CH013TEST.doc

CHAPTER 13 ACCOUNTING FOR CORPORATIONS
True/False Questions

1. Purchasing treasury stock reduces the corporation's assets and stockholders' equity by equal amounts.
Answer: True
2. Common shareholders always share equally with all other shareholders in all dividends.
Answer: False
3. The income of a corporation is subject to taxation.
Answer: True
4. Stock is attractive to investors because stockholders are not liable for the corporation's actions and debts and because stock is easily transferred.
Answer: True
5. If a corporation is authorized to issue 1,000 shares of $50 common stock, it is said to have $50,000 of stock outstanding.
Answer: False
6. Stockholders' equity consists of two main categories: contributed capital and retained earnings.
Answer: True
7. Contributed capital is the total amount of cash and other assets the corporation receives from its stockholders in exchange for common stock.
Answer: True
8. Stated value stock is par stock that is assigned a value per share by the corporation's board of directors.
Answer: False
9. Special rights often granted to preferred stock include a preference for receiving dividends and for the distribution of assets if the corporation is liquidated.
Answer: True
10. Cumulative preferred stock carries the right to be paid both current and all prior periods' unpaid dividends before any dividends are paid to common shareholders.
Answer: True
11. Retained earnings generally consist of a company’s cumulative net income less any net losses and dividends declared since its inception.
Answer: True
12. Retained earnings are part of the stockholders' claims on the company's net assets.
Answer: True
13. Earnings per share is the amount of income earned per share of a company's outstanding (weighted-average) common stock.
Answer: True
14. Stocks with a price-earnings ratio greater than 20 to 25 are likely to be underpriced.
Answer: False
15. A stock dividend is a distribution of corporate assets that returns part of the original investment to shareholders.
Answer: False

Multiple Choice Questions
1. Par value of a stock refers to the:
A) Issue price of the stock.
B) Value assigned to a share of stock by the corporate charter.
C) Market value of the stock on the date of the financial statements.
D) Maximum selling price of the stock.
E) Dividend value of the stock.

Answer: B
2. Stockholders' equity consists of :
A) Long-term assets.
B) Contributed capital and retained earnings.
C) Contributed capital and par value.
D) Retained earnings and cash.
E) Premiums and discounts.
Answer: B
3. 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.
Answer: E
4. A company issued 7% preferred stock with a $100 par value. This means that:
A) Preferred shareholders have a guaranteed dividend.
B) The amount of the potential dividend is $7 per year per preferred share.
C) Preferred shareholders are entitled to 7% of the annual income.
D) The market price per share will approximate $100 per share.
E) Only 7% of the total contributed capital can be preferred stock.
Answer: B
5. Retained earnings:
A) Generally consists of a company's cumulative net income less any net losses and dividends declared since its inception.
B) Can only be appropriated by setting aside a cash fund.
C) Represent an amount of cash available to pay shareholders.
D) Are never adjusted for anything other than net income or dividends.
E) All of the above.
Answer: A
6. The statement of retained earnings may be combined with the:
A) Statement of Cash Flows.
B) Balance Sheet.
C) Statement of Stockholders’ Equity.
D) All of the above.
E) None of the above.
Answer: C
7. Treasury stock is classified as:
A) An asset account.
B) A contra asset account.
C) A revenue account.
D) A contra equity account.
E) A liability account.
Answer: D
8. A company has 40,000 shares of common stock outstanding. The stockholders' equity applicable to common shares is $470,000, and the par value per common share is $10. The book value per share is:
A) $ 0.09.
B) $ 1.75.
C) $10.00.
D) $11.75.
E) $47.50.
Answer: D
Calculation: $470,000/40,000 shares = $11.75 per share
9. A premium on common stock:
A) Is the amount paid in excess of par by purchasers of newly issued stock.
B) Is the difference between par value and issue price when the amount paid is below par.
C) Represents profit from issuing stock.
D) Represents capital gain on sale of stock.
E) Is prohibited in most states.
Answer: A
10. A corporation's distribution of additional shares of its own stock to its stockholders without the receipt of any payment in return is called a:
A) Stock dividend.
B) Stock subscription.
C) Premium on stock.
D) Discount on stock.
E) Treasury stock.
Answer: A
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