Chap 011

Chapter 11 - Reporting and Interpreting Owners' Equity
Chapter 11
Reporting and Interpreting Owners' Equity
True / False Questions
1. Outstanding shares of stock are those shares which a corporation has the ability to issue as
documented in its charter in the state where incorporated.
True False
2. There would be 100,000 shares of common stock outstanding when the number of shares
authorized was 150,000, issued shares totaled 120,000, and 20,000 shares were being held in
the treasury.
True False
3. Earnings per share are calculated by dividing net income by the number of outstanding
shares of common stock at year-end.
True False
4. Treasury stock is a corporation's own stock that was issued and then repurchased, and is
still held by the corporation.
True False
5. Earnings per share increases when a company purchases treasury stock.

True False
6. The issue of $5 par value common stock for $10 per share results in a $10 credit to the
common stock account for each share issued.
True False
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capital in excess of par value account for each share issued.
True False
8. Stockholders' equity decreases when a company purchases treasury stock.

True False
9. Net income increases when treasury stock is sold for an amount in excess of its cost.
True False
10. Total stockholders' equity increases when treasury stock is sold for an amount less than its
cost.
True False
11. Net income decreases when treasury stock is sold for an amount less than its cost.
True False
12. Total stockholders' equity of Grasse Company is not affected when a stockholder sells
shares of Grasse Company stock to another stockholder.
True False
13. Total assets remain the same when a company uses cash to purchase treasury stock.
True False
14. Common stockholders have voting rights and can declare cash dividends.
True False
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15. Shares of stock held as treasury stock do not have voting rights or the right to receive
dividends.
True False
16. Most investors that are retired prefer to receive their return on investment in the form of
stock price appreciation rather in dividends.
True False
17. The dividend yield ratio is dividends per share divided by the number of shares
outstanding.
True False
18. The dividend yield ratio increases when the market price per share increases.
True False
19. The dividend yield ratio increases when a cash dividend is paid.
True False
20. A company's assets and stockholders' equity decrease when a cash dividend is declared by
its board of directors.
True False
21. A company's assets and liabilities decrease when they pay a previously declared cash
dividend.
True False
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22. The declaration of a common stock dividend by a corporation's board of directors creates
a liability on the declaration date.
True False
23. The declaration and distribution of a common stock dividend results in a reduction of the
issuing corporation's total stockholders' equity.
True False
24. The declaration and distribution of a 2-for-1 stock split results in a reduction of retained
earnings.
True False
25. A stock split results in the reduction of the par or stated value per share and a
proportionate increase in the number of shares outstanding.
True False
26. Preferred stock often has a preference in the distribution of assets over common stock in
the event of dissolution of the corporation.
True False
27. Preferred stockholders don't have voting rights but do have a preference with respect to
dividend payments.
True False
28. When a company reissues treasury stock, it creates a cash inflow from an investing
activity because treasury stock is an investment asset on the balance sheet.
True False
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29. When a company issues common stock in exchange for cash, a cash inflow from a
financing activity is reported.
True False
30. When a company pays its previously declared cash dividend, an investing cash outflow is
reported.
True False
Multiple Choice Questions
31. Which of the following statements is false?

A. Stockholders have a residual claim on assets in the event of liquidation.
B. Shares of stock held in the treasury are deducted from the number of issued shares in the
determination of the number of outstanding shares.
C. Common stockholders have voting rights at annual stockholder meetings.
D. Corporations are governed by their stockholders.
32. RKJ Company has provided the following:
 100,000 shares of $5 par value common stock are authorized;

 70,000 shares have been issued;
 65,000 shares are outstanding.
Which of the following statements is correct?

A. RKJ has 35,000 shares of treasury stock.
B. RKJ has 30,000 shares of treasury stock.
C. RKJ can reissue an additional 35,000 shares of common stock.
D. RKJ can issue an additional 30,000 shares of common stock.
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 70,000 shares were issued for $9 per share;
Which of the following statements is correct based only on the above facts?
A. Common stock is reported at $630,000 on the balance sheet.
B. Additional-paid in capital is reported at $260,000 on the balance sheet.
C. Common stock is reported at $350,000 on the balance sheet.
D. Treasury stock is reported at $45,000 on the balance sheet.
34. Which of the following represents the maximum number of shares of stock issuable to the
public?
A. Authorized shares
B. Issued shares
C. Outstanding shares
D. Treasury shares
35. Which of the following statements regarding earnings per share (EPS) is correct?
A. It equals net income divided by the number of authorized common shares.
B. It equals net income divided by the number of outstanding common shares.
C. It equals net income divided by the number of issued common shares.
D. It equals net income divided by the number of treasury shares.
36. Which of the following statements regarding earnings per share (EPS) is false?
A. It increases when treasury stock is acquired.
B. It increases when net income increases.
C. It decreases when additional shares of common stock are issued.
D. It decreases when the number of shares of common stock authorized increases.
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A. EPS can't be used to compare different size companies.
B. Investors expect a higher EPS for companies with higher stock prices.
C. It is calculated by dividing net income by the number of common shares issued.
D. It increases when the number of shares of common stock outstanding increases.
38. Which of the following represents the number of shares currently in the hands of
investors?
B. Issued shares
D. Treasury shares
39. Rye Company has provided the following information:
 Number of issued common shares, 225,000;

 Net income, $500,000;
 Number of authorized common shares, 400,000;
 Number of treasury shares, 25,000.
What is Rye's earnings per share?

A. $2.50
B. $1.25
C. $2.22
D. $1.33
11-7
40. Kirova Company has provided the following information:

 Net income, $1,000,000;
 Number of authorized common shares, 1,000,000;
 Number of outstanding common shares, 800,000
What is Kirova's earnings per share?

A. $1.43
B. $1.25
C. $1.11
D. $1.00
41. Which of the following statements about earnings per share is correct?
A. Increased net income would cause earnings per share to decrease.
B. Issuance of more common shares would cause earnings per share to increase.
C. Purchasing treasury shares would cause earnings per share to decrease.
D. It is calculated using the number of common shares of stock outstanding.
42. CGJ Company has provided the following:

 140,000 shares of common stock were issued for $11 per share;
Which of the following statements is false?

C. Stockholders' equity decreased $110,000 when the treasury stock was purchased.
D. There are 10,000 shares of treasury stock.
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43. Which of the following journal entries doesn't reflect the initial cash sale of shares of
common stock?
A.
B.
C.
D.
44. Which of the following journal entries is correct when no-par common stock is initially
issued for cash?
A.
B.
C.
D.
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45. Which of the following journal entries is correct when common stock is initially issued for
cash at a price in excess of the stock's stated value?
A.
B.
C.
D.
46. Irish Corporation issued (sold) 10,000 shares of its no par common stock for $70 per
share. The bylaws established a stated value of $10 per share. The transaction would increase
the common stock account on the balance sheet by how much?
A. $0
B. $600,000
C. $100,000
D. $700,000
47. Which of the following statements about treasury stock transactions is correct?
A. The total number of shares issued increases when treasury stock is purchased.
B. The total number of shares authorized changes when treasury stock is purchased.
C. Gains and losses on treasury stock transactions are reported on the income statement.
D. A stockholders' equity account is debited when treasury stock is purchased.
48. Watson Company has provided the following data about its common stock: par value per
share, $1; authorized shares, 10,000,000; outstanding shares, 4,300,000; and issued shares
4,700,000. How many shares of treasury stock are there?
A. 0
B. 5,700,000
C. 5,300,000
D. 400,000
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49. During 2010, Thomas Corporation repurchased some shares of its own common stock.
What effect did this transaction have on 2010 stockholders' equity and earnings per share,
respectively?
A. Option A
B. Option B
C. Option C
D. Option D
50. Which of the following entries would be recorded when a company reissues 1,000 shares
of treasury stock for $50 per share when they were repurchased at a cost of $47 per share and
have a $1 par value?
A. Option A
B. Option B
C. Option C
D. Option D
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A. Option A
B. Option B
C. Option C
D. Option D
52. A company reported the following asset and liability balances at the end of 2009 and
2010:
During 2010, cash dividends of $50,000 were declared and paid, and common stock was
issued for $100,000. How much was the 2010 net income?
A. $400,000
B. $480,000
C. $350,000
D. $300,000
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53. On December 15, 2009, the board of directors of Cross Corporation declared a cash
dividend, payable on January 8, 2010 of $.80 per share on the 2,000,000 common shares
outstanding. On December 15, 2009, Cross Corporation should
A. not prepare a journal entry because the event had no effect on the corporation's financial
position until 2010.
B. decrease retained earnings $1.6 million and increase expenses $1.6 million.
C. decrease retained earnings $1.6 million and increase liabilities by $1.6 million.
D. decrease cash $1.6 million and decrease retained earnings $1.6 million.
54. The declaration and payment of a cash dividend

A. reduces retained earnings and increases liabilities by the amount of the dividend.
B. reduces retained earnings and increases contributed capital by the same amount.
C. reduces assets and increases liabilities by the amount of the dividend.
D. reduces both assets and retained earnings by the amount of the dividend.
55. Which of the following correctly describes the affect of declaring and distributing a
common stock dividend?
A. Total stockholders' equity decreases.
B. Total stockholders' equity remains the same.
C. The number of shares outstanding increases while the par value of each share decreases.
D. The number of shares outstanding decreases while the par value of each share increases.
56. A stock dividend

A. results in a transfer of retained earnings to contributed capital.
B. increases the number of shares outstanding and involves a pro rata reduction in the par
value per share.
C. is accounted for in exactly the same manner as a stock split.
D. results in a transfer of retained earnings to contributed capital and also increases the
number of shares outstanding and involves a pro rata reduction in the par value per share.
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57. DORA Company declared and distributed a 10% stock dividend on 20,000 shares of
issued and outstanding $5 par value common stock. The market price per share on the
declaration date was $9 and was $10 on the distribution date. Which of the following
correctly describes the accounting for the declaration and distribution of the stock dividend?
A. Retained earnings decreased $20,000.
B. Capital in excess of par increased $10,000.
C. Common stock increased $18,000.
D. Retained earnings decreased $18,000.
58. Chicago Clock Corporation issued a 3-for-2 stock split of its common stock, which had a
par value of $100 before the split. What dollar amount of retained earnings should be
transferred to the common stock account?
A. Par value of $100 per share.
B. Market value per share on the issue date.
C. Half of the previous total amount in the common stock account.
D. Retained earnings aren't transferred to the common stock account.

