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Chapter 16 QUIZ—Contributed Capital

MULTIPLE CHOICE

QUESTION # 1

1. The corporate form of organization is important to the U.S. economy because

there are more corporations than sole proprietorships

there are more corporations than partnerships

there are more sales of goods and services by corporations than other business forms

corporations provide more donations to the economy than other business forms due to the many tax incentives geared toward corporations

QUESTION # 2

3. Which of the following is not a characteristic of the corporate form of business entity?

It is a separate legal entity.

Owners have unlimited liability.

It has an indefinite life span.

Owners often are not an active part of management.

QUESTION # 3

8. Smooth Corp. has both Class A and Class B shares of common stock. The difference between the two classes of stock is most likely related to

Class A stock being worth more than Class B stock

Class A shareholders having greater voting rights than Class B shareholders

Class A shareholders receiving dividends while Class B shareholders do not

Class A shareholders having better preemptive rights than Class B shareholders

QUESTION # 4

9. Shares of capital stock issued to and held by stockholders as of a specific date are

Authorized

Issued

Outstanding

Capital Stock

Yes

II.

Yes

III.

Yes

IV.

III

QUESTION # 5

10. Which one of the following equations is accurate?

Treasury stock = Authorized stock  Issued stock

Treasury stock = Outstanding stock  Subscribed stock

Treasury stock = Authorized stock  Outstanding stock

Treasury stock = Issued stock  Outstanding stock

QUESTION # 6

12. Which of the following is not part of the stockholders’ equity section of the balance sheet?

working capital

contributed capital

treasury stock

retained earnings

QUESTION # 7

14. A preemptive right is

the right to vote in the election of directors and to establish corporate policies

the right to share in the profits when a dividend is declared

the right to maintain a proportionate interest in the ownership of the corporation by purchasing a proportionate share of additional capital stock should such stock be issued

the right to share in the distribution of the assets of the corporation should it be liquidated

QUESTION # 8

18. If a company has 30,000 shares of treasury stock, 120,000 shares outstanding, and 500,000 shares authorized, how many shares are issued?

500,000

150,000

120,000

90,000

QUESTION # 9

20. A corporation is a legal entity

in conjunction with its owners

separate from its owners

formed by the laws of the U.S. Department of Commerce

under the laws established by the SEC

Exhibit

16-1

Hanson Co. issued 10,000 shares of its $5 par common stock for $15 a share. In addition, it incurred legal and accounting fees, stock certificate costs, and other related expenses totaling $8,500.

QUESTION # 10

22. Refer to Exhibit 16-1. Assume the sale was the initial issuance of stock at incorporation for Hanson Co. The entry to record the sale would include a

debit to Cash for $150,000

credit to Common Stock for $150,000

debit to Organization Expense for $8,500

credit to Additional Paid-in Capital on Common Stock for $91,500

QUESTION # 11

23. Refer to Exhibit 16-1. Assume the sale occurred after the initial issuance at incorporation. The entry to record the sale and related expenses would include a

credit to Additional Paid-in Capital on Common Stock for $91,500

credit to Organization Expense for $8,500

credit to Common Stock for $150,000

debit to Cash for $150,000

QUESTION # 12

28. When common stock is issued at an amount greater than par value, the difference between the par value and the proceeds from the sale is recorded by

crediting the common stock account

debiting an additional paid-in capital account

crediting the retained earnings account

crediting an additional paid-in capital account

QUESTION # 13

29. A corporation acquired a copyright by issuing 1,000 shares of $10 par common stock. At the time of the exchange, the stock was selling for $40 per share. The copyright had a carrying value of $8,000 to the author. The purchasing corporation should assign to the copyright a value of

$ 8,000

$10,000

$32,000

$40,000

QUESTION # 14

32. What account should be debited when stock issuance costs are associated with the initial issuance of stock at incorporation?

Organization Expense

Additional Paid-in Capital

Organization Costs

Unrealized Capital

QUESTION # 15

33. When existing corporations issue stock, costs such as legal fees and underwriter’s fees are usually accounted for as

organization expenses

reduction of Additional Paid-in Capital

organizational costs

reduction of Retained Earnings

QUESTION # 16

37. Werling Co. had 10,000 shares of $8 par common stock outstanding just prior to a stock split. The stock was split two-for-one and the par value was reduced to $3. Which entry correctly records this stock split?

