.. 266,818
(3) Common Stock Warrants (70% x $66,818)........................... 46,773

Cash (7,000 x $30) .............................................................. 210,000
Common Stock (7,000 x $10)....................................... 70,000
Paid-In Capital in Excess of Par—Common Stock.. 186,773
Common Stock Warrants (30% x $66,818)........................... 20,045

Paid-In Capital from Expired Stock Warrants.......... 20,045
Problem 6
Bennett Company paid cash dividends totaling $150,000 in 2000 and $75,000 in
2001. In 2002, Bennett intends to pay cash dividends of $800,000. Compute the
amount of cash dividends per share to be received by common stockholders in
2002 under each of the following assumptions. Treat each case independently.
There were no dividends in arrears as of January 1, 2000.
(1) 25,000 shares of common; 100,000 shares of 6 percent, $50 par cumulative
preferred.
(2) 25,000 shares of common; 50,000 shares of 6 percent, $50 par noncumulative
preferred.
(3) 25,000 shares of common; 70,000 shares of 6 percent, $100 par cumulative
preferred.
Solution 6
LO8
(1) Cumulative preferred
Preferred dividends per year: 100,000 shares x $3 = $300,000
Paid In Arrears
Preferred dividends in 2000 .$150,000 $150,000
Preferred dividends in 2001:
Arrearage from 2000 $ 75,000 ( 75,000)
Arrearage from 2001 $300,000
Total in arrears at 12/31/2001 $375,000
Dividends for 2002:
Arrearage from years 2000 and 2001 $375,000
Current year preferred dividend 300,000
Total preferred dividends paid in 2002 $675,000
Remainder to common: $800,000 - $675,000 = $125,000
Common dividends per share: $125,000/25,000 shares = $5.00 per share
(2) Noncumulative preferred

Dividends in arrears for 2000: $ 0
Dividends in arrears for 2001: 0
Dividends for 2002: 150,000
Total preferred dividends $150,000
Remainder to common: $800,000 - $150,000 = $650,000

Common dividends per share: $650,000/25,000 shares = $26.00 per share
(3) Cumulative preferred
Paid In Arrears
Preferred dividends in 2000 .$150,000 $270,000
Preferred dividends in 2001:
Arrearage from 2000 $ 75,000 (75,000)
Arrearage from 2001 420,000
Total in arrears at 12/31/2001 $615,000
Dividends for 2002:
Total dividends paid in 2002............................................ $800,000
Arrearage from years 2000 and 2001.............................. 615,000
Amount available for preferred dividend in 2002............ $185,000
Total preferred dividends $800,000
Remainder to common: $0
Common dividends per share: $0
Problem 7
On January 1, 2002, the records of the Gerrard Corporation showed these
balances:
Common stock--authorized 78,000 shares at $100 par;
issued 30,800 shares.................................................... $3,080,000
Retained earnings................................................................. 2,960,000
During 2002 and 2003, these transactions occurred:

July 1, 2002 Declared stock dividend (from unissued stock) of 1 share for
each 2 shares outstanding, issued September 1. (Prior to the
declaration, the market value of the unissued stock was $115
per share.)
June 1, 2003 Declared stock dividend (from unissued stock) of 1 share for
each 10 shares outstanding, issued August 1. (Prior to the
declaration, the market value of the unissued stock was $120
per share.)
Provide the entries to record the declaration and payment of the stock dividends
during 2002 and 2003.
Solution 7
LO8
2002
July 1 Retained Earnings.............................................. 1,540,000
Stock Dividends Distributable....................... 1,540,000
[(30,800/2) x $100]
Sep. 1 Stock Dividends Distributable............................ 1,540,000

Common Stock ($100 par)................................ 1,540,000
2003
June 1 Retained Earnings.............................................. 554,400
Stock Dividends Distributable....................... 462,000
Paid-In Capital from Stock Dividends........... 92,400
30,800 + 15,400 = 46,200 outstanding shares
46,200 x 10% = 4,620 shares
4,620 shares x $120 = $554,400
Aug. 1 Stock Dividends Distributed............................... 462,000