A. Stock splits reallocate amounts between retained earnings and contributed capital accounts.
B. Both stock splits and stock dividends increase the common shares issued.
C. Both stock splits and stock dividends increase the common shares outstanding.
D. Both stock splits and stock dividends have the impact of reducing the market price of the
stock.
60. A company has 4 million common shares authorized, 2.5 million shares issued and
100,000 treasury shares. The par value is $1 per share and the market price is $30 when the
company declares a 4-for-1 stock split. Which of the following is correct?
A. There will be a transfer of $2.4 million from retained earnings to contributed capital.
B. Only the shares outstanding will quadruple to 49.86 million and the par value will be
reduced to $.25 per share.
C. The shares authorized, issued, outstanding, and held in treasury will all quadruple while the
par value will be reduced to $.25 per share.
D. The company will be unable to declare a 4-for-1 split because they do not have enough
authorized shares to issue the needed 49.86 million shares.
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61. A company declares a 40% stock dividend when there were 4 million common shares
outstanding with a $1 par value. The current market price is $20 per common share. Which of
the following will be the effect of the stock dividend?
A. Retained earnings will decrease by $1.6 million and contributed capital will increase by
$1.6 million.
B. Contributed capital will decrease by $1.6 million and retained earnings will increase by
$1.6 million.
C. Retained earnings will decrease by $32 million and contributed capital will increase by $32
million.
D. Contributed capital will decrease by $32 million and retained earnings will increase by $32
million.
62. Davidson Company has 10,000,000 common shares issued and 500,000 shares of treasury
stock. The stock's par value is $2 per share and its current market price is $25 per share.
Which of the following is correct when a 15% stock dividend is declared and distributed?
A. Retained earnings will decrease $37.5 million.
B. Retained earnings will decrease $35.625 million.
C. Retained earnings will decrease $3 million.
D. Retained earnings will decrease $2.85 million.
63. Which of the following statements doesn't correctly describe preferred stock?
A. Preferred shareholders have a preference with respect to dividend payments.
B. Preferred shareholders have a preference with respect to assets in the event of liquidation.
C. Preferred shareholders have voting rights on a per share basis.
D. Preferred stock typically has a fixed dividend rate.
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64. What is the correct entry for the sale of 1,000 shares of $10 par value preferred stock for
$50,000 cash?
A. Option A
B. Option B
C. Option C
D. Option D
65. Which of the following doesn't correctly describe preferred stock?

A. Preferred stock has a higher priority status relative to common stock.
B. Preferred shareholders are guaranteed to receive dividends.
C. Preferred stock usually does not carry voting rights.
D. Preferred stockholders receive dividends in arrears only if the shares are cumulative.
66. Assume the following capital structure:

Preferred stock, 6%, $50 par value, 1,000 shares issued and outstanding with dividends in
arrears for three prior years (2007 - 2009).
Common stock, $100 par value, 2,000 shares issued and outstanding.
Total dividends declared and paid in 2010 were $50,000. How much of the 2010 dividend will
be paid to the common stockholders assuming the preferred stock is cumulative?
A. $12,000
B. $50,000
C. $47,000
D. $38,000
11-16

be paid to the preferred stockholders assuming the preferred stock is cumulative?
A. $12,000
B. $3,000
C. $47,000
D. $38,000
be paid to the preferred stockholders assuming the preferred stock is noncumulative?
A. $12,000
B. $3,000
C. $47,000
D. $38,000
be paid to the common stockholders assuming the preferred stock is noncumulative?
A. $12,000
B. $3,000
C. $47,000
D. $38,000
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70. Slickers, Inc. had the following capital structure during 2010:
arrears for 2008 and 2009.
The total dividends declared and paid during 2010 totaled $25,000. How much of the
dividend is paid to the preferred stockholders during 2010 assuming the preferred stock is
cumulative?
A. $3,500
B. $7,000
C. $10,500
D. $14,500
noncumulative?
A. $3,500
B. $7,000
C. $10,500
D. $14,500
11-18
dividend is paid to the common stockholders during 2010 assuming the preferred stock is
noncumulative?
A. $3,500
B. $7,000
C. $21,500
D. $14,500
cumulative?
A. $3,500
B. $7,000
C. $22,500
D. $14,500
74. Which of the following is a correct statement about cumulative and noncumulative
preferred stock?
A. They both receive dividends in arrears.
B. Cumulative stock's undeclared dividends accumulate each year until paid, while
noncumulative stock's right to receive dividends is forfeited in any year that dividends are not
declared.
C. Cumulative preferred stock is guaranteed to receive their dividends.
D. Cumulative preferred stock's right to receive dividends is forfeited in any year that
dividends are not declared. However, noncumulative stock's undeclared dividends accumulate
each year until paid.
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75. Cornhusker Corporation plans to raise $10 million cash on January 1, 2010, by issuing
either bonds payable (8% interest rate) or cumulative preferred stock (8% dividend rate). How
would the annual interest amount on the bonds or annual preferred dividend amount (if paid)
affect the net income for the year ended December 31, 2010?
A. Net income would be reduced by the annual interest on the bonds and by the annual
preferred stock dividends.
B. Net income would be reduced by the annual interest on the bonds but not by the annual
C. Net income would not be reduced by either the annual interest on the bonds or the annual
D. Net income would be reduced by the annual preferred dividends but not by the annual
interest on the bonds.
76. CBA Company reported total stockholders' equity of $85,000 on its balance sheet dated
December 31, 2010. During the year ended December 31, 2011, CBA reported net income of
$10,000, declared and paid a cash dividend of $2,000, and issued additional common stock
for $20,000. What is total stockholders' equity as of December 31, 2011?
A. $117,000
B. $113,000
C. $109,000
D. $101,000
77. A company reported total stockholders' equity of $170,000 on its balance sheet dated
December 31, 2010. During the year ended December 31, 2011, the company reported net
income of $20,000, declared and paid a cash dividend of $4,000, declared and distributed a
10% stock dividend with a $5,000 total market value, and issued additional common stock for
$40,000. What is total stockholders' equity as of December 31, 2011?
A. $234,000
B. $226,000
C. $231,000
D. $221,000
11-20
10% stock dividend with a $10,000 total market value, purchased treasury stock costing
$12,000, and issued additional common stock for $60,000. What is total stockholders' equity
as of December 31, 2011?
A. $432,000
B. $410,000
C. $444,000
D. $420,000
10% stock dividend with a $15,000 total market value, sold treasury stock costing $12,000 for
A. $650,000
B. $670,000
C. $667,000
D. $655,000
80. Wendell Company provided the following pertaining to its recent year of operation:
 Common stock with a $10,000 par value was sold for $50,000 cash.
 Cash dividends totaling $20,000 were declared, of which $15,000 were paid.
 Net income was $70,000.
 A 5% stock dividend resulted in a common stock distribution, which had a $5,000 par value
and a $23,000 market value.
 Treasury stock costing $9,000 was sold for $7,000.
How much did Wendell's total stockholders' equity increase during the recent year of
operation?
A. $107,000
B. $84,000
C. $80,000
D. $112,000
11-21
How much did Wendell's retained earnings increase during the recent year of operation?
A. $32,000
B. $45,000
C. $29,000
D. $27,000
How much did Wendell's contributed capital increase during the recent year of operation?
A. $15,000
B. $73,000
C. $58,000
D. $75,000
11-22
How much did Wendell's capital in excess of par increase during the recent year of operation?
A. $60,000
B. $58,000
C. $67,000
D. $24,000
84. Which of the following statements is not correct?

A. Issuance of common stock creates a financing activities cash inflow.
B. Payment of a common stock cash dividend creates an operating activities cash outflow.
C. Purchase of treasury stock creates a financing activities cash outflow.
D. Issuance of preferred stock creates a financing activities cash inflow.

A. Cash flow from financing activities increases when treasury shares are reissued.
B. Cash dividends decrease cash flow from financing activities.
C. Cash flow from investing activities decreases when treasury shares are purchased.
D. Issuance of a seasoned new issuance of stock increases cash flow from financing activities.
E. AACSB Tag: Relative Thinking
86. Which of the following transactions doesn't result in an increase in stockholders' equity?
A. Sale of no par common stock for cash.
B. Declaration and distribution of a common stock dividend.
C. Sale of preferred stock for cash at par value.
D. Sale of treasury stock for cash at a price less than its cost.
11-23

A. The declaration of a cash dividend creates a liability as of the date of record.
B. The date of record is irrelevant with respect to recording of a liability pertaining to a cash
dividend.
C. The dividend payment date is when the dividend liability is reduced.
D. The dividend liability for a cash dividend is created on the declaration date.
88. A company purchased treasury stock for $19,000; the treasury stock was initially issued
for $12,000 and had a $5,000 par value. Which of the following statements correctly describes
the effects of the treasury stock purchase?
A. Net income increases by $7,000.
B. Net income decreases by $7,000.
C. Stockholders' equity increases $12,000.
D. Stockholders' equity decreases $19,000.
89. A company purchased 1,000 shares of treasury stock for $38,000 cash; the treasury stock
was initially issued for $24,000 and had a $9,000 par value. Which of the following
statements incorrectly describes the effect of treasury stock purchase?
A. Net income is unchanged.
B. Earnings per share increases.
C. Total assets remain the same.
D. Stockholders' equity decreases.
90. Which of the following statements is correct?

