Chapter 12

Question 1

310. Harvey Company is authorized to issue 50,000 shares of $25 par ordinary share. On May 30, 20X6, Harvey issued 25,000 shares at $45 per share. Harvey’s journal entry to record these facts should include
     A. A credit to Paid-in Capital in Excess of Par for $1,125,000
     B. A debit to ordinary shares for $1,125,000
     C. A credit to ordinary shares for $625,000
     D. Both a and c

Answer 1

Answer: C
Chapter: 10
Explanation 25,000 shares x $25 = $625,000

Question 2

315.	Sycamore Corporation purchased treasury shares in 2010 at a price of $20 per share and resold the treasury shares in 20X7 at a price of $35 per share. What amount should Sycamore report on its Income Statement for 20X7? 
A.	$20 gain per share
B.	$15 gain per share
C.	$35 gain per share
D.	$0

Answer 2

D

Question 3

316. The shareholders’ equity section of a corporation’s Balance Sheet reports
     A. No for Discount on Bonds Payable and No for Treasury Shares
     B. Yes for Discount on Bonds Payable and Yes for Treasury Shares
     C. No for Discount on Bonds Payable and Yes for Treasury Shares
     D. Yes for Discount on Bonds Payable and No for Treasury Shares

Answer 3

C

Question 4

317. The purchase of treasury share
     A. Has no effect on total assets, total liabilities, or total shareholders’ equity
     B. Decreases total assets and decreases total shareholders’ equity
     C. Increases one asset and decreases another asset
     D. Decreases total assets and increases total shareholders’ equity

Answer 4

B

Question 5

318. When does a cash dividend become a legal liability?
     A. On date of record
     B. On date of declaration and approval
     C. On date of payment
     D. It never becomes a liability because it is paid

Answer 5

B

Question 6

319.	When do dividends increase shareholders’ equity? 
A.	On date of payment
B.	On date of declaration
C.	On date of record
D.	Never

Answer 6

D

Question 7

320.	Apple Tee Mall, Inc., has 2,000 shares of 2%, $25 par cumulative preference shares and 125,000 shares of $2 par ordinary shares outstanding. At the beginning of the current year, preference dividends were four years in arrears. Apple Tree’s board of directors want to pay a $2.50 cash dividend on each share of outstanding ordinary shares in the current year. To accomplish this, what total amount of dividends must Apple Tree declare? 
A.	$312,500
B.	$317,500
C.	$318,750
D.	Some other amount

Answer 7

Answer: B
Chapter: 10
Explanation:
Annual preference dividend = $1,000 = (2,000 x $25 x 0.02)
Five years preference dividend ($1,000 x 5) + ($125,000 x $2,50 per share ordinary dividend) = $317,500

Question 8

321. Share dividends
     A. Have no effect on total shareholders’ equity
     B. Reduce the total assets of the company
     C. Increase the corporation’s total liabilities
     D. Are distributions of cash to shareholders

Answer 8

A

Question 9

322. What is the effect of a share dividend and a stock split on total assets
     A. Decrease share dividend and decrease stock split
     B. Has no effect on share dividend and decrease stock split
     C. Decrease share dividend and has no effect on stock split
     D. Has no effect on share dividend and has no effect on stock split

Answer 9

D

Question 10

323.	A 2-for-1 stock split has the same effect on the number of shares being issued as a 
A.	200% share dividend
B.	50% share dividend 
C.	20% share dividend
D.	100% share dividend

Answer 10

D

Question 11

324. The denominator for computing earnings per share is
     A. Weighted average number of ordinary shares outstanding during the year
     B. Weighted average number of preferences shares outstanding during the year
     C. Number of all shares outstanding at year-end
     D. Number of ordinary shares outstanding at year-end

Answer 11

A

Question 12

325.	The numerator for computing the rate of return on ordinary equity is
A.	Net income
B.	Net income minus interest expense
C.	Net income plus preference dividends
D.	Net income minus preference dividends