Common Stock ($100 par)............................ 462,000
Problem 8
Upon organization on January 1, 2002, Okra Inc. was authorized to issue 200,000
shares of $10 par common stock in multiples of 100 shares. During 2002, 110,000
shares were sold at $65 per share; 6,000 shares were later reacquired as treasury
stock at $72 per share. A stock split of 2-for-1 on all issued shares was approved
on December 31, 2002.
During 2003, these dividend and treasury stock transactions occurred:

April 12 Declared and paid a 10 percent stock dividend on all outstanding
shares.
Oct. 17 All treasury stock was sold at $81 per share.
Dec. 4 Declared and paid these dividends:

 $1 cash dividend per share for common stock outstanding
 Property dividend of 1 share of Hall Co. common stock for each
10 shares of Okra stock held. The cost to the company for 1
share of Hall Co. common stock was $25 with a current market
value of $30.
Provide the entries to record the declaration and payment of the dividends on
December 4, 2003.
Solution 8
LO8
Common Stock Description Shares
Issued during 2002..................................................................... 110,000
Reacquired during 2002............................................................. (6,000)
Outstanding on December 31, 2002........................................... 104,000
Outstanding after 2-for-1 stock split, December 31, 2002

(104,000 x 2)........................................................................... 208,000
10% stock dividend, April 12 (10% x 208,000)................................. 20,800
Resale of treasury stock, Oct. 17 (6,000 x 2)................................. 12,000
Outstanding December 4, 2003.................................................. 240,800
2003
Dec. 4 Retained Earnings................................................... 240,800
Cash Dividends Payable (240,800 x $1)................. 240,800
Cash Dividends Payable......................................... 240,800

Cash ................................................................. 240,800
Dec. 4 Retained Earnings (24,080 x $30)................................ 722,400

Property Dividends Payable (24,080 x $25)........... 602,000
Gain on Distribution of Property Dividends (24,080 x $5) 120,400
Property Dividends Payable.................................... 602,000

Investment in Hall Co. Stock.............................. 602,000
Problem 9
During 2002, the following transactions related to the capital stock of the Buffet-Line
Corp. occurred:
Jan. 7 Declared a $.75 cash dividend on 150,000 shares of preferred stock.
Feb. 7 Paid dividends on preferred stock.
March 4 Declared a $.50 cash dividend on 200,000 shares of common stock with a
$20 par value.
March 18 Paid dividends on common stock.
June 30 Split common stock 4-for-1.
July 9 Purchased 12,000 shares of Buffet-Line’s own common stock at $32 per
share; acquisition recorded at cost.
Sept. 10 Declared a cash dividend of $.40 per share on common stock
outstanding.
Sept. 18 Paid dividends on common stock.
Provide the entries to record the above transactions.

Solution 9
LO8
Jan. 7 Retained Earnings (150,000 x $.75)........................... 112,500
Cash Dividends Payable--Preferred Stock..... 112,500
Feb. 7 Cash Dividends Payable--Preferred Stock........... 112,500

Cash................................................................. 112,500
Mar. 4 Retained Earnings (200,000 x $.50)........................... 100,000

Cash Dividends Payable--Common Stock...... 100,000
Mar. 18 Cash Dividends Payable--Common Stock............ 100,000

Cash................................................................. 100,000
June 30 Memorandum entry
July 9 Treasury Stock--Common..................................... 384,000

Cash................................................................. 384,000
Sept. 10 Retained Earnings................................................ 315,200

Cash Dividends Payable--Common Stock
[(800,000 - 12,000) x $.40]....................................... 315,200
Sept. 18 Cash Dividends Payable--Common Stock............ 315,200

