58 NINJA MCQ Flashcards
On December 31 of the current year, Pack Corp.’s board of directors canceled 50,000 shares of $2.50 par value common stock held in treasury at an average cost of $13 per share. Before recording the cancellation of the treasury stock, Pack had the following balances in its stockholder’s equity accounts:
Common stock $540,000
Additional paid-in capital 750,000
Retained earnings 900,000
Treasury stock, at cost 650,000
In its balance sheet at December 31, Pack should report common stock outstanding of
A $0
B $250,000
C $415,000
D $540,000
C $415,000
C $415,000
Under the cost method, the cost of the treasury stock is reported as an unallocated reduction of the stockholders’ equity. Under this method, the treasury stock did not reduce the Common Stock account prior to their cancellation.
Par value of common stock before recording cancellation of treasury stock $540,000
Less: Par value of treasury stock canceled (50,000 shares × $2.50 par value) (125,000)
Par value of common stock outstanding after cancellation of treasury stock $415,000
Question # 190 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
Issued Outstanding
Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock at December 31 of year 3. During year 4, transactions involving Nest’s common stock were as follows:
May 3 1,000 shares of treasury stock were sold
August 6 10,000 shares of previously unissued stock were sold
November 18 A 2-for-1 stock split took effect
Laws in Nest’s state of incorporation protect treasury stock from dilution. At December 31 of year 4, how many shares of Nest’s common stock were issued and outstanding?
Shares:
A 220,000 212,000
B 220,000 216,000
C 222,000 214,000
D 222,000 218,000
A 220,000 212,000
A 220,000 212,000
Issued Outstanding
Beginning balance, shares 100,000 95,000
May 3, sale of treasury stock 1,000
Aug. 6, additional stock sold 10,000 10,000
Subtotal prior to stock split 110,000 106,000
Nov. 18, 2-for-1 stock split × 2 × 2
Ending balance, shares 220,000 212,000
Question # 182 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
work on this
In the previous year, Seda Corp. acquired 6,000 shares of its $1 par value common stock at $36 per share. During the current year Seda issued 3,000 of these shares at $50 per share. Seda uses the cost method to account for its treasury stock transactions. What accounts and amounts should Seda credit in the current year to record the issuance of the 3,000 shares?
paid-in capital Retained
earnings Common stock
A $102,000 $42,000 $6,000
B $144,000 $6,000
C $108,000 $42,000
D $108,000 $42,000
Question # 184 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
Retained earnings Shareholder’s equity
LLA, Inc. was capitalized through the issuance of 10,000 shares of $30 par common stock that was sold at $50 per share. LLA had net income as follows:
Year 1 $100,000
Year 2 $200,000
If, during year 2, LLA paid dividends to its shareholders at $25 per share, what amount was LLA’s retained earnings balance and shareholders’ equity balance at the end of year 2?
B $50,000 $800,000
C $300,000 $550,000
D $300,000 $800,000
A $50,000 $550,000
A $50,000 $550,000
Question # 196 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
Cyan Corp. issued 20,000 shares of $5 par common stock at $10 per share. On December 31 of the previous year, Cyan’s retained earnings were $300,000. In March of the current year, Cyan reacquired 5,000 shares of its common stock at $20 per share. In June of the current year, Cyan sold 1,000 of these shares to its corporate officers for $25 per share. Cyan uses the cost method to record treasury stock. Net income for the current year ended December 31 was $60,000. At December 31 of the current year, what amount should Cyan report as retained earnings?
A $360,000
B $365,000
C $375,000
D $380,000
A $360,000
A $360,000
A $360,000
Under the cost method, treasury stock is recorded and carried at the acquisition cost of $20 per share. Cyan sold some of the shares for $5 per share more than the acquisition cost. This excess is credited to a Paid-In-Capital From Treasury Stock account and Retained Earnings is not affected. If Cyan sold any of the shares for less than the acquisition cost, the deficit would first be charged to any existing balance in the Paid-In-Capital From Treasury Stock account, and the excess, if any, would be charged against Retained Earnings.