Answer 12

D

Question 13

326. Dividends:
     A. Are expenses
     B. Always affect net income
     C. Are distributions to shareholders of assets (usually cash) paid out from net income
     D. Are recorded as direct reductions of retained earnings

Answer 13

D

Question 14

327.	Company XYZ paid $180,000 for 30% of the ordinary shares of the Company ABC. Company ABC earned net income of $50,000 and paid dividends of $20,000 over 2014. The amount that Company XYZ recognizes in the income statement on 31 December 2014 related to this investment is:
A.	$30,000
B.	$50,000
C.	$35,000
D.	$15,000

Answer 14

Answer: D
Chapter: 10
Explanation:
Net income x percentage of the ordinary share = Amount to be recognized
$50,000 x 30/100 = $15,000

Question 15

328.	Dividends received on an equity-method investment:
A.	Increase dividend revenue
B.	Increase shareholders’ equity
C.	Decrease shareholders’ equity
D.	Decrease the investment account

Answer 15

D

Question 16

329. The purchase of treasury shares
     A. Decreases total assets and increases total shareholders’ equity
     B. Decreases total assets and decreases total shareholders’ equity
     C. Increases one account of shareholders’ equity and decreases another
     D. Has no effect on either total assets or shareholders’ equity

Answer 16

B

Question 17

330. Company XYZ has outstanding 600 shares of 7% preference shares, $100 par value, and 1,600 shares of ordinary shares, $30 par value. Company XYZ declares dividends of $15,800. The correct journal entry is:
     A. Debit Dividends Payable; Credit Cash
     B. Debit Dividends Expense; Credit Cash
     C. Debit Retained Earnings; Credit Dividends Payable
     D. None of the above

Answer 17

C

Question 18

331.	Company XYZ has outstanding 600 shares of 7% preference shares, $100 par value, and 1,600 shares of ordinary shares, $30 par value. The net income of the company is $320,000. Company XYZ declares dividends of $15,800. The amount of dividends for the preferred shareholders is:
A.	$7,900
B.	$4,200
C.	$11,600
D.	$6,400

Answer 18

Answer: B
Chapter: 10
Explanation:
Number of preferred shares = Number of shares x percentage of preference share
600 x 0.07 = 42
Amount of dividends for the preferred shareholders = Number of preferred shares x price of preferred shares
42 x $100 = $4,200

Question 19

332.	The difference between the issue price of the shares and the par value of the shares is:
A.	Par value
B.	Market value
C.	Treasury shares
D.	Additional paid-in capital

Answer 19

D

Question 20

333. Company repurchased 10,000 shares of its own $5 par value ordinary shares for $10 per share. The company later reissued 5,000 shares for $15 per share. The transactions resulted in a:
     A. $100,000 increase in paid-in capital
     B. $25,000 increase in paid-in capital
     C. $25,000 gain on the sale of treasury shares
     D. $100,000 gain on the sale of treasury shares

Answer 20

Answer: B
Chapter: 10
Explanation:
10,000 x $10 = $100,000
5,000 x $15 = $75,000
$100,000 - $75,000 = $25,000

Question 21

334.	All of the following transactions increase shareholders’ equity except:
A.	Generating sales revenues
B.	Profitable operations
C.	Declaration of a dividend
D.	Issuance of common stock

Answer 21

C

Question 22

335. The purchase of treasury stock:
     A. Has no effect on the balance sheet
     B. Decreases assets and decreases shareholders’ equity
     C. Increases one asset and decreases another
     D. Decreases assets and decreases liabilities

Answer 22

B

Question 23

336.	All of the following transactions increase shareholders’ equity except:
A.	Generating sales revenues
B.	Declaration of a dividend
C.	Issuance of common stock
D.	Profitable operations

Answer 23

B

Question 24

337. The purchase of treasury stock:
     A. Decreases assets and decreases liabilities
     B. Decreases assets and decreases shareholders’ equity
     C. Has no effect on the balance sheet
     D. Increases one asset and decreases another

Answer 24

B

Question 25

338.	Who ultimately controls a corporation?
A.	Board of Directors
B.	The Chief Executive Officer (CEO)
C.	The shareholders
D.	The President