Cash................................................................. 315,200
Problem 10
The stockholders’ equity section of Jessie Corp. is presented below.
Common stock, $20 par value, authorized 1,000,000 shares,

issued and outstanding 400,000 shares............................... $ 8,000,000
Additional paid-in capital............................................................ 2,400,000
Retained earnings....................................................................... 10,800,000
Total stockholders’ equity............................................................ $21,200,000
Complete the following table to depict the number of shares of stock and balances in
the stockholders’ equity accounts after each of the following transactions. Each
situation is to be considered independently of the others.
(a) 15 percent stock dividend, market value $25 per share
(b) 2-for-1 stock split
(c) 100 percent stock dividend, market value $25 per share
Additional Total
Outstanding Common Paid-In Retained Stockholders’
Shares Stock Capital Earnings Equity
(a)
(b)
(c)
Solution 10
LO8
Additional Total
Outstanding Common Paid-In Retained Stockholders’
Shares Stock Capital Earnings Equity
(a) 460,000 $9,200,000 $2,700,000 $9,300,000 $21,200,000

(b) 800,000 $8,000,000 $2,400,000 $10,800,000 $21,200,000
(c) 800,000 $16,000,000 $2,400,000 $2,800,000 $21,200,000
Problem 11
The following information pertains to Rondo Corp. for the year ended September 30,
2002.
Net income.......................................................................................... $ 75,000

Retained earnings, Oct. 1, 2001......................................................... 860,000
Cash dividends declared.................................................................... 16,400
Stock dividends declared.................................................................... 41,000
Overstatement of depreciation expense of 1998 and 1999—pretax.. 62,000
Tax rate................................................................................................ 30%
Prepare a statement of retained earnings for Rondo Corp. for the year ended
September 30, 2002.
Solution 11
LO6
Rondo Corp.
Statement of Retained Earnings
For Year Ended September 30, 2002
Retained earnings, October 1, 2001, as originally reported. $ 860,000

Prior period adjustment--overstatement of depreciation, net
of income taxes of $18,600............................................ 43,400
Retained earnings, October 1, 2001, as restated................. $ 903,400
Add: Net income.............................................................. 75,000
Less: Cash dividends declared.................................. $ 16,400
Stock dividends declared.................................. 41,000 57,400)
Retained earnings, September 30, 2002.............................. $ 921,000
Problem 12
The board of directors of Logan Piano Co. decided that the company should undergo
a quasi-reorganization effective on December 31, 2002. On that date, the company
determined the following asset values.
Book Value Market Value

Machinery............................................. $ 40,000 $ 40,000
Building................................................. 300,000 175,000
Equipment............................................. 95,000 80,000
$435,000 $295,000
The stockholders’ equity section at December 31, 2002, is presented below.

Common stock, $25 par, 25,000 shares issued and outstanding.... $625,000
Additional paid-in capital.................................................................. 250,000
Retained earnings (deficit)............................................................... (225,000)
Total……………………………………………………………… $650,000
The quasi-reorganization is to be accomplished by reducing the par value of the

stock to $20 per share.
(1) Prepare the journal entry required to adjust the assets.
(2) Prepare the journal entry to record the recapitalization.
(3) Prepare the journal entry to record the elimination of the deficit.
Solution 12
LO11
(1) Adjustment of asset values to proper carrying amounts:
Retained Earnings................................................ 140,000
Building............................................................ 125,000
Equipment........................................................ 15,000
(2) Recapitalization:
Common Stock (25,000 x $5 par reduction)................... 125,000
Additional Paid-In Capital................................ 125,000
(3) Elimination of deficit:

Additional Paid-In Capital..................................... 365,000
Retained Earnings........................................... 365,000
($225,000 + $140,000)
Problem 13
The balance sheet below was prepared for the Cardenas Corporation just prior to a
quasi-reorganization:
Cardenas Corporation
Balance Sheet
July 31, 2002
Assets
Current assets................................................................................. $ 400,000
Land. .….......................................................................................... 200,000
Buildings and equipment................................................................ 1,700,000
Less accumulated depreciation--buildings and equipment............ (600,000)
Total assets.......................................................................... $ 1,700,000
Liabilities and Stockholders’ Equity

Current liabilities............................................................................. $ 200,000
Capital stock (par $50).................................................................... 1,600,000
Paid-In capital in excess of par....................................................... 320,000
Retained earnings (deficit).............................................................. (420,000)
Total liabilities and stockholders’ equity.............................. $ 1,700,000
On August 15, 2002, the stockholders approved a reorganization plan with these
provisions:
 Gross buildings and equipment are to be adjusted to their current value of