A. A 2-for-1 common stock split decreases both earnings per share and total stockholders'
equity.
B. A 10% common stock dividend decreases both earnings per share and total stockholders'
equity.
C. A 2-for-1 common stock split increases both the number of common shares outstanding
and total stockholders' equity.
D. A 30% common stock dividend increases the number of common shares outstanding and
does not affect total stockholders' equity.
11-24

A. A treasury stock purchase for less than its original issue cost results in a decrease in total
stockholders' equity.
B. A treasury stock purchase for less than its original issue cost results in an increase in total
C. A treasury stock purchase for an amount equal to its original issue cost results in no change
to total stockholders' equity.
D. A treasury stock purchase for more than its original issue cost results in an increase in total
92. Atkins Company had 20,000 shares of $5 par value common stock outstanding prior to a
10% common stock dividend declaration and distribution. The market value of the common
stock on the declaration date was $11. Which of the following statements correctly describes
the affect of the common stock dividend and declaration?
B. Retained earnings decreased $10,000.
C. Total stockholders' equity decreased $22,000.
D. Total stockholders' equity decreased $10,000.
93. Katie Company had 40,000 shares of $2 par value common stock outstanding prior to a
stock on the declaration date was $10. Which of the following statements incorrectly
describes the affect of the common stock dividend and declaration?
B. Capital in excess of par remained the same.
C. Contributed capital increased $128,000.
D. Total stockholders' equity remained the same.

A. The dividend yield and earnings per share both have the same denominator.
B. The dividend yield and earnings per share both have the same numerator.
C. Dividends per share are used in calculation of both earnings per share and dividend yield.
D. Net income is used in the calculation of earnings per share but not in the calculation of
dividend yield.
11-25
95. Which of the following statements correctly describes either the dividend yield or
earnings per share?
A. The dividend yield decreases when net income increases.
B. Earnings per share are per share of both common and preferred stock.
C. The dividend yield increases when the market price per share decreases.
D. Earnings per share decreases when dividends per share decrease.
96. Which of the following statements incorrectly describes earnings per share?
A. Earnings per share are per common share.
B. An increase in the market price per common share does not result in a decrease in earnings
per share.
C. An increase in dividends per share results in an increase in earnings per share.
D. The reissue of treasury stock decreases earnings per share.
97. Which of the following is not a primary advantage of a general partnership relative to a
corporation?
A. The ease of formation.
B. The limited liability for the owners.
C. There isn't income taxation on the business itself.
D. The complete control of the business given to the partners.
98. Which of the following is true about a proprietorship?

A. The capital account is used to record only the investments of the owner.
B. The drawing account records distribution of assets to the proprietor.
C. A proprietorship is a separate legal entity from the owner.
D. A proprietorship is subject to income tax.
99. Which of the following statements is true about a partnership?

A. One capital and drawing account is used for each partnership.
B. The capital account is used to record each partner's investment and their designated share
of the earnings.
C. Partnerships are subject to income taxes.
D. The drawings account is closed to retained earnings at the end of the period.
11-26
100. Which of the following statements is true about partnership accounting?

A. A particular partner's capital account is debited when a withdrawal takes place by that
partner.
B. The process of closing, through the closing entry process, a positive net income results in
an increase in overall partner capital.
C. The drawings account balances are deducted to arrive at the net income to allocate to the
partners.
Essay Questions
101. Constance Corporation reported a $750,000 balance in its common stock account at the
end of 2010. The company held 50,000 shares of treasury stock and had 700,000 shares
outstanding. Calculate the par value per share of the company's common stock.
102. The charter of Delta Corporation specified a maximum of 25,000 shares of common
stock. At the current date, 5,000 shares remain unissued, and 2,000 of the issued shares have
been repurchased and are still held by Delta. Calculate the number of shares issued,
authorized, outstanding, and held in the treasury.
11-27
103. DRP, Inc. sold and issued 50,000 shares of its own $50 par value preferred stock for
$110 per share, and 200,000 shares of its no par common stock for $40 per share. Prepare the
required journal entry.
104. Three dates are described below.
Part A: Name each of the described dates.
Part B: Prepare the journal entry for each date. Assume a $25,000 cash dividend.
11-28
105. At the end of 2010, Washington Corporation reported a $40,000 balance in its common
stock account (par value $1 per share). The treasury stock account balance was $720 (cost $6
per share). During 2010, the company declared and paid a cash dividend at $1.50 per share.
Calculate the total amount of the 2010 cash dividend.
106. Survivor Company was formed on January 1, 2010 by selling and issuing 20,000 shares
of common stock at $15 per share. On December 1, 2010, the company declared a cash
dividend of $10,000 which will be paid in cash on January 15, 2011.
Requirements:
A. Prepare the journal entry to record the sale and issuance of the common stock on January
1, 2010 under each of the following independent assumptions:
1. The common stock has a par value of $10 per share.
2. The common stock was no par with a stated value of $5 per share.
3. The common stock was no par and no stated value.
B. Prepare the journal entry to record the dividend declaration on December 1, 2010.
C. Prepare the journal entry to record payment of the dividend on January 15, 2011.
11-29
107. Contrast the economic effects of a cash dividend (declared and paid) with a stock
dividend (declared and issued) on the distributing corporation by completing the following
chart by placing "X" where appropriate.
108. The following information is available for Bradford Bikes for the years 2011 and 2010:
Requirements:
A. Calculate the dividend yield ratio for both 2011 and 2010.
B. Interpret the yield ratio in terms of whether it is high or low, whether it indicates a steady
dividend policy, and whether Bradford Bikes appears to be growing or stagnant.
11-30
109. The following information is available for Italiano Ices for the years 2011 and 2010:
Requirements:
A. Calculate the dividend yield for both 2011 and 2010.

B. Does the dividend yield appear to be low, moderate or high and what caused the change in
the yield from 2010 to 2011?
11-31
110. Tractor Corporation was just formed. The following accounts of Tractor Corporation,
with code letters, are needed to record the transactions given below. You are to indicate the
appropriate journal entry for each transaction by entering the code letters and the correct
amounts. The transactions including the example are independent unless otherwise stated.
11-32
111. HighRise Company reported the following amounts of contributed capital in the
stockholders' equity accounts as of January 1, 2010:
Indicate the journal entry required to record each of the following transactions by entering the
letter code corresponding to each account to be debited and credited and the amount of each
debit and credit. The transactions including the example are independent unless otherwise
stated.
11-33
112. On January 1, 2010, the stockholders' equity section of Gibbons Corporation's balance
sheet reported the following:
During 2010, the following selected transactions occurred (assume they occurred in the order
given):
(1) Issued a 10% stock dividend; 1,000 shares issued when the market price was $12.
(2) 200 shares of treasury stock were purchased at $11 per share.
(3) Declared and paid a cash dividend of $19,800.
(4) Net income was $30,000.
Prepare the stockholders' equity section of the balance sheet as of December 31, 2010
11-34
113. On January 1, 2010, the accounts of Mac Corporation showed the following:
During 2010, the following transactions occurred affecting stockholders' equity (in the order
given):
A. Issued a 100% stock dividend when the market price was at $5 per share.
B. Purchased treasury stock, 1,000 shares at a total cost of $8,000.
C. Declared and paid cash dividends, $15,000.
D. Net income for 2010, $25,000.
Required:
The stockholders' equity section of the balance sheet for the company must be prepared for
the December 31, 2010 balance sheet. It is given below with certain amounts missing. Supply
the missing amounts by entering them in the blanks.
11-35
114. On December 31, 2010, Brave Corporation reported the following on its balance sheet:
11-36
115. During 2010, Sanders Corporation made the following journal entry to record the
declaration and payment of a cash dividend:
The total par values of common and preferred stock outstanding were $70,000 and $40,000,
respectively. No dividends were declared or paid during 2009. There are 1,000 shares of
common treasury stock.
Requirements:
A. If the preferred stock is noncumulative, calculate the current dividend rate on the preferred
stock.
B. If the preferred stock is cumulative, calculate the current dividend rate on the preferred
stock.
11-37
116. Wedge Corporation has the following capital stock outstanding:
$1 par value common stock, 250,000 shares.

8% preferred stock, par $100, 5,000 shares, cumulative, with 2 years in arrears.
Cash dividends of $150,000 were declared and paid near the end of the current year.
Requirements:
A. Calculate the dividends received by the preferred stockholders.

B. Calculate the dividends received by the common stockholders.
117. Marlin, Inc., declared a cash dividend of $40,000 in 2009 when the following stocks
were outstanding:
No dividends were declared or paid during the prior year. Compute the amount of cash that
would be paid to each stockholder group under each of the following separate cases.
11-38
118. Identify the effects on cash flow from financing activities of the following activities as
increasing (+), decreasing (-) or having no effect on financing cash flows:
11-39
119. Determine the effect of the following transactions on the financial statement components
identified. Code your answers as follows:
A: If the transaction results in an increase in the financial statement component.

B: If the transaction results in a decrease in the financial statement component.
C. If the transaction does not affect the financial statement component.
Transaction 1: Common stock was sold at a price in excess of par value.

Net income_____
Total assets_____
Stockholders' equity_____
Transaction 2: Treasury stock was purchased using cash.

Net income_____
Total assets_____
Transaction 3: Treasury stock was sold for cash at a price less than the treasury stock's cost.
Net income_____
Total assets_____
11-40

Transaction 1: A cash dividend was declared.

Net income_____
Total assets_____
Total liabilities______
Transaction 2: A previously declared cash dividend was paid.