Answer 25

C

Question 26

339. The entry to record the issuance of 1,000 shares of $1 par value ordinary shares at $10 per share includes a:
     A. Debit to Ordinary shares for $1,000
     B. Credit to Paid-in Capital in Excess of Par Value-Ordinary for $9,000
     C. Credit to Ordinary shares for $10,000
     D. Debit to Paid-in Capital in Excess of Par Value-Ordinary for $10,000

Answer 26

B
Chapter: 10
Explanation:
1,000 x $10 = $10,000
1,000 x $1 = $1,000
$10,000 - $1,000 = $9,000

Question 27

340. ABC Company has $10 par value Ordinary shares and has 1,000,000 shares authorized, 750,000 shares issued. The entry to record ABC’s re-purchase of 10,000 ordinary shares at $15 per share includes a:
     A. Credit to Ordinary shares for $130,000
     B. Debit to Retained Earnings for $65,000
     C. Credit to Paid-in Capital in Excess of Par Value-Ordinary for $65,000
     D. Debit to Treasury shares for $150,000

Answer 27

D

10,000 x $15 = $150,000

Question 28

341. The declaration of cash dividend:
     A. Increases liabilities and increases shareholders’ equity
     B. Increases liabilities and reduces assets
     C. Reduces liabilities and increases shareholders’ equity
     D. Increases liabilities and decreases shareholders’ equity

Answer 28

D

Question 29

344.	Treasury shares is a(n):
A.	Asset account
B.	Contra-equity account
C.	Liability account
D.	Contra-asset account

Answer 29

B

Question 30

345. Which statement below regarding treasury shares is TRUE?
     A. Treasury shares transactions have no effect on assets and equity
     B. Purchasing treasury shares decreases assets and equity
     C. Issuing treasury shares decreases assets and equity
     D. Issuing treasury shares increases assets and decreases equity

Answer 30

B

Question 31

346. ABC Company repurchased 10,000 shares of its own $5 par value ordinary shares for $10 per share. The company later reissued 5,000 of these treasury shares for $15 per share. These transactions resulted in a:
     A. $25,000 increase in paid-in capital
     B. $100,000 gain on the sale of the treasury shares
     C. $25,000 gain on the sale of treasury shares
     D. $100,000 increase in paid-in capital

Answer 31

A

Question 32

346. ABC Company repurchased 10,000 shares of its own $5 par value ordinary shares for $10 per share. The company later reissued 5,000 of these treasury shares for $15 per share. These transactions resulted in a:
     A. $25,000 increase in paid-in capital
     B. $100,000 gain on the sale of the treasury shares
     C. $25,000 gain on the sale of treasury shares
     D. $100,000 increase in paid-in capital

Answer 32

A
10,000 x $10 = $100,000
5,000 x $15 = $75,000
$100,000 - $75,000 = $25,000

Question 33

347.	When 100 ordinary shares of $10 par value are issued at $53 per share, Paid-in Capital in Excess of Par value will:
A.	Increase with $4,300
B.	Not be affected
C.	Increase with $5,300
D.	Increase with $1,000

Answer 33

Answer: A
Chapter: 10
Explanation:
100 x $10 = $1,000
100 x $53 = $5,300
$5,300 - $1,000 = $4,300

Question 34

349. The auditor serves as an important information intermediary between the firm and external stakeholders. What do we mean by this?
     A. The auditor collects information inside the firm and passes it on to the board of directors
     B. The auditor provides consulting services to the firm and integrates both consulting and accounting information
     C. The auditor checks all information provided by the firm on its reliability or users of the financial statements
     D. The auditor works together with the managers to provide the best information possible to other parties

Answer 34

C

Question 35

What are par value shares?

Answer 35

Par value shares (nominal) are ordinary shares to which the charter has assigned a value per share. Par has no relationship with market price.

Question 36

What are no par value shares?

Answer 36

No-par value sharesare ordinary shares to which the charter has not assigned a value. Often, the board of directorsassign a stated valueto no-par shares.