Retained Earnings, Dec. 31, previous year $300,000
Net Income 60,000
Retained Earnings, Dec. 31, current year $360,000
VQuestion # 192 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
Selected information from the accounts of Row Co. at December 31 follows:
Total income since incorporation $420,000
Total cash dividends paid 130,000
Total value of property dividends distributed 30,000
Excess of proceeds over cost of treasury stock sold, accounted for using the cost method 110,000
In its December 31 financial statements, what amount should Row report as retained earnings?
B $ 290,000
C $ 370,000
D $ 400,000
A $ 260,000
A $ 260,000
The excess of proceeds over cost of treasury stock sold, accounted for using the cost method, is credited to an appropriately titled Paid-In Capital account, such as Additional Paid-In Capital From Treasury Stock Transactions.
Income since incorporation $420,000
Less: Cash dividends (130,000)
Less: Property dividends ( 30,000)
Retained earnings, 12/31 $260,000
Question # 193 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
work on this
Grid Corp. acquired some of its own common shares at a price greater than both their par value and original issue price but less than their book value. Grid uses the cost method of accounting for treasury stock. What is the impact of this acquisition on total stockholders’ equity and the book value per common share?
A Increase Increase
B Increase Decrease
C Decrease Increase
D Decrease Decrease
C Decrease Increase
When treasury stock is acquired, total stockholders’ equity decreases by the cost of the treasury shares, regardless of the method used to account for the treasury stock. The book value per common share is computed by dividing total stockholders’ equity applicable to common stock by the number of common stock shares outstanding. The acquisition of treasury shares at a price less than their book value will reduce both the numerator and denominator of the book value ratio; however, the reduction of the numerator is less than the amount that was in there for these shares.
Therefore, the excess book value for those shares would now be spread over the remaining common shares outstanding, resulting in an increase in the book value per common share.
Question # 185 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
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On incorporation, Dee, Inc., issued common stock at a price in excess of its par value. No other stock transactions occurred except treasury stock was acquired for an amount exceeding this issue price. If Dee uses the par value method of accounting for treasury stock appropriate for retired stock, what is the effect of the acquisition on the following?
paid-in capital Retained earnings
A No effect Decrease No effect
B Decrease Decrease Decrease
C Decrease No effect Decrease
D No effect Decrease Decrease
B Decrease Decrease Decrease
B Decrease Decrease Decrease
The entry to record the acquisition of the treasury stock in excess of its original issue price using the par method will involve a debit to Treasury Stock for the par value of the stock, a debit to Additional Paid-in Capital for the amount of the premium on the original issuance, a debit to Retained Earnings for the excess of the cost of the treasury stock over the original issuance price, and a credit to Cash for the cost of the treasury shares. When the par method is used, the balance of the Treasury Stock account is classified contra to the Common Stock account. Therefore, the use of the par method of recording will result in a decrease in net common stock, a decrease in additional paid-in capital and a decrease in retained earnings.
Question # 187 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
The____________ method of accounting for treasury stock transactions views the purchase and subsequent disposition of stock as one transaction.
A Cost
B Par value
C Acquisition
D None of the above
A Cost
A Cost
The cost method of accounting for treasury stock views the purchase and subsequent disposition of stock as one transaction.
Question # 186 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
An entity authorized 500,000 shares of common stock. At January 1, year 2, the entity had 110,000 shares of common stock issued and 100,000 shares of common stock outstanding. The entity had the following transactions in year 2:
March 1 Issued 15,000 shares of common stock
June 1 Resold 2,500 shares of treasury stock
September 1 Completed a 2-for-1 common stock split
What is the total number of shares of common stock that the entity has outstanding at the end of year 2?
A 117,500
B 230,000
C 235,000
D 250,000
C 235,000
C 235,000
January 1, beginning balance 100,000
March 1, issued common stock 15,000
June 1, resold treasury stock 2,500
September 1, balance 117,500
September 1, 2-for-1 split 117,500
Year-end balance 235,000
Question # 191 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
A company that uses the accrual method of accounting started the fiscal year with assets of $600,000 and liabilities of $400,000. During the fiscal year, the company recorded credit sales of $250,000, of which $8,000 remained to be collected at year-end, and incurred expenses of $90,000, of which $72,000 was paid in cash. A stock dividend valued at $10,000 was declared and issued to stockholders during the year. What is the year-end balance of total equity?
