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Exam Sample 4, Chapters 11 and 12 Chapter 11 Questions 1. If a corporation is authorized to issue 1,000 shares of $50 common stock, it is said to have $50,000 of stock outstanding. A) B) True False 2 Par value per share is the price at which a share of stock is bought or sold. A) True B) False 3. Cumulative preferred stock carries the right to be paid both current and all prior periods' unpaid dividends before any dividends are paid to common shareholders. A) True B) False 4 The declaration of cash dividends reduces retained earnings. A) True B) False 5. Purchasing treasury stock reduces the corporation's assets and stockholders' equity by equal amounts. A) True B) False 6. If a company resells treasury stock below the acquisition cost, then the income statement must report a loss from the sale of treasury stock. A) True B) False 7. The total amount of stock that a corporation's charter allows it to issue is referred to as: A) Issued stock. B) Outstanding stock. C) Common stock. D) Preferred stock. E) Authorized Stock. 8. A company issued 7% preferred stock with a $100 par value. This means that: A) Preferred shareholders have a guaranteed dividend. B) The amount of the potential dividend is $7 per year per preferred share. C) Preferred shareholders are entitled to 7% of the annual income. D) The market price per share will approximate $100 per share. E) Only 7% of the total contributed capital can be preferred stock. 1 9. For all of 2007, Axel Company has $1 par value common stock, 200,000 shares authorized, 100,000 shares issued and 90,000 shares outstanding. The balance in Retained Earnings at the beginning of the year was $500,000. Net income for the current year was $300,000. If the company declared and paid a cash dividend of $2 per share on its common stock during 2007, what is the balance in Retained Earnings at the end of the year? A) $ 800,000 B) $ 1,000,000 C) $ 600,000 D) $ 620,000 E) $ 400,000 10 At January 1, 2007, Baxter Company has $1 par value common stock, 200,000 shares authorized, 90,000 shares issued and 80,000 shares outstanding. How many shares of treasury stock does the company have at January 1, 2007? A) 30,000 shares B) 110,000 shares C) 120,000 shares D) 10,000 shares E) cannot be determined from the information above 11. Izzy Corporation repurchased some of its own common stock from the marketplace in January of 2007. Izzy paid $20 per share to purchase 1,000 shares of its $10 par value stock. Note that this is the first treasury stock transaction that Izzy has undertaken. Assume that, on December 1, 2007, Izzy reissued all 1,000 shares of treasury stock at $19 per share. The journal entry to record this reissue would include: A. a credit to Treasury Stock for $19,000 B. a credit to Treasury Stock for $10,000 C. a debit to Retained Earnings for $1,000 D. a credit to Cash for $19,000 E. a debit to Loss on Sale of Stock for 1,000 12. Treasury stock is classified as: A) An asset account. B) A contra asset account. C) A revenue account. D) A contra equity account. E) A liability account. 13. Xtreme Sports has $100,000 of 8% noncumulative preferred stock outstanding. Xtreme Sports also has $500,000 of common stock outstanding. In the company's first year of operation, no dividends were paid. During the second year, Xtreme Sports paid cash dividends of $30,000. This dividend should be distributed as follows: A) $8,000 preferred; $22,000 common. 2 B) C) D) E) $16,000 preferred; $14,000 common. $7,500 preferred; $22,500 common. $15,000 preferred; $15,000 common. $0 preferred; $30,000 common. 14. Xtreme Sports has $100,000 of 8% cumulative preferred stock outstanding. Xtreme Sports also has $500,000 of common stock outstanding. In the company's first year of operation, no dividends were paid. During the second year, Xtreme Sports paid cash dividends of $30,000. This dividend should be distributed as follows: A) $8,000 preferred; $22,000 common. B) $16,000 preferred; $14,000 common. C) $7,500 preferred; $22,500 common. D) $15,000 preferred; $15,000 common. E) $0 preferred; $30,000 common. 15. On June 1, 2008, Doran Company declared a cash dividend of $100,000. the dividend was to be paid on August 1, 2008 to the shareholders of record at July 1, 2008. The journal entry to record the declaration on June 1, 2008 would be: A) B) C) D) E) Dividend Expense Cash Retained Earnings (Dividends) Cash Dividend Expense Dividends Payable Retained Earnings (Dividends) Dividends Payable 100,000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 No journal entry is necessary, as the dividends will not be paid until August 1, 2008. 