TRUE / FALSE (1/2 point for each question)
2. T F The valuation of available-for-sale securities is similar to the procedures followed for
trading securities, except that changes in fair value are not recognized in current income.
income statement, balance sheet, and retained earnings statement.
a Loss on Sale of Treasury Stock being recognized on the income statement.
capital, (2) retained earnings, and (3) drawings.
accounting principles.
10. T F A 10% stock dividend will increase the number of shares outstanding but the book value
per share will decrease.
MULTIPLE CHOICE (1/2 point for each question)
11. Ralston Company is authorized to issue 10,000 shares of 8%, $100 par value preferred stock and 500,000 shares of no-par common stock with a stated value of $1 per share. If Ralston issues 6,000 shares of common stock to pay its recent attorney’s bill of $25,000 for legal services on a land access dispute, which of the following would be the journal entry for Ralston to record?
a. Legal Expense 6,000
Common Stock 6,000
b. Legal Expense 25,000
Common Stock 25,000
c. Legal Expense 25,000
Common Stock 6,000
Paid-in Capital in Excess of Stated Value – Common 19,000
d. Legal Expense 25,000
Common Stock 6,000
Paid-in Capital in Excess of Par – Preferred 19,000
12. Locke Co. purchased 50, 6% Johnston Company bonds on January 1, 2012 for $50,000 cash plus brokerage fees of $500.
The journal entry to record this investment includes a debit to
a. Debt Investments for $50,000.
b. Debt Investments for $50,500.
c. Cash for $50,500.
d. Stock Investments for $50,000.
13. If a stockholder receives a dividend that reduces retained earnings by the fair market value of the stock, the stockholder has received a
a. large stock dividend.
b. cash dividend.
c. contingent dividend.
d. small stock dividend.
14. Which of the following statements concerning leases istrue?
a. Capital leases are favored by lessees.
b. The appearance of the account, Leased Asset, on the balance sheet, signifies an operating lease.
c. The portion of a lease liability expected to be paid in the next year is reported as a current liability.
d. Present value is irrelevant in accounting for leases.
The entry to record the first monthly payment will include a
a. debit to the Cash account for $5,400.
b. credit to the Cash account for $5,000.
c. debit to the Interest Expense account for $5,000.
d. credit to the Mortgage Payable account for $5,400.
16. Library, Inc. has 2,500 shares of 4%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2011, and December 31, 2012. The board of directors declared and paid a $4,000 dividend in 2011. In 2012, $15,000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2012?
Preferred Common
a. $9,000 $6,000
b. $7,500 $7,500
c. $6,000 $9,000
d. $5,000 $10,000
17. Stock dividends and stock splits have the following effects on retained earnings:
Stock Splits Stock Dividends
a. Increase No change
b. No change Decrease
c. Decrease Decrease
d. No change No change
18. Stout Corporation had net income of $200,000 and paid dividends to common stockholders of $40,000 in 2012. The weighted average number of shares outstanding in 2012 was 50,000 shares. Stout Corporation’s common stock is selling for $75 per share on the New York Stock Exchange. Stout Corporation’s price-earnings ratio is
a. 3.8 times.
b. 15 times.
c. 18.8 times.
d. 12 times.
19. If the cost method is used to account for a long-term investment in common stock, dividends received should be
a. credited to the Stock Investments account.
b. credited to the Dividend Revenue account.
c. debited to the Stock Investments account.
d. recorded only when 20% or more of the stock is owned.
a. Edison’s Paid-in Capital in Excess of Par account increased $1,000,000.
b. Edison’s total stockholders’ equity was unaffected.
c. Edison’s Stock Dividends account increased $3,000,000.
d All of the above.
21. The net income reported on the income statement for the current year was $240,000. Depreciation was $50,000. Account receivable and inventories decreased by $10,000 and $30,000, respectively. Prepaid expenses and accounts payable increased, respectively, by $1,000 and $8,000. How much cash was provided by operating activities?
a. $301,000
b. $337,000
c. $321,000
d. $329,000
22. Winston Corporation had 400,000 shares of common stock outstanding during the year. Winston declared and paid cash dividends of $200,000 on the common stock and $160,000 on the preferred stock. Net income for the year was $880,000. What is Winston’s earnings per share?
a. $1.75
b. $1.70
c. $1.80
d. $1.30
23. Realistic Corporation’s December 31, 2012 balance sheet showed the following:
8% preferred stock, $20 par value, cumulative, 20,000 shares
authorized; 10,000 shares issued $ 200,000
Common stock, $10 par value, 2,000,000 shares authorized;
1,950,000 shares issued, 1,930,000 shares outstanding 19,500,000
Paid-in capital in excess of par—preferred stock 60,000
Paid-in capital in excess of par—common stock 27,000,000
Retained earnings 7,650,000
Treasury stock (20,000 shares) 630,000
Realistic’s total paid-in capital was:
a. $46,760,000.
b. $47,390,000.
c. $46,130,000.
d. $27,060,000.
24. Darius, Inc. has the following income statement (in millions):
DARIUS, INC.