A $350,000
B $360,000
C $370,000
D $380,000
B
$360,000
Closing Stockholders’ equity can be calculated simply by adding Profit for the year to the Opening Stockholders’ equity, i.e., the difference between the total assets and liabilities. In this specific problem statement, the year-end balance of equity is:
Description $
Opening Equity (Assets – Liabilities) ($600,000- $400,000) $200,000
Add: Profit (Sales – Expense) ($250,000 - $90,000) $160,000
Closing Equity $360,000
Note: The stock dividend is a dividend paid in the form of stock and results in a decrease in Retained Earnings and in Common Stock, meaning total equity will not change.
Question # 194 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
At December 31 of the previous year, Rama Corp. had 20,000 shares of $1 par value treasury stock that had been acquired during that year at $12 per share. In May of the current year, Rama issued 15,000 of these treasury shares at $10 per share.
The cost method is used to record treasury stock transactions. Rama is located in a state where laws relating to acquisition of treasury stock restrict the availability of retained earnings for declaration of dividends.
At December 31 of the current year, what amount should Rama show in notes to financial statements as a restriction of retained earnings as a result of its treasury stock transactions?
A $ 5,000
B $10,000
C $60,000
D $90,000
C $60,000
C $60,000
The amount that Rama discloses as a restriction of retained earnings as a result of treasury stock held is $60,000 [(20,000 - 15,000) × $12 per share].
Question # 183 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
Lem Co., which accounts for treasury stock under the par value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what amount would Lem’s additional paid-in capital from common stock decrease as a result of the acquisition?
A $0
B $100
C $300
D $400
B $100
B $100
Under the par value method, the acquisition of the treasury shares is viewed as a constructive retirement of the stock. Since capital stock is carried on the balance sheet at par (or stated value), the acquisition of treasury stock is also recorded at par (or stated value), by debiting Treasury Stock. Any Additional Paid-In Capital—Common Stock associated with the original issuance of the stock is also removed. If the acquisition cost exceeds the stock’s original issue price, then the excess is debited to Additional Paid-In Capital—Treasury Stock, but only to the extent of any existing balance from prior treasury stock transactions. The remaining excess, if any, is then debited to Retained Earnings.
Question # 189 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
The par-value method of accounting for treasury stock differs from the cost method in that
A Any gain is recognized upon repurchase of stock but a loss is treated as an adjustment to retained earnings.
B No gains or losses are recognized on the issuance of treasury stock using the par-value method.
D It reverses the original entry to issue the common stock with any difference between carrying value and purchase price being shown as an ordinary gain or loss and does not recognize any gain or loss on a subsequent resale of the stock.
C It reverses the original entry to issue the common stock with any difference between carrying value and purchase price adjusted through paid-in capital and/or retained earnings and treats a subsequent reissuance like a new issuance of common stock.
The theoretical justification for the par value method is that the purchase of treasury stock is in fact a constructive retirement of those shares; therefore, reacquired stock is recorded essentially by reversing the amounts at which the stock was originally issued and adjusting any difference to Additional Paid-In Capital or Retained Earnings. Reissuance of the stock is treated as if it were a new issue, i.e., the excess purchase price received over par is credited to Additional Paid-In Capital.
Question # 188 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
A company’s year-end comparative statement of financial position reflects the following changes from the prior year: cash increased by $40,000, total liabilities increased by $32,000, and all other assets decreased by $65,000. Which of the following statements is correct regarding the current-year change in the company’s stockholders’ equity?
A It increased by $25,000
B It increased by $105,000
C It decreased by $32,000
D It decreased by $57,000
D It decreased by $57,000
The correct answer is (D).
Stockholders’ equity is nothing but the difference between the assets and liabilities of a company. In the given problem statement, the assets have decreased by a net $25,000 [$65,000 Other Assets (Decrease)- $40,000 Cash (Increase)] whereas liabilities have increased by $32,000.
This would cause the equity figure to decrease by ($25,000+ $32,000) = $57,000.
Question # 195 | Blueprint Area: 1 A iv : Statement of Changes in EquityRelated Chapter: FAR-5 : Statement of Changes in Stockholders’ Equity