$1,100,000; the accumulated depreciation is to reflect 40 percent
depreciation on the revised value.
 The capital stock is to be reduced to a par value of $20 per share.
 The deficit is to be applied to the paid-in capital in excess of par on capital
stock; any excess is to be charged to the paid-in capital from the reduction in
value assigned to the capital stock created by the restatement of capital
stock.
Provide the entries required to give effect to the reorganization plan.
Solution 13
LO11
Aug. 15 Retained Earnings......................................................... 440,000
Accumulated Depreciation--Buildings and
Equipment..................................................................... 160,000
Buildings and Equipment......................................... 600,000
15 Capital Stock ($50 par).................................................1,600,000

Capital Stock ($20 par)............................................ 640,000
Paid-In Capital from Reduction in Stock Par Value. 960,000
15 Paid-In Capital in Excess of Par................................... 320,000

Paid-In Capital from Reduction in Stock Par Value...... 540,000
Retained Earnings................................................... 860,000
Problem 14
On July 23, Tinbabe Company declared a cash dividend totaling $80,000.
Stockholders were notified that $15,000 of this dividend represented a liquidating
dividend. At the time, the balance in Paid-In Capital in Excess of Par was $113,000.
Make the journal entries to record (1) the declaration and (2) the payment of this
dividend.
Solution 14
LO8
(1) Dividends (or Retained Earnings)......................................... 65,000
Paid-In Capital in Excess of Par........................................... 15,000
Dividends Payable........................................................ 80,000
(2) Dividends Payable................................................................. 80,000

Cash ............................................................................ 80,000
Problem 15
Indicate how each of the following transactions would be reflected in a statement of
cash flows:
(1) Cash dividends declared and paid during the year.

(2) A 10 percent stock dividend declared and distributed during the year.
(3) A 50 percent stock dividend declared and distributed during the year.
(4) A property dividend declared and distributed during the year.
(5) A retained earnings appropriation made during the year.
Solution 15
LO8
(1) Cash outflow in the financing activities section.
(2) Not reflected in the statement of cash flows.
(4) Not reflected in the statement of cash flows. Supplemental disclosure.
Problem 16
On January 1, 1998, Thomas Company granted its 20 top executives stock options
to acquire 6,000 shares of $10 par value common stock for $15 per share in the year
commencing January 1, 2001. The market price of Thomas stock is $20 on the date
of the grant. The executives must remain in the employ of the company only until
December 31, 1999, to retain their options.
The market price of the stock is $20, $25, and $26 on December 31, 1998,
1999, and 2001, respectively. On January 1, 2001, options equivalent to 5,200
shares are exercised, with no other exercises of options during the year.
Prepare the journal entries necessary under APB Opinion No. 25 on January 1,
1998,
December 31, 1998, December 31, 1999, and during the year beginning January 1,
2001.
Solution 16
LO5
Jan. 1, 1998 No entry required.
Dec. 31, 1998 Salary Expense.................................................. 15,000

Paid-in Capital-Stock Options................. 15,000
Dec. 31, 1999 Salary Expense.................................................. 15,000

Paid-in Capital-Stock Options................. 15,000
Jan. 1, 2001 Cash (5,200 shares x %15)................................ 78,000
Paid-in Capital-Stock Options............................ 26,000
(5,200 shares x ($20 - $15)
Common Stock....................................... 52,000
Paid-in Capital in Excess of Par........... 52,000
(5,200 shares x ($20 - $10)
Dec. 31, 2001 Paid-in Capital-Stock Options............................ 4,000

Paid-in Capital in Excess of Par........... 4,000
Problem 17
The accounts from the stockholders’ equity section of the balance sheet of Western
Company showed the following at December 31, 2001:
Common Stock $ 475,000