Net income_____
Total assets_____
Total liabilities
Transaction 3: A 2-for-1 stock split was declared and distributed.

Net income_____
Total assets_____
Total liabilities_____
Transaction 4: A common stock dividend was declared and distributed.

Net income_____
Total assets_____
11-41
121. Prepare journal entries for each of the following AJ Partnership transactions:
1. A and J each contribute cash into the partnership in exchange for capital.
2. A makes a cash withdrawal from the partnership.
3. Partnership net income is allocated to the partners' capital accounts.
4. A's drawing account is closed.
11-42
Chapter 11 Reporting and Interpreting Owners' Equity Answer Key
True / False Questions
1. Outstanding shares of stock are those shares which a corporation has the ability to issue as
FALSE
Authorized shares of stock are those shares which a corporation has the ability to issue as
AACSB: Reflective Thinking

AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 11-01 Explain the role of stock in the capital structure of a corporation. Explain the role of stock in the capital structure
of a corporation.
Topic Area: Understanding The Business
11-43
2. There would be 100,000 shares of common stock outstanding when the number of shares
authorized was 150,000, issued shares totaled 120,000, and 20,000 shares were being held in
the treasury.
TRUE
The number of shares outstanding (100,000) equals the number of shares issued (120,000)
minus the number of treasury shares (20,000).

AICPA FN: Measurement
Bloom's: Understand
Difficulty: Medium
of a corporation.
3. Earnings per share are calculated by dividing net income by the number of outstanding
shares of common stock at year-end.
FALSE
Earnings per share are calculated by dividing net income by the average number of
outstanding shares of common stock during the period.

Bloom's: Remember
Difficulty: Easy
Learning Objective: 11-02 Analyze the earnings per share ratio.
Topic Area: Key Ratio Analysis
11-44
4. Treasury stock is a corporation's own stock that was issued and then repurchased, and is
still held by the corporation.
TRUE
Stock bought back and being held by the issuing company is called treasury stock.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
of a corporation.
5. Earnings per share increases when a company purchases treasury stock.

TRUE
The earnings per share denominator is the average number of common shares outstanding.
Purchasing treasury stock reduces the number of outstanding shares and therefore increases
earnings per share.

Bloom's: Understand
Difficulty: Medium
common stock account for each share issued.
FALSE
The common stock account is credited for the par value ($5) of the issued shares.

AICPA FN: Reporting, Measurement
Bloom's: Understand
Difficulty: Easy
Learning Objective: 11-03 Describe the characteristics of common stock and analyze transactions affecting common stock.
Topic Area: Common Stock Transactions
11-45
capital in excess of par value account for each share issued.
TRUE
The capital in excess of par value account is credited for $9; the excess of the selling price
($10) over the par value ($1) of the issued shares.

Bloom's: Understand
Difficulty: Easy
8. Stockholders' equity decreases when a company purchases treasury stock.

TRUE
Treasury stock is reported on the balance sheet as a contra-equity account.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
9. Net income increases when treasury stock is sold for an amount in excess of its cost.
FALSE
Treasury stock transactions do not affect net income.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
11-46
10. Total stockholders' equity increases when treasury stock is sold for an amount less than its
cost.
TRUE
Total stockholders' equity increases by the treasury stock selling price.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
11. Net income decreases when treasury stock is sold for an amount less than its cost.
FALSE
Treasury stock transactions do not affect net income.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
12. Total stockholders' equity of Grasse Company is not affected when a stockholder sells
shares of Grasse Company stock to another stockholder.
TRUE
A stock transaction between investors doesn't affect the stockholders' equity of Grasse
Company.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
11-47
13. Total assets remain the same when a company uses cash to purchase treasury stock.
FALSE
Total assets decrease by the amount of the cash payment; treasury stock is reported on the
balance sheet as a contra-equity account.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
14. Common stockholders have voting rights and can declare cash dividends.
FALSE
Common stockholders do have voting rights; the board of directors declares dividends.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
15. Shares of stock held as treasury stock do not have voting rights or the right to receive
dividends.
TRUE
Treasury stock doesn't have stockholder rights.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
11-48
16. Most investors that are retired prefer to receive their return on investment in the form of
stock price appreciation rather in dividends.
FALSE
Most retired people tend to prefer their return on investment to be in the form of dividends.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 11-04 Discuss dividends and analyze transactions.
17. The dividend yield ratio is dividends per share divided by the number of shares
outstanding.
FALSE
The dividend yield ratio is dividends per share divided by the market price per share.

Bloom's: Remember
Difficulty: Easy
Learning Objective: 11-05 Analyze the dividend yield ratio.
18. The dividend yield ratio increases when the market price per share increases.
FALSE
The dividend yield ratio is dividends per share divided by the market price per share.
Therefore, the ratio decreases when the market price per share increases.

Bloom's: Remember
Difficulty: Medium
11-49
19. The dividend yield ratio increases when a cash dividend is paid.
FALSE
The dividend yield ratio is dividends per share divided by the market price per share. The
ratio increases when a cash dividend is declared.

Bloom's: Remember
Difficulty: Medium
20. A company's assets and stockholders' equity decrease when a cash dividend is declared by
its board of directors.
FALSE
Liabilities increase and stockholders' equity decreases when a cash dividend is declared.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
21. A company's assets and liabilities decrease when they pay a previously declared cash
dividend.
TRUE
Assets (cash) decrease and liabilities (dividends payable) decrease when a previously declared
cash dividend is paid.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
11-50
22. The declaration of a common stock dividend by a corporation's board of directors creates
a liability on the declaration date.
FALSE
The declaration of a common stock dividend doesn't create a liability. The declaration affects
stockholder equity accounts only.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
Learning Objective: 11-06 Discuss the purpose of stock dividends and stock splits; and report transactions.
23. The declaration and distribution of a common stock dividend results in a reduction of the
issuing corporation's total stockholders' equity.
FALSE
Retained earnings decrease and common stock related accounts increase by equal amounts;
therefore, total stockholders' equity doesn't change.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
24. The declaration and distribution of a 2-for-1 stock split results in a reduction of retained
earnings.
FALSE
Stock splits do not affect retained earnings. Stock splits reduce the par value per share of the
stock and increase the number of shares outstanding.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Easy
11-51
25. A stock split results in the reduction of the par or stated value per share and a
proportionate increase in the number of shares outstanding.
TRUE
Stock splits reduce the par value per share of the stock and increase the number of shares
outstanding.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Easy
26. Preferred stock often has a preference in the distribution of assets over common stock in
the event of dissolution of the corporation.
TRUE
Preferred stockholders have a preference with respect to payment when a company is being
dissolved.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Easy
Learning Objective: 11-07 Describe the characteristics of preferred stock and analyze transactions affecting preferred stock.
Topic Area: Preferred Stock
27. Preferred stockholders don't have voting rights but do have a preference with respect to
dividend payments.
TRUE
Preferred stockholders have a preference with respect to dividend payments, but don't have
voting rights.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Topic Area: Preferred Stock
11-52
28. When a company reissues treasury stock, it creates a cash inflow from an investing
activity because treasury stock is an investment asset on the balance sheet.
FALSE
Treasury stock is reported on the balance sheet as a contra-equity account. Reissuing treasury
stock creates a cash flow from financing activities.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
Learning Objective: 11-08 Discuss the impact of capital stock transactions on cash flows.
Topic Area: Focus On Cash Flows
29. When a company issues common stock in exchange for cash, a cash inflow from a
financing activity is reported.
TRUE
Issuing common or preferred stock in exchange for cash results in a cash inflow from
financing activities.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
30. When a company pays its previously declared cash dividend, an investing cash outflow is
reported.
FALSE
Cash payments of dividends results in a cash outflow from financing activities.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Easy
11-53
Multiple Choice Questions

A. Stockholders have a residual claim on assets in the event of liquidation.
B. Shares of stock held in the treasury are deducted from the number of issued shares in the
determination of the number of outstanding shares.
C. Common stockholders have voting rights at annual stockholder meetings.
D. Corporations are governed by their stockholders.
Corporations are governed by their board of directors.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
of a corporation.

 70,000 shares have been issued;
Which of the following statements is correct?

A. RKJ has 35,000 shares of treasury stock.
B. RKJ has 30,000 shares of treasury stock.
C. RKJ can reissue an additional 35,000 shares of common stock.
D. RKJ can issue an additional 30,000 shares of common stock.
RKJ can issue an additional 30,000 shares of common stock (100,000 shares authorized minus
70,000 shares already issued).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
of a corporation.
11-54

 70,000 shares were issued for $9 per share;
Which of the following statements is correct based only on the above facts?
C. Common stock is reported at $350,000 on the balance sheet.
D. Treasury stock is reported at $45,000 on the balance sheet.
Common stock ($350,000) = Issued shares (70,000)  Par value ($5)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
34. Which of the following represents the maximum number of shares of stock issuable to the
public?
B. Issued shares
D. Treasury shares
The maximum number of shares that can be issued equals the number of authorized shares.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
of a corporation.
11-55
A. It equals net income divided by the number of authorized common shares.
B. It equals net income divided by the number of outstanding common shares.
C. It equals net income divided by the number of issued common shares.
D. It equals net income divided by the number of treasury shares.
EPS is calculated by dividing net income by the number of outstanding shares of common
stock.

Bloom's: Remember
Difficulty: Medium
36. Which of the following statements regarding earnings per share (EPS) is false?
A. It increases when treasury stock is acquired.
B. It increases when net income increases.
C. It decreases when additional shares of common stock are issued.
D. It decreases when the number of shares of common stock authorized increases.
The EPS denominator is the number of outstanding shares, not the number of authorized
shares.