Common Stock, $8 par 80,000
Common Stock, $3 par 80,000

Common Stock, $8 par 80,000
Common Stock, $3 par 60,000
Additional Paid-in Capital from Stock Split 20,000

Common Stock, $8 par 80,000
Common Stock, $3 par 60,000
Gain on Stock Split 20,000

Common Stock, $8 par 80,000
Common Stock, $3 par 60,000
Capital Surplus 20,000

QUESTION # 17

38. A noncompensatory stock option plan is designed to

provide additional compensation to key officers and employees within the corporation

obtain more widespread employee ownership of the corporate stock

raise additional capital for the firm

obtain more widespread employee ownership or to raise additional capital for the firm

QUESTION # 18

47. When stock options are exercised by an employee under a compensatory stock option plan, the issuance of the common stock is recorded at the

amount of cash received

amount of cash received less the previously recorded value of the warrants received

amount of cash received plus the previously recorded value of the warrants received

market price minus the stock option price

QUESTION # 19

49. The measurement date of an employee compensatory stock option plan under the intrinsic value method is

the date the number of shares and option price are known

the date of the grant

the date of the plan

the date any shares are issued

QUESTION # 20

52. When using the preferred approach to account for a compensatory stock option plan, the total compensation cost is the

fair value per option times the number of options issued

fair value per option times the number of options that actually become vested

fair value per option times an estimate, at the grant date, of the number of options expected to be deferred

fair value per option times the number of options expired

QUESTION # 21

54. On January 1, 2010, Wilson Corporation granted Emelia Walker, its president, a compensatory stock option plan to purchase 8,000 shares of Wilson’s $10 par common stock. The option price is $25 per share and the option has a fair value of $7 per option, which is exercisable on January 1, 2014, after four years of service. How much compensation expense should Wilson recognize on December 31, 2010?

$ 0

$14,000

$56,000

$80,000

Exhibit 16-3

On January 1, 2010, Hilltop, Inc. granted to a key executive a fixed compensatory option plan for 1,000 shares of $4 par common stock for $30 a share. The fair value per option on that date was $12 per option. The service period extended through December 31, 2011.

QUESTION # 22

55. Refer to Exhibit 16-3. What entry, if any, was required on December 31, 2010?

no entry was necessary

Compensation Expense 12,000
Common Stock Option Warrants 12,000

Compensation Expense 6,000
Common Stock Option Warrants 6,000

Compensation Expense 9,000
Deferred Compensation 9,000

QUESTION # 23

56. Refer to Exhibit 16-3. Which balance sheet disclosure would be correct at December 31, 2010?

Stockholders’ equity:
Common stock option warrants $ 6,000

Liabilities:
Employee stock option plan $ 6,000

Stockholders’ equity:
Common stock option warrants $ 6,000
Less: Deferred compensation 6,000
$12,000

footnote disclosure only

Exhibit 16-5

On January 1, 2010, Roberto Company adopts a compensatory stock option plan and grants 40 executives 1,000 shares each at $30 a share. The fair value per option is $7 on the grant date. The company estimates that its annual employee turnover rate during the service period of three years will be 4%.

QUESTION # 24

62. Refer to Exhibit 16-5. The journal entry to record compensation expense for 2010 will be (Round off any turnover calculations to three decimal places.)

Compensation Expense 247,726
Common Stock Option Warrants 247,726

Compensation Expense 82,575
Common Stock Option Warrants 82,575

Compensation Expense 91,467
Common Stock Option Warrants 91,467

Compensation Expense 93,333
Common Stock Option Plan 93,333

QUESTION # 25

63. Refer to Exhibit 16-5. At the end of 2011, the company estimates that the employee turnover will be 5% a year for the entire service period. The compensation expense for 2011 will be (Round off turnover calculations to three decimal places and answer to the nearest dollar.)

$ 77,468

$ 80,022

$ 82,575

$160,043

QUESTION # 26

69. For a stock appreciation rights (SAR) compensation plan, the measurement date is the date

on which the options (SARs) are granted to the employees

when the employees may first exercise the options (SARs)

on which the options (SARs) are exercised

of the adoption of the plan

QUESTION # 27

70. The accounting method that is used for stock appreciation rights (SARs) compensation plans is similar to the accounting procedures that can be used for

fixed compensatory stock option plans

performance-based stock option plans

noncompensatory stock option plans

both fixed compensatory and performance-based stock option plans

Exhibit 16-8

On January 1, 2010, Marietta Company granted stock appreciation rights (SARs) to the president, which permitted her to receive cash or stock for the difference between the quoted market price and $50 for 2,000 shares of the company’s stock on the exercise date. The service period ends on December 31, 2012, and the rights must be exercised by December 31, 2015. Assume that on December 31, 2013, the president exercises all of her rights and receives cash. Using an options pricing model, the estimated fair values of the SARs were as follows:

January 1, 2010

$10

December 31, 2010

December 31, 2011

December 31, 2012

December 31, 2013

QUESTION # 28

72. Refer to Exhibit 16-8. What is the compensation expense related to the SARs for the year ending December 31, 2010?

$ 3,333

$10,000

$30,000

$33,333

QUESTION # 29

73. Refer to Exhibit 16-8. What is the compensation expense related to the SARs for the year ending December 31, 2011?

$13,333

$16,667

$26,667

$40,000

QUESTION # 30

77. Which of the following methods should be used to account for the conversion of preferred stock to common stock?

Book Value

Market Value

Yes

II.