Income Statement
For the Year Ended December 31, 2012
Net Sales $300
Cost of Goods Sold 120
Gross Profit 180
Operating Expenses 44
Net Income $136
Using vertical analysis, what percentage is assigned to Net Income?
a. 100%
b. 75.6%
c. 45.3%
d. None of the above
25 . Thirty $1,000 bonds with a carrying value of $39,600 are converted into 3,000 shares of $5 par value common stock. The common stock had a market value of $9 per share on the date of conversion. The entry to record the conversion is
a. Bonds Payable 39,600
Common Stock 15,000
Paid-in Capital in Excess of Par 24,600
b. Bonds Payable 30,000
Premium on Bonds Payable 9,600
Common Stock 27,000
Paid-in Capital in Excess of Par 12,600
c. Bonds Payable 30,000
Premium on Bonds Payable 9,600
Common Stock 15,000
Paid-in Capital in Excess of Par 24,600
d. Bonds Payable 39,600
Common Stock 27,000
Paid-in Capital in Excess of Par 12,600
26. Karl Corporation was organized on January 2, 2010. During 2012, Karl issued 20,000 shares at $24 per share, purchased 3,000 shares of treasury stock at $26 per share, and had net income of $300,000. What is the total amount of stockholders’ equity at December 31, 2012?
a. $640,000
b. $702,000
c. $708,000
d. $720,000
27. Nickel Company owns 30% interest in the stock of Finn Corporation. During the year, Finn pays $25,000 in dividends, and reports $200,000 in net income. Nickel Company’s investment in Finn will increase by
a. $25,000.
b. $60,000.
c. $67,500.
d. $52,500.
28. Library, Inc. has 2,500 shares of 4%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2011, and December 31, 2012. The board of directors declared and paid a $4,000 dividend in 2011. In 2012, $15,000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2012?
Preferred Common
a. $9,000 $6,000
b. $7,500 $7,500
c. $6,000 $9,000
d. $5,000 $10,000
29. Changes from cost are reported as part of net income for
a. available-for-sale securities.
b. held-to-maturity securities.
c. debt securities.
d. trading securities.
30. Which of the following adjustments to convert net income to net cash provided by operating activities is incorrect?
Add to Net Income Deduct from Net Income
a. Accounts Receivable decrease increase
b. Prepaid Expenses increase decrease
c. Inventory decrease increase
d. Accounts Payable increase decrease
31. Land acquired from the issuance of common stock is reported
a. as a financing activity.
b. as an investing activity.
c. as an operating activity.
d. in a separate schedule at the bottom of the statement.
32. During 2012, Korman Industries reported cash provided by operations of $690,000, cash used in investing of $1,029,000, and cash used in financing of $135,000. In addition, cash spent for fixed assets during the period was $414,000. No dividends were paid. Based on this information, what was Korman’s free cash flow?
a. ($339,000)
b. $1,440,000
c. $276,000
d. ($888,000)
33. Long-term creditors are usually most interested in evaluating
a. liquidity and solvency.
b. solvency and marketability.
c. liquidity and profitability.
d. profitability and solvency.
34. A major disadvantage resulting from the use of bonds is that
a. earnings per share may be lowered.
b. interest must be paid on a periodic basis.
c. bondholders have voting rights.
d. taxes may increase.
35. The acid-test (quick) ratio
a. is used to quickly determine a company’s solvency and long-term debt paying ability.
b. relates cash, short-term investments, and net receivables to current liabilities.
c. is calculated by taking one item from the income statement and one item from the balance sheet.
d. is the same as the current ratio except it is rounded to the nearest whole percent.
36. If a stockholder receives a dividend that reduces retained earnings by the fair market value of the stock, the stockholder has received a
d. small stock dividend.
37. A $600,000 bond was retired at 103 when the carrying value of the bond was $622,000. The entry to record the retirement would include a
a. gain on bond redemption of $18,000.
b. loss on bond redemption of $12,000.
c. loss on bond redemption of $18,000.
d. gain on bond redemption of $4,000.
38. At December 31, 2012, Gammon Inc. has these data on its security investments:
Security Cost Fair Value 12/31/12
Trading $ 140,000 $192,000
Available-for-sale 137,000 125,000
If the available-for-sale securities are held as long-term investments, which of the following will be recorded to adjust the securities to fair value?
a. Securities 40,000
Unrealized Gain¾Income 40,000
b. Unrealized Loss¾Income 12,000
Securities 40,000
Unrealized Gain¾Income 52,000
c. Market Adjustment¾Trading 52,000
Unrealized Gain¾Income 52,000
Unrealized Gain or Loss¾Equity 12,000
Market Adjustment¾Available-for-Sale 12,000
d. Unrealized Gain¾Income 52,000
Market Adjustment¾Trading 52,000
Market Adjustment¾Available-for-Sale 12,000
Unrealized Gain or Loss¾Equity 12,000
39. The following data are available for Nemo Corporation.
Sale of land $250,000
Sale of equipment $125,000
Issuance of common stock 140,000
Purchase of equipment 60,000
Payment of cash dividends 120,000
Net cash provided by investing activities is:
a. $315,000.
b. $260,000.
c. $335,000.
d. $455,000.
40. The following information pertains to Sampson Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.
Assets
Cash and short-term investments $ 45,000
Accounts receivable (net) 25,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $300,000
Liabilities and Stockholders’ Equity
Current liabilities $ 50,000
Long-term liabilities 90,000
Stockholders’ equity—common 160,000
Total Liabilities and Stockholders’ Equity $300,000
Income Statement
Sales $ 120,000
Cost of goods sold 66,000
Gross profit 54,000
Operating expenses 18,000
Net income $ 36,000
Number of shares of common stock 6,000
Market price of common stock $33
Dividends per share .50
What is the price-earnings ratio for Sampson?
a. 5.5 times
b. 1.1 times
c. 6 times
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