Bloom's: Understand
Difficulty: Medium
11-56
A. EPS can't be used to compare different size companies.
B. Investors expect a higher EPS for companies with higher stock prices.
C. It is calculated by dividing net income by the number of common shares issued.
D. It increases when the number of shares of common stock outstanding increases.
Generally speaking, a higher EPS is expected when the market price of a stock is relatively
higher.

Bloom's: Understand
Difficulty: Medium
38. Which of the following represents the number of shares currently in the hands of
investors?
B. Issued shares
D. Treasury shares
The outstanding shares of stock represent stock currently held by investors.

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
of a corporation.
11-57
39. Rye Company has provided the following information:

 Net income, $500,000;
 Number of authorized common shares, 400,000;
What is Rye's earnings per share?

A. $2.50
B. $1.25
C. $2.22
D. $1.33
Earnings per share ($2.50) = Net income ($500,000)  Outstanding shares (225,000 - 25,000)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-58
40. Kirova Company has provided the following information:

 Net income, $1,000,000;
 Number of authorized common shares, 1,000,000;
 Number of outstanding common shares, 800,000
What is Kirova's earnings per share?

A. $1.43
B. $1.25
C. $1.11
D. $1.00
Earnings per share ($1.25) = Net income ($1,000,000)  Outstanding shares (800,000)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
41. Which of the following statements about earnings per share is correct?
A. Increased net income would cause earnings per share to decrease.
B. Issuance of more common shares would cause earnings per share to increase.
C. Purchasing treasury shares would cause earnings per share to decrease.
D. It is calculated using the number of common shares of stock outstanding.
The earnings per share denominator is the number of common shares outstanding.

Bloom's: Understand
Difficulty: Medium
11-59
42. CGJ Company has provided the following:

 140,000 shares of common stock were issued for $11 per share;
Which of the following statements is false?

C. Stockholders' equity decreased $110,000 when the treasury stock was purchased.
D. There are 10,000 shares of treasury stock.
The amount paid for the treasury stock is not known.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-60
43. Which of the following journal entries doesn't reflect the initial cash sale of shares of
common stock?
A.
B.
C.
D.
Gains and losses on the issue of stock are not recognized.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
11-61
44. Which of the following journal entries is correct when no-par common stock is initially
issued for cash?
A.
B.
C.
D.
Common stock is credited for the cash selling price when the stock doesn't have a par value
(no-par).

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
11-62
45. Which of the following journal entries is correct when common stock is initially issued for
cash at a price in excess of the stock's stated value?
A.
B.
C.
D.
Common stock is credited for stated value and capital in excess of par is credited for the
excess of the selling price above stated value.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
46. Irish Corporation issued (sold) 10,000 shares of its no par common stock for $70 per
share. The bylaws established a stated value of $10 per share. The transaction would increase
the common stock account on the balance sheet by how much?
A. $0
B. $600,000
C. $100,000
D. $700,000
Common stock is credited for stated value ($100,000) and capital in excess of par is credited
for the excess of the selling price above stated value ($600,000).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-63
47. Which of the following statements about treasury stock transactions is correct?
A. The total number of shares issued increases when treasury stock is purchased.
B. The total number of shares authorized changes when treasury stock is purchased.
C. Gains and losses on treasury stock transactions are reported on the income statement.
D. A stockholders' equity account is debited when treasury stock is purchased.
Treasury stock is a contra-equity account with a debit balance.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
48. Watson Company has provided the following data about its common stock: par value per
share, $1; authorized shares, 10,000,000; outstanding shares, 4,300,000; and issued shares
4,700,000. How many shares of treasury stock are there?
A. 0
B. 5,700,000
C. 5,300,000
D. 400,000
Outstanding shares (4,300,000) = Issued shares (4,700,000) - Treasury shares (400,000)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-64
49. During 2010, Thomas Corporation repurchased some shares of its own common stock.
What effect did this transaction have on 2010 stockholders' equity and earnings per share,
respectively?
A. Option A
B. Option B
C. Option C
D. Option D
Treasury stock is a contra-equity account, which therefore reduces stockholders' equity.

Purchasing treasury stock reduces the number of shares outstanding, which increases earnings
per share given that the number of outstanding shares is the earnings per share denominator.

Bloom's: Apply
Difficulty: Medium
11-65
A. Option A
B. Option B
C. Option C
D. Option D
Treasury stock is credited for its original cost ($47,000) and capital in excess of par value is
credited for $3,000, the difference between the selling price ($50,000) and the original cost
($47,000).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-66
A. Option A
B. Option B
C. Option C
D. Option D
Treasury stock is credited for its original cost ($44,000) and capital in excess of par value is
debited for $4,000, the difference between the selling price ($40,000) and the original cost
($44,000).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-67
52. A company reported the following asset and liability balances at the end of 2009 and
2010:
During 2010, cash dividends of $50,000 were declared and paid, and common stock was
issued for $100,000. How much was the 2010 net income?
A. $400,000
B. $480,000
C. $350,000
D. $300,000
(1) 2009 stockholders' equity ($3,600,000) = Assets ($6,800,000) - Liabilities ($3,200,000).

(2) 2010 stockholders' equity ($4,000,000) = Assets ($7,600,000) - Liabilities ($3,600,000).
(3) The change in stockholders' equity during 2010 ($400,000) = 2010 equity ($4,000,000) -
2009 equity ($3,600,000).
(4) The change in stockholders' equity during 2010 ($400,000) = The change in contributed
capital ($100,000) + The change in retained earnings ($300,000)
(5) The change in retained earnings ($300,000) = Net income ($350,000) - Dividends
($50,000).
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
11-68
53. On December 15, 2009, the board of directors of Cross Corporation declared a cash
dividend, payable on January 8, 2010 of $.80 per share on the 2,000,000 common shares
outstanding. On December 15, 2009, Cross Corporation should
A. not prepare a journal entry because the event had no effect on the corporation's financial
position until 2010.
B. decrease retained earnings $1.6 million and increase expenses $1.6 million.
C. decrease retained earnings $1.6 million and increase liabilities by $1.6 million.
D. decrease cash $1.6 million and decrease retained earnings $1.6 million.
Retained earnings is debited (decreased) and dividends payable, a liability, is credited

(increased) for $1.6 million (2,000,000 shares  $.80).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
54. The declaration and payment of a cash dividend

A. reduces retained earnings and increases liabilities by the amount of the dividend.
B. reduces retained earnings and increases contributed capital by the same amount.
C. reduces assets and increases liabilities by the amount of the dividend.
D. reduces both assets and retained earnings by the amount of the dividend.
Dividends are distributions of retained earnings and therefore decrease retained earnings. The
cash payment reduces assets.
AACSB: Understand
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
11-69
55. Which of the following correctly describes the affect of declaring and distributing a
common stock dividend?
A. Total stockholders' equity decreases.
B. Total stockholders' equity remains the same.
C. The number of shares outstanding increases while the par value of each share decreases.
D. The number of shares outstanding decreases while the par value of each share increases.
The declaration and distribution affects stockholder equity accounts only; retained earnings
decreases, common stock and capital in excess of par increases in total by an amount equal to
the retained earnings decrease.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
Topic Area: Financial Analysis
56. A stock dividend

A. results in a transfer of retained earnings to contributed capital.
B. increases the number of shares outstanding and involves a pro rata reduction in the par
value per share.
C. is accounted for in exactly the same manner as a stock split.
D. results in a transfer of retained earnings to contributed capital and also increases the
number of shares outstanding and involves a pro rata reduction in the par value per share.
The declaration and distribution of a stock dividend affects stockholder equity accounts only;
retained earnings decreases, common stock and capital in excess of par (the sum of these two
accounts is contributed capital) increases in total by an amount equal to the retained earnings
decrease.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
11-70
57. DORA Company declared and distributed a 10% stock dividend on 20,000 shares of
issued and outstanding $5 par value common stock. The market price per share on the
declaration date was $9 and was $10 on the distribution date. Which of the following
correctly describes the accounting for the declaration and distribution of the stock dividend?
B. Capital in excess of par increased $10,000.
C. Common stock increased $18,000.
D. Retained earnings decreased $18,000.
The retained earnings decrease ($18,000) equals the number of shares issued (20,000  10%)
multiplied by the market price per share ($9) on the declaration date.
AACSB: Analytic
AICPA FN: Reporting
Bloom's: Apply
Difficulty: Medium
58. Chicago Clock Corporation issued a 3-for-2 stock split of its common stock, which had a
par value of $100 before the split. What dollar amount of retained earnings should be
transferred to the common stock account?
A. Par value of $100 per share.
B. Market value per share on the issue date.
C. Half of the previous total amount in the common stock account.
D. Retained earnings aren't transferred to the common stock account.
Retained earnings and common stock are unaffected by stock splits. Stock splits reduce the
par value per share and increase the number of common shares authorized, issued and
outstanding.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
11-71