Paid-in Capital in Excess of Par............................. 6,650,000
Retained Earnings.................................................. 787,500
Western issued 475,000 shares of the $1 par value common stock on January 1,
2001.
The company also is authorized to issue 500,000 shares of $5 par value, 6%

preferred stock.
During 2002, Western had the following transactions:
Jan. 10 Issued an additional 90,000 shares of common stock at $17 per share.
Apr. 1 Issued 100,000 shares of preferred stock at $8 per share.
July 19 The board of directors authorized the appropriation of $295,000 of
retained earnings for the purchase of equipment.
Oct. 23 Sold an additional 60,000 shares of preferred stock at $9 per share.
Dec.31 Net income for the year was $1,200,000. The board of directors
declared a dividend of $623,000 to stockholders of record on January
15, 2003, to be paid on February 1, 2003.
Prepare a statement of changes in stockholders’ equity for 2002 using the

information given above.
192 Chapter 11  Equity Financing
Solution 17
LO10
Western Company
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2002
Paid-in Paid-in
Capital Capital
Preferred In Excess Common In Excess Retained
Stock of Par Stock of Par Earnings
Total
Balances,
Dec. 31, 2002 $ -0- $ -0- $475,000 $6,650,000 $ 787,500 $ 7,912,000
Jan. 10:
Issued 90,000
common at $17 90,000 1,440,000 1,530,000
Apr. 23:
Issued 100,000
preferred at $8 500,000 300,000 800,000
Oct 23:
Issued 60,000
preferred at $9 300,000 240,000 540,000
Dec. 31:
Net income for
2002 1,200,000 1,200,000
Cash dividends:
Preferred:
$.30 x 160,000 (48,000) (48,000)
Common:
$1.00 x 575,000 (575,000) (575,000)
Balances,
Dec. 31, 2002 $800,000 $540,000 $575,000 $8,090,000 $1,364,500 $11,359,500
Problem 18
The Carver Company began a performance-based employee stock option plan on
January1, 2001. The performance base for the plan is net sales in the year 2003.The
plan provides for stock options to be awarded to employees as a group on the
following basis:
Level Net Sales Range Options Granted

1 < $200,000 5,000
2 $200,000--$399,000 10,000
3 $400,000--$900,000 15,000
Test Bank, Intermediate Accounting, 14th ed. 193
4 >$900,000 20,000
The options are exercisable on January 1, 2004. The option exercise price is $20
per share. On January 1, 2001, each option had a fair value of $12. The market
prices of Carver stock on selected dates in 2001 through 2003 were:
January 1, 2001....................................... $30
December 31, 2001................................. $35
December 31, 2002................................. $40
December 31, 2003................................. $36
Estimates of sales for the year 2003 were:

January 1, 2001....................................... $450,000
December 31, 2001................................. $475,000
December 31, 2002................................. $500,000
Actual sales for 2003 were $600,000.
Calculate the compensation expense Carver should report for the years 2001, 2002,
and 2003 related to the option plan under the:
(1) Fair value method

(2) Intrinsic value method.
Solution 18
LO12
(1) 2001
Fair value method:
Probable 2003 sales at December 31, 2001........................ $375,000
Options for probable sales.................................................... 10,000
Fair value of options at grant date........................................ $12
Estimated compensation expense from options................... $120,000
Number of years between grant date and performance date  3 years
2001 compensation expense................................................ $ 40,000
2002
Probable 2003 sales at December 31, 2002........................ $500,000
Estimated compensation expense from options................... $180,000
Number of years between grant date and performance date 3 years
Revised compensation expense for 2001 and 2002
($180,000 x 2/3).................................................................... $120,000
Less compensation expense for 2001.................................. 40,000

2003
Actual 2003 sales.................................................................. $ 60,000
Options earned...................................................................... 15,000
Compensation expense from options.................................... $ 180,000
Compensation expense recognized in 2001 and 2002........ 120,000
(2) Intrinsic Value Method:

2001
Probable 2003 sales at December 31, 2001........................ $ 375,000
Difference between December 31, 2001, market price and
option price............................................................................ $15
Estimated compensation expense from options................... $ 150,000
Number of years between grant date and performance date  3 years
2002
Probable 2003 sales at December 31, 2002........................ $ 500,000
option price............................................................................ $20
Estimated compensation expense from options................... $ 300,000
Number of years between grant date and performance date 3 years
Revised compensation expense for 2001 and 2002
($300,000 x 2/3).................................................................... $ 200,000
Less compensation expense for 2001.................................. 50,000
2003
Actual 2003 sales.................................................................. $ 600,000
Options earned...................................................................... 15,000
option price............................................................................ $16
Compensation expense......................................................... $ 240,000
Compensation expense recognized for 2001 and 2002....... 200,000
Problem 19
A major conclusion of the FASB’s standard on accounting for stock options is that fixed
option plans for which the option price is equal to the market price of the stock at the
date of grant will result in compensation cost. Under APB Opinion No. 25, such plans
generated no such compensation cost if the exercise price was greater than or equal to
the market price at the grant date. Under the FASB standard, compensation expense
would be measured by the value of the option rather than the spread between the option
price and the market price of the stock at the grant date.
One means of measuring the value of the option itself is the use of a mathematical
model, such as the Black-Scholes option pricing model. This model considers both the
minimum value and volatility values in measuring the fair value of an option. The
minimum value is the current price of the stock minus both the present value of the
exercise price and the present value of expected dividends on the stock during the term
of the option, both discounted at the risk-free rate of return. The volatility value is a
measure of the amount by which the price of the stock has fluctuated or is expected to
fluctuate during a period. Volatility is measured by the standard deviation of a probability
distribution. The larger
the standard deviation in relation to average price level, the more variable the price
Identify the objections that might be raised to the use of the Black-Scholes mathematical
option pricing model in valuing options issued as part of a stock compensation plan.
Solution 19
LO5
The following may be cited as objections to the use of the Black-Scholes model:
(1) The estimation of stock-price volatility may prove to be difficult and

timeconsuming and estimates too imprecise.
(2) The model was developed for third-party, traded options and is not
applicable
to employee stock options which, unlike third-party, traded options, are
forfeitable and nontransferable.
(3) The model was developed primarily for shorter-term options rather than for
the long-term employee stock options to which the model is to be applied
under the FASB standard.
(4) The model is not appropriate for emerging entities whose stock is not
publicly offered and for which an estimation of volatility would be difficult if
not impossible.
195
Chapter 11-- QUIZ A

Name _________________________
Section ________________________
T F 1. Preferred stock is generally issued with a par value.
T F 2. In most states, a corporation may issue only one class of preferred stock.
T F 3. When a corporation fails to declare dividends on cumulative preferred stock,

such dividends are recorded as a liability and require payment in the future
before any dividends may be paid to common stockholders.
T F 4. Convertible preferred stock allows the issuing corporation to redeem the stock.
T F 5. The call price on callable preferred stock is usually specified in the original
agreement and provides for payment of dividends in arrears, if applicable, as
part of the repurchase price.
T F 6. Stock Subscriptions Receivable is usually regarded as a current asset.
T F 7. Additional paid-in capital for the excess of the stock subscription price over par
or stated value is recorded at the time of subscription.
T F 8. Stock option forfeitures should be accounted for by decreasing compensation

expense in the period of the forfeiture.
T F 9. When capital stock is issued for consideration in the form of property other
than cash, the net book value of the property is used to record the transaction.
T F 10. The purchase method of accounting for a business combination calls for the
combining of all the asset, liability, and owners’ equity balances with no asset
revaluation.
CHAPTER 11 -- QUIZ B
Name _________________________
Section ________________________
T F 1. Reacquisitions of stock do not give rise to income or loss.
T F 2. Although there is theoretical support for both acceptable methods of

accounting for treasury stock, the par value method is strongly favored
because of its simplicity.
T F 3. Stock warrants are sold by a corporation for cash, generally in conjunction

with another security.
T F 4. When stock rights are issued to stockholders, only a memorandum entry is

made on the issuing company’s books.
T F 5. When detachable warrants are sold in conjunction with preferred stock, the
selling price is allocated between the preferred stock and the stock warrants.
T F 6. One reason a company may have to acquire its own stock is to help protect
against a hostile takeover.
T F 7. The conversion of preferred stock to common stock often affects the total
amount of stockholders’ equity.
T F 8. The reduction of the number of shares outstanding by combining shares and