Yes

III.

Yes

IV.

III

QUESTION # 31

79. Lopez, Inc. issued 500 shares of $50 par value convertible preferred stock at $80 a share. Each preferred share may be converted to 6 shares of $10 par common stock. The entry to record the conversion of all shares would include a

debit to Preferred Stock for $30,000

debit to Additional Paid-in Capital on Preferred Stock for $40,000

credit to Common Stock for $25,000

credit to Additional Paid-in Capital from Preferred Stock Conversion for $10,000

QUESTION # 32

82. Mercury Corp. has 10,000 shares of $10 par, cumulative, 6% preferred stock and 10,000 shares of common stock outstanding since being organized at the beginning of 2010. It declared its first dividend of $40,000 at the end of 2012. This means that

all of the $40,000 dividends available are paid to the preferred stockholders

all of the $40,000 dividends available are paid to the common stockholders

an equal dollar amount is paid to each class of shareholder

3 years’ worth of dividends will be paid to preferred stockholders prior to paying anything to common stockholders

QUESTION # 33

84. The preference to dividends that preferred stockholders have is

the right to receive the appropriate dividend before common stockholders are paid any dividends when dividends are declared

the right to accumulate dividends that have not been declared

the right to share dividends equally with common stockholders when dividends are declared

the right to be paid a minimum dividend each year

QUESTION # 34

89. Wang Corporation issued 8,000 shares of $50 par preferred stock at $74 a share. A stock warrant attached to each preferred share allows the holder to buy one share of $10 par common stock for $20. Right after issuance, the preferred stock sells ex-rights for $63 per share. The warrants began selling at $7 per warrant. The amount credited to Common Stock Warrants at issuance of the preferred stock is

$ 0

$ 56,000

$ 59,200

$160,000

QUESTION # 35

91. All of the following would appear in the contributed capital section of stockholders’ equity on the balance sheet except

additional paid-in capital from stock conversions

retained earnings

stock warrants and options

stock dividends to be distributed

QUESTION # 36

92. The following information is provided for Murphy Corporation:

Common stock, $10 par

$340,000

Bonds payable

28,000

Additional paid-in capital from conversion of preferred

stock into common

3,000

Retained earnings

100,000

Additional paid-in capital on preferred stock

10,000

Common stock subscribed

30,000

Unrealized capital

5,600

Premium on bonds payable

2,000

Preferred stock, 6%, $100 par

80,000

What is the amount of contributed capital for Murphy Corporation?

$430,000

$433,000

$463,000

$468,600

QUESTION # 37

93. The following information is provided for Spring Company:

Retained earnings

$ 35,000

Preferred stock, 5%, $50 par

100,000

Organization expense

2,500

Premium on common stock

Additional paid-in capital from recall of preferred stock

1,000

Premium on bonds payable

3,000

Common stock, $10 par

300,000

If total contributed capital is $406,000, what is the amount of premium on common stock for Spring Company?

$2,500

$3,500

$5,000

$6,000

none of these

QUESTION # 38

98. Under the cost method of accounting for treasury stock transactions, when the proceeds from a sale are greater than the cost, the excess over cost is treated as a(n)

increase in Other Expenses from Treasury Stock Sales

increase in Additional Paid-in Capital from Treasury Stock

increase in a contra-stockholders’ equity account

increase in Additional Paid-in Capital on Common Stock

none of these

QUESTION # 39

107. The accounting method required for share-based compensation arrangements is

Under IFRS

Under GAAP

intrinsic method

II.

intrinsic method

fair value method

III.

fair value method

intrinsic method

IV.

fair value method

III

QUESTION # 40

108. Which set of accounting principles directly uses the term “reserve”?

Both IFRS and GAAP

GAAP but not IFRS

IFRS but not GAAP

neither IFRS nor GAAP

QUESTION # 41

109. Under IFRS, owners’ equity is subdivided into which of the following classifications in addition to capital stock and additional paid-in capital?

reserves and accumulated profits and losses

retained earnings and reserves

retained earnings and accumulated profits and losses

accumulated profits and losses only

16-1

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