A. Stock splits reallocate amounts between retained earnings and contributed capital accounts.
B. Both stock splits and stock dividends increase the common shares issued.
C. Both stock splits and stock dividends increase the common shares outstanding.
D. Both stock splits and stock dividends have the impact of reducing the market price of the
stock.
Retained earnings is unaffected by stock splits.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
60. A company has 4 million common shares authorized, 2.5 million shares issued and
100,000 treasury shares. The par value is $1 per share and the market price is $30 when the
company declares a 4-for-1 stock split. Which of the following is correct?
A. There will be a transfer of $2.4 million from retained earnings to contributed capital.
B. Only the shares outstanding will quadruple to 49.86 million and the par value will be
reduced to $.25 per share.
C. The shares authorized, issued, outstanding, and held in treasury will all quadruple while
the par value will be reduced to $.25 per share.
D. The company will be unable to declare a 4-for-1 split because they do not have enough
authorized shares to issue the needed 49.86 million shares.
Four shares of $.25 par value common stock will be issued for every share of $1 par value
common stock.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-72
61. A company declares a 40% stock dividend when there were 4 million common shares
outstanding with a $1 par value. The current market price is $20 per common share. Which of
the following will be the effect of the stock dividend?
A. Retained earnings will decrease by $1.6 million and contributed capital will increase by
$1.6 million.
B. Contributed capital will decrease by $1.6 million and retained earnings will increase by
$1.6 million.
C. Retained earnings will decrease by $32 million and contributed capital will increase by $32
million.
D. Contributed capital will decrease by $32 million and retained earnings will increase by $32
million.
For a large stock dividend, the retained earnings decrease ($1.6 million) and contributed
capital increase ($1.6 million) equals the number of shares issued (4 million  40%)
multiplied by the par value per share ($1) on the declaration date.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
62. Davidson Company has 10,000,000 common shares issued and 500,000 shares of treasury
stock. The stock's par value is $2 per share and its current market price is $25 per share.
Which of the following is correct when a 15% stock dividend is declared and distributed?
A. Retained earnings will decrease $37.5 million.
B. Retained earnings will decrease $35.625 million.
C. Retained earnings will decrease $3 million.
D. Retained earnings will decrease $2.85 million.
The retained earnings decrease ($35.625 million) equals the number of shares issued
{(10,000,000 - 500,000)  15%} multiplied by the market price per share ($25).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-73
63. Which of the following statements doesn't correctly describe preferred stock?
A. Preferred shareholders have a preference with respect to dividend payments.
B. Preferred shareholders have a preference with respect to assets in the event of liquidation.
C. Preferred shareholders have voting rights on a per share basis.
D. Preferred stock typically has a fixed dividend rate.
Preferred stock doesn't provide voting rights.

AICPA FN: Risk Analysis
Bloom's: Understand
Difficulty: Medium
11-74
64. What is the correct entry for the sale of 1,000 shares of $10 par value preferred stock for
$50,000 cash?
A. Option A
B. Option B
C. Option C
D. Option D
The preferred stock credit is for par value (1,000  $10) and the capital in excess of par credit
is for the excess of the selling price over par value {($50 - $10)  1,000}.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-75
65. Which of the following doesn't correctly describe preferred stock?

A. Preferred stock has a higher priority status relative to common stock.
B. Preferred shareholders are guaranteed to receive dividends.
C. Preferred stock usually does not carry voting rights.
D. Preferred stockholders receive dividends in arrears only if the shares are cumulative.
Preferred shareholders only are entitled to dividends when they are declared. There is no
guarantee they will receive dividends.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium

be paid to the common stockholders assuming the preferred stock is cumulative?
A. $12,000
B. $50,000
C. $47,000
D. $38,000
The preferred stock annual dividend ($3,000) = Preferred stock par value (1,000  $50)
multiplied times 6%.
The 2010 dividend payment to the preferred stockholders ($12,000) equals the annual
dividend ($3,000) multiplied by four years (2007 - 2010).
The 2010 dividend payment to the common stockholders ($38,000) equals the 2010 dividend
declaration ($50,000) minus the dividend payment to the preferred stockholders ($12,000).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-76

be paid to the preferred stockholders assuming the preferred stock is cumulative?
A. $12,000
B. $3,000
C. $47,000
D. $38,000
multiplied times 6%.
The 2010 dividend payment to the preferred stockholders ($12,000) equals the annual
dividend ($3,000) multiplied by four years (2007 - 2010).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-77
be paid to the preferred stockholders assuming the preferred stock is noncumulative?
A. $12,000
B. $3,000
C. $47,000
D. $38,000
multiplied times 6%. The preferred stockholders do not receive the dividends in arrears
because the preferred stock is noncumulative.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-78
be paid to the common stockholders assuming the preferred stock is noncumulative?
A. $12,000
B. $3,000
C. $47,000
D. $38,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-79
cumulative?
A. $3,500
B. $7,000
C. $10,500
D. $14,500
multiplied times 7%. The 2010 dividend payment to the preferred stockholders ($10,500)
equals the annual dividend ($3,500) multiplied by three years (2008 - 2010).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-80
noncumulative?
A. $3,500
B. $7,000
C. $10,500
D. $14,500
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-81
noncumulative?
A. $3,500
B. $7,000
C. $21,500
D. $14,500
because the preferred stock is noncumulative. The 2010 dividend payment to the common
stockholders ($21,500) equals the 2010 dividend declaration ($25,000) minus the dividend
payment to the preferred stockholders ($3,500).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-82
cumulative?
A. $3,500
B. $7,000
C. $22,500
D. $14,500
multiplied times 7%. The 2010 dividend payment to the preferred stockholders ($10,500)
equals the annual dividend ($3,500) multiplied by three years (2008 - 2010).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-83
74. Which of the following is a correct statement about cumulative and noncumulative
preferred stock?
A. They both receive dividends in arrears.
B. Cumulative stock's undeclared dividends accumulate each year until paid, while
noncumulative stock's right to receive dividends is forfeited in any year that dividends are not
declared.
C. Cumulative preferred stock is guaranteed to receive their dividends.
D. Cumulative preferred stock's right to receive dividends is forfeited in any year that
dividends are not declared. However, noncumulative stock's undeclared dividends accumulate
each year until paid.
Cumulative preferred stockholders have the right to receive dividends in arrears when
dividends are subsequently declared.

Bloom's: Understand
Difficulty: Medium
11-84
75. Cornhusker Corporation plans to raise $10 million cash on January 1, 2010, by issuing
either bonds payable (8% interest rate) or cumulative preferred stock (8% dividend rate). How
would the annual interest amount on the bonds or annual preferred dividend amount (if paid)
affect the net income for the year ended December 31, 2010?
A. Net income would be reduced by the annual interest on the bonds and by the annual
B. Net income would be reduced by the annual interest on the bonds but not by the annual
C. Net income would not be reduced by either the annual interest on the bonds or the annual
D. Net income would be reduced by the annual preferred dividends but not by the annual
interest on the bonds.
Annual interest on bonds is reported as interest expense on the income statement and would
reduce net income. Preferred stock dividends are not reported on the income statement.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
76. CBA Company reported total stockholders' equity of $85,000 on its balance sheet dated
December 31, 2010. During the year ended December 31, 2011, CBA reported net income of
$10,000, declared and paid a cash dividend of $2,000, and issued additional common stock
for $20,000. What is total stockholders' equity as of December 31, 2011?
A. $117,000
B. $113,000
C. $109,000
D. $101,000
December 31, 2011 stockholders' equity ($113,000) = December 31, 2010 stockholders'
equity ($85,000) + 2011 net income ($10,000) - 2011 dividend declarations ($2,000) + 2011
common stock issued ($20,000)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-85
10% stock dividend with a $5,000 total market value, and issued additional common stock for
$40,000. What is total stockholders' equity as of December 31, 2011?
A. $234,000
B. $226,000
C. $231,000
D. $221,000
equity ($170,000) + 2011 net income ($20,000) - 2011 cash dividend declarations ($4,000) +
2011 common stock issued ($40,000). Stock dividends do not affect total stockholders' equity.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-86
10% stock dividend with a $10,000 total market value, purchased treasury stock costing
A. $432,000
B. $410,000
C. $444,000
D. $420,000
equity ($340,000) + 2011 net income ($40,000) - 2011 cash dividend declarations ($8,000) -
treasury stock purchase ($12,000) + 2011 common stock issue ($60,000). Stock dividends do
not affect total stockholders' equity.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-87
10% stock dividend with a $15,000 total market value, sold treasury stock costing $12,000 for
A. $650,000
B. $670,000
C. $667,000
D. $655,000
equity ($540,000) + 2011 net income ($60,000) - 2011 cash dividend declarations ($18,000) +
treasury stock sale ($15,000) + 2011 common stock issue ($70,000).
Stock dividends do not affect total stockholders' equity.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-88
How much did Wendell's total stockholders' equity increase during the recent year of
operation?
A. $107,000
B. $84,000
C. $80,000
D. $112,000
Stockholders' equity increase ($107,000) = Common stock issue ($50,000) - Cash dividends
declared ($20,000) + Net income ($70,000) + Treasury stock sale ($7,000)
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
11-89
How much did Wendell's retained earnings increase during the recent year of operation?
A. $32,000
B. $45,000
C. $29,000
D. $27,000
Retained earnings increase ($27,000) = Net income ($70,000) - Cash dividends declared
($20,000) - Market value of stock dividend ($23,000)
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
11-90
How much did Wendell's contributed capital increase during the recent year of operation?
A. $15,000
B. $73,000
C. $58,000
D. $75,000
Contributed capital increase ($73,000) = Common stock cash issue ($50,000) + Common
stock dividend ($23,000)
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard
11-91
How much did Wendell's capital in excess of par increase during the recent year of operation?
A. $60,000
B. $58,000
C. $67,000
D. $24,000
Capital in excess of par increase ($60,000) = Common stock cash issue ($50,000 - $10,000) +
Common stock dividend ($23,000 - $5,000) + Treasury stock sale ($9,000 - $7,000)
AACSB: Analytic
Bloom's: Apply
Difficulty: Hard

A. Issuance of common stock creates a financing activities cash inflow.
B. Payment of a common stock cash dividend creates an operating activities cash outflow.
C. Purchase of treasury stock creates a financing activities cash outflow.
D. Issuance of preferred stock creates a financing activities cash inflow.
Cash dividends are financing activities cash outflows.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
11-92

A. Cash flow from financing activities increases when treasury shares are reissued.
B. Cash dividends decrease cash flow from financing activities.
C. Cash flow from investing activities decreases when treasury shares are purchased.
D. Issuance of a seasoned new issuance of stock increases cash flow from financing activities.
E. AACSB Tag: Relative Thinking
Treasury stock transactions are financing activities cash flows.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
86. Which of the following transactions doesn't result in an increase in stockholders' equity?
A. Sale of no par common stock for cash.
B. Declaration and distribution of a common stock dividend.
C. Sale of preferred stock for cash at par value.
D. Sale of treasury stock for cash at a price less than its cost.
The declaration and distribution of a common stock dividend decreases retained earnings and
increases contributed capital by equal amounts.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
11-93

A. The declaration of a cash dividend creates a liability as of the date of record.
B. The date of record is irrelevant with respect to recording of a liability pertaining to a cash
dividend.
C. The dividend payment date is when the dividend liability is reduced.
D. The dividend liability for a cash dividend is created on the declaration date.
The declaration date is when the liability is created.

