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A company issues 1 million shares of preferred stock with a par value of $2 and a market price of $26 per share. The issuance should be recorded as:


A) a debit to Cash of $26 million and a credit to Preferred Stock of $26 million.
B) a debit to Cash of $2 million and a credit to Preferred Stock of $2 million.
C) a debit to Cash of $24 million, a debit to Treasury Stock of $2 million, and a credit to Preferred Stock of $26 million.
D) a debit to Cash of $26 million, a credit to Preferred Stock of $2 million, and a credit to Additional Paid-in

E) C) and D)
F) B) and D)

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For a business to be considered a corporation:


A) its stock must be sold in extremely large amounts.
B) it must be organized as a separate legal entity.
C) it must issue both common and preferred stock.
D) it must pay dividends.

E) A) and B)
F) A) and C)

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A company issues 100,000 shares of preferred stock for $40 a share. The stock has a fixed annual dividend rate of 5% and a par value of $3 per share. Preferred stockholders can anticipate receiving a dividend of:


A) $200,000 each year.
B) $15,000 each year.
C) 5% of net income each year.
D) 5% of the market value of the stock at the time the dividend is declared.

E) A) and B)
F) B) and C)

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How many of the following statements regarding earnings per share (EPS) is (are) true? The EPS ratio is important because it signals the ability of the company to pay future dividends, which investors factor into the stock price. Earnings per share is generally reported in the balance sheet under stockholders' equity. Earnings per share is the best way to compare the performance of different companies. EPS, in its basic form, is calculated by dividing net income by the average number of all shares issued.


A) One
B) Two
C) Three
D) Four

E) All of the above
F) A) and C)

Correct Answer

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Company X has 12 million shares of common stock authorized with a par value of $3 and a market price of $116. 7 million shares are outstanding and 1 million shares are held in treasury stock. The company declares a 12 ′\prime dividend. Prepare the journal entry and show the effect on assets, liabilities, and stockholders' equity at the time of declaration and at the time of payment.

Correct Answer

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One of the advantages of a partnership is:


A) limited liability.
B) the salaries of the partners can be written off as an expense.
C) ease of formation.
D) income tax is paid by the business.

E) A) and C)
F) A) and B)

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Which of the following statements regarding repurchased stock is true?


A) It is generally less costly for a company to give employees repurchased shares than to issue new shares.
B) When a company records a stock repurchase, it is tracking a stockholder's sale of stock to another investor.
C) Treasury stock is reported on the balance sheet as an asset.
D) Treasury stock is repurchased stock that has been authorized but is not issued.

E) A) and B)
F) A) and C)

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Which of the following statements is true about retained earnings?


A) Retained earnings represents cash available to pay dividends to stockholders.
B) Retained earnings cannot be restricted by loan covenants.
C) Retained earnings generally consists of cumulative net income less any net losses and dividends since inception.
D) Retained earnings is reduced by the par value of stock splits.

E) A) and D)
F) B) and C)

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If a company's P/E ratio is 12.5 and the company's stock price is $17.50 per share then the company's EPS is:


A) $0.71.
B) $1.40.
C) $5.00.
D) $0.40.

E) C) and D)
F) B) and D)

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On February 16, a company declares a 34 ′\prime dividend to be paid on April 5. There are 2 million shares of common stock issued and 100,000 shares of treasury stock. What does the company record in February?


A) A debit to Dividends Payable and a credit to Cash for $680,000.
B) A debit to Dividends Declared and a credit to Dividends Payable for $646,000.
C) A debit to Dividends Payable and a credit to Cash for $646,000.
D) A debit to Dividends Declared and a credit to Dividends Payable for $680,000.

E) None of the above
F) All of the above

Correct Answer

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A company has outstanding 9 million shares of $2 par value common stock and 1 million shares of $4 par value preferred stock. The preferred stock has an 8% dividend rate. The company declares $600,000 in total dividends for the year. Which of the following is true if dividends in arrears are $30,000?


A) Preferred stockholders will receive $350,000. Common stockholders will receive $250,000.
B) Preferred stockholders will receive $60,000. Common stockholders will receive $540,000.
C) Preferred stockholders will receive $320,000. Common stockholders will receive $280,000.
D) Preferred stockholders will receive $90,000. Common stockholders will receive $510,000.

E) None of the above
F) All of the above

Correct Answer

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Company X has a P/E ratio of 16 in year 2010 and 16.5 in 2011. In 2012, its P/E ratio is 24. The best way to interpret these data is to conclude that:


A) the stock is overpriced and should be sold.
B) the stock has great growth capacity and should be bought.
C) other financial results and news should be examined to determine the cause of the P/E ratio change.
D) the stock is underpriced and should be bought.

E) All of the above
F) A) and C)

Correct Answer

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Which of the following is TRUE about reissuing treasury stock?


A) If treasury stock is sold at a higher price than the stock's cost when the company reacquired it, a gain will be recognized.
B) If treasury stock is sold at a higher price than the stock's par value, a gain will be recognized.
C) If the treasury stock is sold at a lower price than the amount of the original issuance, a loss will be recognized.
D) A gain or loss on the reissuance of treasury stock is never recognized.

E) All of the above
F) None of the above

Correct Answer

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Which of the following statements accurately explains why the board of directors of a company that is facing financial difficulties might issue a 2-for-1 stock split rather than declare a 100% stock dividend?


A) A stock split would not reduce the market price per share, whereas a stock dividend would.
B) A stock split would reduce the market price per share, whereas a stock dividend would not.
C) A stock split would increase total stockholders' equity, whereas a stock dividend would not.
D) A stock split would not reduce retained earnings, whereas a stock dividend would.

E) B) and D)
F) B) and C)

Correct Answer

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Dividends in arrears does not apply to stock which does not have a cumulative dividend preference.

A) True
B) False

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Which of the following statements regarding treasury stock is true?


A) When a company reissues treasury stock for more than it originally paid for the stock, it does not report a gain.
B) When a company purchases treasury stock or pays a dividend, it increases total stockholders' equity.
C) Treasury stock is reported as an asset on the balance sheet.
D) Treasury stock is reported as issued and outstanding stock.

E) C) and D)
F) A) and B)

Correct Answer

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A company had 300,000 shares of $10 par value common stock outstanding. The amount of Additional paid-in capital is $1,500,000, and retained earnings is $450,000. The company issues a 2-for-1 stock split. The market price of the stock is $13. What is the balance in the common stock account after this issuance?


A) $6,000,000
B) $6,900,000
C) $3,000,000
D) $4,500,000

E) A) and B)
F) All of the above

Correct Answer

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The balance in Retained Earnings represents the amount of capital contributed by owners in exchange for stock plus the amount of net income earned.

A) True
B) False

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State laws often restrict dividends to the amount of retained earnings.

A) True
B) False

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The payment date for a dividend is the date on which the company:


A) debits Dividends Declared and credits Dividends Payable for the amount of the dividend.
B) debits Dividend Expense and credits Cash for the dividend amount.
C) debits Dividends Payable and credits Cash for the dividend amount.
D) establishes who will receive the dividend payment.

E) None of the above
F) All of the above

Correct Answer

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