16. Parker Pharmaceuticals issued 10,000 shares of $1 par value common stock. At the date of issue, the market price per share was $20. The journal entry to record the issue would include: A) a debit to Common Stock for $200,000 B) a credit to Cash for $200,000 C) a credit to Additional Paid in Capital on Common Stock for $190,000 D) a credit to Common Stock for $200,000 3 Given the following excerpt from the 2008 balance sheet of Poser Corporation: Common stock, $5 par value, 500,000 shares authorized, ? shares issued, ? shares outstanding $ 100,000 Additional paid-in capital on Common Stock 400,000 Retained earnings 500,000 Less treasury stock, 2,000 shares at cost (36,000) Total stockholders' equity $ 964,000 17. How many shares of common stock of Poser Corporation are issued at December 31, 2008? a. 100,000 shares b. 500,000 shares c. 18,000 shares d. 20,000 shares 18. How many shares of common stock of Poser Corporation are outstanding at December 31, 2008? a. shares 100,000 b. 500,000 shares c. 18,000 shares d. 20,000 shares ___19. What was the average market price per share of Poser's common stock at its issue? a. $5 per share b. $20 per share c. $25 per share d. $50 per share 4 Answers to Chapter 11 Questions 1. B 2.B 3.A 4.A 5.A 6.B 7.E 8.B 9.D 10.D 11.C 12.D 13.A 14.B 15.D 16.C 17.D 18.C 19.C 5 Chapter 12 Sample Questions The following information is for the next 4 questions: Barber Company had the following balance sheet amounts at the end of 2007 and 2008: 2008 2007 Cash $ 7,000 $ 25,000 Accounts receivable 60,000 75,000 Inventory 95,000 125,000 Property, plant and equipment 650,000 500,000 Accumulated depreciation (125,000) (100,000) Accounts payable 50,000 35,000 Income tax payable 35,000 22,000 Notes payable 60,000 100,000 Bonds payable 300,000 300,000 Common stock 195,000 150,000 Retained earnings 47,000 18,000 During 2008: 1. Equipment of $100,000 was purchased with cash. 2. A building costing $60,000 was purchased with the issue of a notes payable. 3. Land costing $10,000 was sold for $11,000 cash, at a gain of $1,000. 4. Payments of $100,000 were made to the bank on the notes payable. 5. Common stock was issued for cash. 6. Net income for 2008 was $29,000, and depreciation expense for 2008 was $25,000. 1. For the 2008 Statement of Cash Flows, net cash inflow from operating activities would be: A) $126,000 B) $124,000 C) $ 66,000 D) $ 67,000 2. For the 2008 Statement of Cash Flows, net cash outflow for investing activities would be: A) $( 90,000) B) $( 150,000) C) $( 100,000) D) $( 89,000) 3. For the 2008 Statement of Cash Flows, net cash outflow for financing activities would be: A) $( 50,000) B) $( 150,000) C) $( 100,000) D) $( 55,000) 4. The net increase or decrease in cash during 2008 would be A) $25,000 increase B) $ 7,000 increase C) $18,000 increase D) $18,000 decrease 6 5. Financing activities include the purchase and sale of long-term assets and lending and collecting on loans. A) True B) False 6. Cash dividends paid to shareholders is considered a financing outflow of cash. A) True B) False 7. When preparing the operating section of the statement of cash flows using the indirect method, depreciation expense is added back to net income. A) True B) False 8. When preparing the operating section of the statement of cash flows using the indirect method, an increase in income taxes payable is added to net income. A) True B) False 9. When preparing the operating section of the statement of cash flows using the indirect method, a decrease in accounts receivable is subtracted from net income. A) True B) False 10. The appropriate section in the statement of cash flows for reporting the issuance of common stock for cash is: A) Operating activities. B) Financing activities. C) Investing activities. D) Schedule of noncash investing or financing activity. E) None of these. This is not reported on the statement of cash flows. 11. Typical cash flows from investing activities include: A) Payments to purchase property, plant and equipment or other productive assets (excluding inventory). B) Cash proceeds from the sale of land C) Cash paid to purchase a patent. D) All of the above. 12. The appropriate section in the statement of cash flows for reporting the purchase of land in exchange for common stock is: A) Operating activities. 7 B) C) D) E) Financ...