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
88. A company purchased treasury stock for $19,000; the treasury stock was initially issued
for $12,000 and had a $5,000 par value. Which of the following statements correctly describes
the effects of the treasury stock purchase?
A. Net income increases by $7,000.
B. Net income decreases by $7,000.
C. Stockholders' equity increases $12,000.
D. Stockholders' equity decreases $19,000.
Stockholders' equity is reduced by the $19,000 cost of the treasury stock. Treasury stock is
reported on the balance sheet as a contra-equity account.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-94
89. A company purchased 1,000 shares of treasury stock for $38,000 cash; the treasury stock
was initially issued for $24,000 and had a $9,000 par value. Which of the following
statements incorrectly describes the effect of treasury stock purchase?
A. Net income is unchanged.
B. Earnings per share increases.
C. Total assets remain the same.
D. Stockholders' equity decreases.
Treasury stock is reported on the balance sheet as a contra-equity account. Assets decrease
because of the use of cash to acquire the treasury stock.
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium

A. A 2-for-1 common stock split decreases both earnings per share and total stockholders'
equity.
B. A 10% common stock dividend decreases both earnings per share and total stockholders'
equity.
C. A 2-for-1 common stock split increases both the number of common shares outstanding
and total stockholders' equity.
D. A 30% common stock dividend increases the number of common shares outstanding and
does not affect total stockholders' equity.
Stock dividends increase the number of shares outstanding and don't affect total stockholders'
equity because the retained earnings reduction is transferred to contributed capital.

Bloom's: Understand
Difficulty: Medium
11-95

A. A treasury stock purchase for less than its original issue cost results in a decrease in total
B. A treasury stock purchase for less than its original issue cost results in an increase in total
C. A treasury stock purchase for an amount equal to its original issue cost results in no change
to total stockholders' equity.
D. A treasury stock purchase for more than its original issue cost results in an increase in total
All treasury stock purchases result in a decrease in total stockholders' equity.

Bloom's: Understand
Difficulty: Medium
92. Atkins Company had 20,000 shares of $5 par value common stock outstanding prior to a
stock on the declaration date was $11. Which of the following statements correctly describes
the affect of the common stock dividend and declaration?
B. Retained earnings decreased $10,000.
C. Total stockholders' equity decreased $22,000.
D. Total stockholders' equity decreased $10,000.
The decrease in retained earnings ($22,000) equals the market value of the common shares
issued (20,000  10%)  $11, the increase in retained earnings. So there is no effect on

Bloom's: Understand
Difficulty: Medium
11-96
93. Katie Company had 40,000 shares of $2 par value common stock outstanding prior to a
stock on the declaration date was $10. Which of the following statements incorrectly
describes the affect of the common stock dividend and declaration?
B. Capital in excess of par remained the same.
C. Contributed capital increased $128,000.
D. Total stockholders' equity remained the same.
Large stock dividends are recorded at par value. Therefore, contributed capital would increase
by $32,000 (40,000  .40  $2).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium

A. The dividend yield and earnings per share both have the same denominator.
B. The dividend yield and earnings per share both have the same numerator.
C. Dividends per share are used in calculation of both earnings per share and dividend yield.
D. Net income is used in the calculation of earnings per share but not in the calculation of
dividend yield.
Earnings per share equal net income divided by the average number of common shares
outstanding. Dividend yield equals dividends per share divided by market price per share.

Bloom's: Understand
Difficulty: Medium
11-97
95. Which of the following statements correctly describes either the dividend yield or
earnings per share?
A. The dividend yield decreases when net income increases.
B. Earnings per share are per share of both common and preferred stock.
C. The dividend yield increases when the market price per share decreases.
D. Earnings per share decreases when dividends per share decrease.
Dividend yield equals dividends per share divided by market price per share. Therefore, the
dividend yield increases when the market price per share decreases.

Bloom's: Understand
Difficulty: Medium
96. Which of the following statements incorrectly describes earnings per share?
A. Earnings per share are per common share.
B. An increase in the market price per common share does not result in a decrease in earnings
per share.
C. An increase in dividends per share results in an increase in earnings per share.
D. The reissue of treasury stock decreases earnings per share.
Earnings per share are calculated by dividing net income by the average number of common
shares outstanding. Therefore, dividends per share do not affect earnings per share.

Bloom's: Understand
Difficulty: Medium
11-98
97. Which of the following is not a primary advantage of a general partnership relative to a
corporation?
A. The ease of formation.
B. The limited liability for the owners.
C. There isn't income taxation on the business itself.
D. The complete control of the business given to the partners.
Limited liability is a corporation characteristic, not a characteristic of a partnership.

Bloom's: Understand
Difficulty: Medium
Learning Objective: Chapter Supplement A
Topic Area: Accounting For Sole Proprietorships And Partnerships
98. Which of the following is true about a proprietorship?

A. The capital account is used to record only the investments of the owner.
B. The drawing account records distribution of assets to the proprietor.
C. A proprietorship is a separate legal entity from the owner.
D. A proprietorship is subject to income tax.
The drawing account is used to record proprietor asset withdrawals.

Bloom's: Understand
Difficulty: Medium
11-99
99. Which of the following statements is true about a partnership?

A. One capital and drawing account is used for each partnership.
B. The capital account is used to record each partner's investment and their designated share
of the earnings.
C. Partnerships are subject to income taxes.
The capital account in a partnership keeps track of each partner's capital balance and is
affected by partner investments and withdrawals as well as net income.

Bloom's: Understand
Difficulty: Medium
100. Which of the following statements is true about partnership accounting?

A. A particular partner's capital account is debited when a withdrawal takes place by that
partner.
B. The process of closing, through the closing entry process, a positive net income results in
an increase in overall partner capital.
C. The drawings account balances are deducted to arrive at the net income to allocate to the
partners.
The capital account in a partnership keeps track of each partner's capital balance and is
affected by partner investments and withdrawals as well as net income.

Bloom's: Understand
Difficulty: Medium
Essay Questions
11-100
101. Constance Corporation reported a $750,000 balance in its common stock account at the
end of 2010. The company held 50,000 shares of treasury stock and had 700,000 shares
outstanding. Calculate the par value per share of the company's common stock.
Answers will vary
Feedback: Common stock ($750,000) = Number of common shares issued (50,000 + 700,000)
 Par value per share ($1)
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
102. The charter of Delta Corporation specified a maximum of 25,000 shares of common
stock. At the current date, 5,000 shares remain unissued, and 2,000 of the issued shares have
been repurchased and are still held by Delta. Calculate the number of shares issued,
authorized, outstanding, and held in the treasury.
Answers will vary
Feedback: Authorized shares (25,000) - Unissued shares (5,000) = Issued shares (20,000).
Outstanding shares (18,000) = Issued shares (20,000) - Treasury shares (2,000).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-101
103. DRP, Inc. sold and issued 50,000 shares of its own $50 par value preferred stock for
$110 per share, and 200,000 shares of its no par common stock for $40 per share. Prepare the
required journal entry.
Answers will vary
Feedback:
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-102
104. Three dates are described below.
Part A: Name each of the described dates.
Part B: Prepare the journal entry for each date. Assume a $25,000 cash dividend.
11-103
Answers will vary
Feedback:

AICPA FN: Reporting
Bloom's: Remember
Difficulty: Medium
11-104
105. At the end of 2010, Washington Corporation reported a $40,000 balance in its common
stock account (par value $1 per share). The treasury stock account balance was $720 (cost $6
per share). During 2010, the company declared and paid a cash dividend at $1.50 per share.
Calculate the total amount of the 2010 cash dividend.
Answers will vary
Feedback: The number of issued shares (40,000) = Common stock account balance ($40,000)
 $1 per share par value.
The number of treasury shares (120) = Treasury stock account balance ($720)  Cost per
share ($6).
2010 cash dividend ($59,820) = Number of outstanding shares (40,000 - 120)  Dividend per
share ($1.50).
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-105
106. Survivor Company was formed on January 1, 2010 by selling and issuing 20,000 shares
of common stock at $15 per share. On December 1, 2010, the company declared a cash
dividend of $10,000 which will be paid in cash on January 15, 2011.
Requirements:
A. Prepare the journal entry to record the sale and issuance of the common stock on January
1, 2010 under each of the following independent assumptions:
1. The common stock has a par value of $10 per share.
2. The common stock was no par with a stated value of $5 per share.
3. The common stock was no par and no stated value.
B. Prepare the journal entry to record the dividend declaration on December 1, 2010.
C. Prepare the journal entry to record payment of the dividend on January 15, 2011.
Answers will vary
Feedback:
11-106
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
107. Contrast the economic effects of a cash dividend (declared and paid) with a stock
dividend (declared and issued) on the distributing corporation by completing the following
chart by placing "X" where appropriate.
Answers will vary
Feedback:

Bloom's: Understand
Difficulty: Medium
11-107
108. The following information is available for Bradford Bikes for the years 2011 and 2010:
Requirements:
A. Calculate the dividend yield ratio for both 2011 and 2010.
B. Interpret the yield ratio in terms of whether it is high or low, whether it indicates a steady
dividend policy, and whether Bradford Bikes appears to be growing or stagnant.
Answers will vary
Feedback: A. Dividend yield in 2011 is 1.6% ($.85/$53.00) and 2010 is 1.5% ($.63/$41.50)
B. The dividend yield paid as an immediate return to Bradford Bikes' stockholders is low in
comparison to the market price investors are willing to pay for their shares of stock. However,
they are paying out about 30% of their current earnings (EPS) as dividends to their investors.

