ACCT 201 Principles of Financial Accounting
Practice Exam - Chapter 11
Reporting & Analyzing Equity
Dr. Fred Barbee
Part I: Multiple-Choice Questions
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1. The costs of bringing a corporation into existence, including legal fees, promoter fees, and amounts paid to the state are called:
a.  Minimum legal capital.
b.  Stock subscriptions
c.  Organization costs
d.  Cumulative costs
e.  Prepaid fees
2. The total amount of stock that a corporation's charter allows it to issue is referred to as:
a.  Issued stock.
b.  Outstanding stock.
c.  Common stock.
d.  Preferred stock.
e.  Authorized stock.
3. The total amount of cash and other assets received by a corporation from its stockholders in exchange for common stock is:
a.  Always equal to its par value.
b.  Always equal to its stated value.
c.  Referred to as contributed capital.
d.  Referred to as retained earnings.
e.  Always below its stated value.
4. Preferred stock on which the right to receive dividends is forfeited for any year that the dividends are not declared is referred to as:
a.  Participating preferred stock.
b.  Callable preferred stock.
c.  Cumulative preferred stock.
d.  Convertible preferred stock.
e.  Noncumulative preferred stock.
5. A corporation that makes a change in its accounting principles must report in its financial statements:
a.  The cumulative effect of the change on net income of prior periods.
b.  The effect of the change on earnings per share.
c.  The nature and justification for the change.
d.  The effect of the change on net income.
e.  All of the above.
6. Extraordinary items:
a.  Are not reported on a corporate income statement.
b.  Are included in income from operations.
c.  Are unusual and infrequent.
d.  Include changes in accounting principle.
e.  Are disclosed before discontinued operations on the income statement.
7. Changes in accounting estimates are:
a.  Considered accounting errors.
b.  Reported as prior period adjustments.
c.  Accounted for with a cumulative "catch-up" adjustment.
d.  Extraordinary items.
e.  Accounted for in current and future periods.
8. Retained earnings:
a.  Normally approximates a company's cumulative net income less dividends declared.
b.  Can be subject to a statutory restriction by a state.
c.  Can be subject to restrictions due to loan agreements.
d.  Can be subject to appropriation by a corporation's directors to limit dividends.
e.  All of the above.
9. A company has 1,000 shares of $100 par value preferred stock. It also has 25,000 shares of common stock outstanding, and its total stockholders' equity equals $500,000. This implies its book value per common share is:
a.  $15.38
b.  $16.00
c.  $19.23
d.  $20.00
e.  $100.00
10. The price-earnings ratio is calculated by dividing:
a.  Market value per share by earnings per share.
b.  Earnings per share by market value.
c.  Dividends by earnings per share.
d.  Dividends by market value per share.
e.  Market value per share by dividends.

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Part II: Short Problems

Short Problem #1

A company is authorized to issue 50,000 shares of $50 par value, 8% cumulative, participating preferred stock, and 750,000 shares of $5 par value common stock. Prepare journal entries to record the following selected transactions that occurred during the company's first year of operations:

Jan. 10 Sold 96,000 shares of common stock for $8 cash per share.
Jan. 15 Exchanged 10,000 shares of common stock for equipment with a market value of $80,000.
Feb. 1 Exchanged 500 shares of common stock for $2,500 of legal services incurred during the company's organization.

Short Problem #2

A corporation had the following stock outstanding when the company's board of directors declared a $112,000 cash dividend during the current year:

Preferred Stock, $100 par value, 6%, 5,000 shares issued $500,000
Common Stock, $10 par value, 50,000 shares issued 500,000
Total: $1,000,000

Allocate the cash dividend between the preferred and common stockholders assuming the preferred stock is cumulative and nonparticipating and dividends are one year in arrears.

Short Problem #3

A corporation has 200,000 shares of $10 par value common stock outstanding. The following selected transactions related to the company's stock took place during the current year:

Apr. 15 Declared a 40% stock dividend to stockholders of record on May 1, to be issued May 10. The current market value is $15 per common share.
May 10 Issued the common stock dividend.

Part III: Problems

A company's treasury stock transactions for the current year are as follows: (1) 1,000 shares of its common stock were purchased on June 1 for $40,000; (2) On July 1 it reissued 500 of these shares at $45 per share; (3) On August 1 it reissued the 500 remaining treasury shares at $38 per share.

Required:

  1. Prepare the journal entries required to record these transactions.
  2. Calculate the balance in Contributed Capital, Treasury Stock, on September 1 (assume its beginning-year balance is zero).

         

Last Modified September 19, 2002