increasing par values is referred to as a reverse stock split.
T F 9. Contributed capital and its components should be disclosed separately from

retained earnings in the balance sheet.
T F 10. A description of the major features of each class of stock should be disclosed
in the financial statements.
197
CHAPTER 11 -- QUIZ C
Name _________________________
Section ________________________
T F 1. A stock dividend decreases retained earnings while increasing the legal

capital of a corporation.
T F 2. As a general guideline, a stock dividend of less than 20-25 percent of the

number of shares previously outstanding is considered a small stock
dividend.
T F 3. With a large stock dividend, a company transfers from retained earnings to

contributed capital an amount equal to the fair value of the additional shares
at the declaration date.
T F 4. A stock dividend does not change total stockholders’ equity.
T F 5. A liquidating dividend is accounted for as a reduction in paid-in capital.
T F 6. Retained earnings may be decreased as a result of treasury stock

transactions.
T F 7. A deficit in retained earnings arises whenever a net loss is reported for the
period.
T F 8. Appropriations of retained earnings are a means of disclosing restrictions on

the amount of earnings available for dividends.
T F 9. A quasi-reorganization is a procedure to recapitalize a corporation and

remove a deficit in retained earnings.
T F 10. Earnings subsequent to a quasi-reorganization are accumulated in a dated

retained earnings account.
198
CHAPTER 11 -- QUIZ D
Name _________________________
Section ________________________
A. Stock split J. Stock warrants

B. Purchase method K. Dividends in arrears
C. Business combination L. Treasury stock
D. Stock rights M. Stock options
E. Par value N. Noncumulative preferred stock
F. Stock appreciation rights O. Stock appreciation rights
G. Owners’ equity P. Pooling of interest method
H. Common stock Q. Stated value
I. Legal capital R. Corporation
Select the term that best fits each of the following definitions and descriptions.
____ 1. Dividends on cumulative preferred stock for prior years that were not paid and that
still are an obligation once current year dividends are declared.
____ 2. The residual interest in the net assets of an enterprise.
____ 3. A form of business combination where the value of the stock in excess of the values
assigned to identifiable assets is recorded as goodwill.
____ 4. A company’s own stock that has been issued, reacquired, and is held by the
company rather than being formally retired.
____ 5. A value that may be assigned to no-par stock by the board of directors of a
corporation.
____ 6. A reduction in the par or stated value of stock accompanied by a proportionate

increase in number of shares outstanding.
____ 7. A method of accounting for a business combination whereby all the asset, liability,
and owners’ equity values are combined.
____ 8. Securities issued to existing shareholders entitling them to purchase additional

shares of stock at a specified price to permit maintenance of their proportionate
ownership interests.
____ 9. A class of stock that allows shareholders the right to vote and to receive dividends if
declared.
____ 10. A nominal value assigned to each share of stock and reported on the stock
certificate.
199
CHAPTER 11 -- QUIZ E
Name _________________________
Section ________________________
A. Stock rights G. Property dividend

B. Liquidating dividend H. Noncumulative preferred stock
C. Quasi-reorganization I. Legal capital
D. Statement of changes in J. Stock warrants
stockholders’ equity K. Equity reserve
E. Par value L. Stock split
F. Unappropriated retained earnings M. Stated value
Select the term that best fits each of the following definitions and descriptions.
____ 1. A partition of total equity common in the financial statements of foreign
companies.
____ 2. A reduction in the par or stated value of stock accompanied by a proportional

increase in the number of shares outstanding.
____ 3. The payment of a dividend in the form of some asset other than cash.
____ 4. A distribution to stockholders representing a return of a portion of contributed

capital.
____ 5. The unrestricted portion of retained earnings.
____ 6. Provides a “fresh start” for a company by changing retained earnings from a
negative to a zero balance.
____ 7. Provides a reconciliation of the beginning and ending stockholders’ equity

amounts.
____ 8. The amount of contributed capital for a corporation that is legally restricted
by state statute for the protection of creditors.
____ 9. Preferred stock that has no claim on any prior year dividends that may have
been passed.
____ 10. Securities that are sold for cash, generally in conjunction with another
security, entitling the purchaser to acquire shares of the issuer’s stock at a
specified price.
CHAPTER 11 -- QUIZ SOLUTIONS