Bloom's: Understand
Difficulty: Medium
11-108
109. The following information is available for Italiano Ices for the years 2011 and 2010:
Requirements:
A. Calculate the dividend yield for both 2011 and 2010.

B. Does the dividend yield appear to be low, moderate or high and what caused the change in
the yield from 2010 to 2011?
Answers will vary
Feedback: A. The 2011 dividend yield was 2.6% ($1  $38.30) and the 2010 yield was 2.0%
($.88  $44.00).
B. The yield appears to be on the low side, which means the company is reinvesting in growth
of operations and earnings to improve the price performance. The ratio increased primarily
because the market price of the stock dropped almost $5 per share in 2011 even though the
dividends went up $.12 per share.
AACSB: Apply
Bloom's: Analytic
Difficulty: Medium
11-109
110. Tractor Corporation was just formed. The following accounts of Tractor Corporation,
with code letters, are needed to record the transactions given below. You are to indicate the
appropriate journal entry for each transaction by entering the code letters and the correct
amounts. The transactions including the example are independent unless otherwise stated.
11-110
Answers will vary
Feedback:
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
Topic Area: Common Stock Transactions, Financial Analysis
11-111
111. HighRise Company reported the following amounts of contributed capital in the
stockholders' equity accounts as of January 1, 2010:
Indicate the journal entry required to record each of the following transactions by entering the
letter code corresponding to each account to be debited and credited and the amount of each
debit and credit. The transactions including the example are independent unless otherwise
stated.
11-112
Answers will vary
Feedback:
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-113
112. On January 1, 2010, the stockholders' equity section of Gibbons Corporation's balance
sheet reported the following:
During 2010, the following selected transactions occurred (assume they occurred in the order
given):
(1) Issued a 10% stock dividend; 1,000 shares issued when the market price was $12.
(2) 200 shares of treasury stock were purchased at $11 per share.
(3) Declared and paid a cash dividend of $19,800.
(4) Net income was $30,000.
Prepare the stockholders' equity section of the balance sheet as of December 31, 2010
Answers will vary
Feedback:
*$160,000 - $19,800 - (1,000 shares x $12) + $30,000 = $158,200
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-114
113. On January 1, 2010, the accounts of Mac Corporation showed the following:
During 2010, the following transactions occurred affecting stockholders' equity (in the order
given):
A. Issued a 100% stock dividend when the market price was at $5 per share.
B. Purchased treasury stock, 1,000 shares at a total cost of $8,000.
C. Declared and paid cash dividends, $15,000.
D. Net income for 2010, $25,000.
Required:
The stockholders' equity section of the balance sheet for the company must be prepared for
the December 31, 2010 balance sheet. It is given below with certain amounts missing. Supply
the missing amounts by entering them in the blanks.
Answers will vary
Feedback:
(1) ($60,000/$2) = 30,000 shares x 2 (100% stock dividend) = 60,000 shares

(2) 60,000 shares x $1 = $60,000
(3) $60,000
(4) $60,000 + $60,000 = $120,000
(5) $140,000 - (stock dividend, 30,000 shares x $1) - (cash dividend, $15,000) + net income,
$25,000 = $120,000
(6) Treasury stock, shares, 1,000
(7) $8,000 (cost)
(8) $120,000 + $120,000 - $8,000 = $232,000
11-115
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
114. On December 31, 2010, Brave Corporation reported the following on its balance sheet:
Answers will vary
Feedback:
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-116
115. During 2010, Sanders Corporation made the following journal entry to record the
declaration and payment of a cash dividend:
The total par values of common and preferred stock outstanding were $70,000 and $40,000,
respectively. No dividends were declared or paid during 2009. There are 1,000 shares of
common treasury stock.
Requirements:
A. If the preferred stock is noncumulative, calculate the current dividend rate on the preferred
stock.
B. If the preferred stock is cumulative, calculate the current dividend rate on the preferred
stock.
Answers will vary
Feedback:
A. $40,000 x Rate = $3,600; Rate = 9%

B. 2 x ($40,000 x Rate) = $3,600
($40,000 x Rate) = $1,800
Rate = 4.5% or 9% (from part A.)  2
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-117
116. Wedge Corporation has the following capital stock outstanding:
$1 par value common stock, 250,000 shares.

8% preferred stock, par $100, 5,000 shares, cumulative, with 2 years in arrears.
Cash dividends of $150,000 were declared and paid near the end of the current year.
Requirements:
A. Calculate the dividends received by the preferred stockholders.

B. Calculate the dividends received by the common stockholders.
Answers will vary
Feedback: A. Preferred: (5,000 shares x $100 x 8%) x 3 years = $120,000

B. Common: $150,000 - $120,000 = $30,000
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-118
117. Marlin, Inc., declared a cash dividend of $40,000 in 2009 when the following stocks
were outstanding:
No dividends were declared or paid during the prior year. Compute the amount of cash that
would be paid to each stockholder group under each of the following separate cases.
Answers will vary
Feedback:
AACSB: Analytic
Bloom's: Apply
Difficulty: Medium
11-119
118. Identify the effects on cash flow from financing activities of the following activities as
increasing (+), decreasing (-) or having no effect on financing cash flows:
Answers will vary
Feedback:

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
11-120


Net income_____
Total assets_____

Net income_____
Total assets_____
Net income_____
Total assets_____
11-121
Answers will vary
Feedback:

Net income __C___
Total assets __A___
Stockholders' equity __A___

Net income __C___
Total assets __B___
Stockholders' equity __B___
Net income __C___
Total assets __A___
Transaction 4: Treasury stock was sold for cash at a price greater than the treasury stock's
cost.
Net income __C___
Total assets __A___

Bloom's: Understand
Difficulty: Medium
11-122


Net income_____
Total assets_____
Total liabilities______

Net income_____
Total assets_____
Total liabilities

Net income_____
Total assets_____

Net income_____
Total assets_____
11-123
Answers will vary
Feedback:

Net income __C___
Total assets __C___
Total liabilities ___A___
Stockholders' equity ___B___

Net income __C___
Total assets __B___
Total liabilities __B___
Stockholders' equity __C___

Net income __C___
Total assets __C___
Total liabilities __C___

Net income __C___
Total assets __C___
Total liabilities __C___

Bloom's: Understand
Difficulty: Medium
11-124
121. Prepare journal entries for each of the following AJ Partnership transactions:
1. A and J each contribute cash into the partnership in exchange for capital.
2. A makes a cash withdrawal from the partnership.
3. Partnership net income is allocated to the partners' capital accounts.
4. A's drawing account is closed.
Answers will vary
Feedback:

AICPA FN: Reporting
Bloom's: Understand
Difficulty: Medium
11-125

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Chapter 11 - Reporting and Interpreting Owners' Equity

True / False Questions

5. Earnings per share increases when a company purchases treasury stock.

8. Stockholders' equity decreases when a company purchases treasury stock.

Multiple Choice Questions

31. Which of the following statements is false?

32. RKJ Company has provided the following:

 100,000 shares of $5 par value common stock are authorized;

Which of the following statements is correct?

33. RKJ Company has provided the following:

 100,000 shares of $5 par value common stock are authorized;

39. Rye Company has provided the following information:

 Number of issued common shares, 225,000;

What is Rye's earnings per share?

40. Kirova Company has provided the following information:

 Number of issued common shares, 900,000;

What is Kirova's earnings per share?

42. CGJ Company has provided the following:

 200,000 shares of $5 par value common stock are authorized;

Which of the following statements is false?

54. The declaration and payment of a cash dividend

56. A stock dividend

59. Which of the following statements is false?

65. Which of the following doesn't correctly describe preferred stock?

66. Assume the following capital structure:

67. Assume the following capital structure:

68. Assume the following capital structure:

69. Assume the following capital structure:

84. Which of the following statements is not correct?

85. Which of the following statements is not correct?

87. Which of the following statements is false?

90. Which of the following statements is correct?

91. Which of the following statements is correct?

94. Which of the following statements is correct?

98. Which of the following is true about a proprietorship?

99. Which of the following statements is true about a partnership?

100. Which of the following statements is true about partnership accounting?

104. Three dates are described below.

Part A: Name each of the described dates.

A. Calculate the dividend yield for both 2011 and 2010.

116. Wedge Corporation has the following capital stock outstanding:

$1 par value common stock, 250,000 shares.

A. Calculate the dividends received by the preferred stockholders.

A: If the transaction results in an increase in the financial statement component.

Transaction 1: Common stock was sold at a price in excess of par value.

Transaction 2: Treasury stock was purchased using cash.

A: If the transaction results in an increase in the financial statement component.

Transaction 1: A cash dividend was declared.

Transaction 2: A previously declared cash dividend was paid.

Transaction 3: A 2-for-1 stock split was declared and distributed.

Transaction 4: A common stock dividend was declared and distributed.

Chapter 11 Reporting and Interpreting Owners' Equity Answer Key

True / False Questions

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

5. Earnings per share increases when a company purchases treasury stock.

AACSB: Reflective Thinking

AACSB: Reflective Thinking

AACSB: Reflective Thinking

8. Stockholders' equity decreases when a company purchases treasury stock.

Treasury stock is reported on the balance sheet as a contra-equity account.