Quiz A Quiz B Quiz C Quiz D
1. T 1. T 1. T 1. K
2. F 2. F 2. T 2. G
3. F 3. T 3. F 3. B
4. F 4. T 4. T 4. L
5. T 5. T 5. T 5. Q
6. F 6. T 6. T 6. A
7. T 7. F 7. F 7. P
8. T 8. T 8. T 8. D
9. F 9. T 9. T 9. H
10. F 10. T 10. T 10. E
Quiz E
1. K
2. L
3. G
4. B
5. F
6. C
7. D
8. I
9. H
10. J

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 CHAPTER 11 

1 Preferred stock and basic shareholder rights

32 Valuation of property dividend

d 2. Which of the following features of preferred stock would most likely be

d 3. Which of the following is not one of the basic shareholders rights?

b 4. The full amount of compensation expense incurred in a compensatory stock

c 7. Current financial accounting standards require

c 8. An adjustment to retained earnings as a result of a conversion of preferred

b 9. Which of the following is least likely to affect the retained earnings

b 12. The use of equity reserves under international accounting standards

c 13. The par value of common stock represents

a 20. The issuance of shares of preferred stock to shareholders

d 23. Stock warrants outstanding should be classified as

b 29. Which of the following is issued to shareholders by a corporation as

b 31. Select the statement that is incorrect concerning the appropriations of

b 34. When a portion of stockholders’ original investment is returned in the form

b 36. How would the declaration of a 20 percent stock dividend by Jets

a 37. When a dividend is declared and paid in stock,

b 39. Undistributed stock dividends should be reported as

c 40. A restriction of retained earnings is most likely to be required by

d 42. A company with a substantial deficit undertakes a quasi-reorganization.

d 43. If 40 percent of the recent dividend paid by Packers Corporation was

c 45. A company declared a cash dividend on its common stock in December

a 47. An investment in marketable securities was accounted for by the cost

a 49. How would the declaration of a 10 percent stock dividend by a corporation

c 55. On March 2, 2002, Ross Corporation issued 4,000 shares of 6 percent

d 61. The stockholders’ equity section of Hall Corporation’s balance sheet at

Book Value Market Value

The stockholders’ equity section at December 31, 2002, is presented below.

The quasi-reorganization is to be accomplished by reducing the par value

Dolphin’s board of directors declared a 10 percent stock dividend on April 1,

No dividends were paid on preferred stock for 2000 and 2001. On

b 74. On January 2, 2000, the board of directors of Gimli Mining Corporation

The $1,200,000 dividend includes a liquidating dividend of

Cardinal's new management suggested, and received approval for a quasi-

Cardinal's new management suggested, and received approval for a quasi-

On March 31, 2003, Addyson declared a 10 percent stock dividend, and

What was the effect on Sackville’s stockholders’ equity accounts as a result

d 79. On September 1, 2002, Steelers Corporation declared and issued a 20

What should be the current balance of Retained Earnings?

The stockholders approved the quasi-reorganization effective July 1, to be

Holding period................................................................................2 years

Expiration period...................................................................Dec. 31,

(1) Total liabilities and stockholders’ equity

(2) $1,326,600 - $82,000 = $1,244,600

(3) $1,120,000 + $18,600 = $1,138,600

(4) 40,600 shares x $15 = $609,000

(5) 40,600 shares x $15 = $609,000

(6) 120,000 - 40,600 = 79,400 shares

(7) $1,138,600 - $609,000 = $529,600

The following transactions relate to the stockholders’ equity transactions of Lindsay

(b) Cash (40,000 x $14).............................................................. 560,000

(c) Land ................................................................................. 240,000

(d) Organization Costs (2,000 x $16)........................................ 32,000

(e) Cash (10,000 x $53 x 40%)..................................................... 212,000

(f) Cash (10,000 x $53 x 60%)..................................................... 318,000

Preferred Stock Subscribed............................................. 500,000

Nov. 21 Cash (8,000 x $145)............................................. 1,160,000