ACC 206 Week 11 Final Exam Strayer

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Chapter 14 Through 19

CORPORATIONS:DIVIDENDS, RETAINED EARNINGS, AND INCOME REPORTING

CHAPTERSTUDY OBJECTIVES

1. Prepare the entries for cash dividends and stock dividends.

2. Identify the items reported in a retained earnings statement.

3. Prepare and analyze a comprehensive stockholders' equity section.

4. Describe the form and content of corporation income statements.

5. Compute earnings per share.

TRUE-FALSESTATEMENTS

1.Dividends may be declared and paid in cash or stock.

2.Cash dividends are not a liability of the corporation until they are declared by the board of directors.

3.The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.

4.A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease.

5.A 3 for 1 common stock split will increase total stockholders' equity but reduce the par or stated value per share of common stock.

6.Retained earnings represents the amount of cash available for dividends.

7.Net income of a corporation should be closed to retained earnings and net losses should be closed to paid-in capital accounts.

8.A debit balance in the Retained Earnings account is identified as a deficit.

9.A correction in income of a prior period involves either a debit or credit to the Retained Earningsaccount.

10.Prior period adjustments to income are reported in the current year's income statement.

11.Retained earnings that are restricted are unavailable for dividends.

12.Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.

13.A retained earnings statement shows the same information as a corporation income statement.

14.A detailed stockholders' equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.

15.Common Stock Dividends Distributable is shown within the Paid-in Capital subdivision of the stockholders' equity section of the balance sheet.

16.Return on common stockholders equity is computed by dividing net income by ending stockholders equity.

17.Many companies prepare a stockholders equity statement instead of presenting a detailed stockholders equity section in the balance sheet.

18.A major difference among corporations, proprietorships, and partnerships is that a corporation's income statement reports income tax expense.

19.A corporation incurs income tax expense only if it pays dividends to stockholders.Corporations:Dividends, Retained Earnings, and Income Reporting14 - 5

20.Income tax expense usually appears as a separate section on a corporation income statement.

21.Earnings per share is calculated by dividing net income by the weighted average number of shares of preferred stock and common stock outstanding.

22.Preferred dividends paid are added back to net income in calculating earnings per share for common stockholders.

23.Earnings per share indicates the net income earned by each share of outstanding common stock.

24.Earnings per share is reported for both preferred and common stock.

25.Most companies are required to report earnings per share on the face of the income statement.

Additional True-False Questions

26.A dividend based on paid-in capital is termed a liquidating dividend.

27.Common Stock Dividends Distributable is reported as additional paid-in capital in the stockholders' equity section.

28.A prior period adjustment is reported as an adjustment of the beginning balance of RetainedEarnings.

29.Income tax expense and the related liability for income taxes payable are recorded when taxes are paid.

30.Earnings per share is reported only for common stock.

MULTIPLECHOICE QUESTIONS

31.Each of the following decreases retained earnings except a a. cash dividend.b. liquidating dividend. c. stock dividend.d. All of these decrease retained earnings.

32.Each of the following decreases total stockholders' equity except a a. cash dividend.b. liquidating dividend. c. stock dividend.d. All of these decrease total stockholders' equity.

33.Which one of the following is not necessary in order for a corporation to pay a cash dividend?a. Adequate cashb. Approval of stockholdersc. Declaration of dividends by the board of directors d. Retained earnings

34.If a corporation declares a dividend based upon paid-in capital, it is known as a a. scrip dividend.b. property dividend. c. paid dividend.d. liquidating dividend.

35.The date on which a cash dividend becomes a binding legal obligation is on the a. declaration date.b. date of record. c. payment date.d. last day of the fiscal year-end.

36.The effect of the declaration of a cash dividend by the board of directors is to

Increasea. Stockholders' equity b.Assetsc.Liabilities d.LiabilitiesDecreaseAssets LiabilitiesStockholders' equity Assets

37.The cumulative effect of the declaration and payment of a cash dividend on a company's financial statements is toa. decrease total liabilities and stockholders' equity. b. increase total expenses and total liabilities.c. increase total assets and stockholders' equity. d. decrease total assets and stockholders' equity.Corporations:Dividends, Retained Earnings, and Income Reporting14 - 7

38.Common Stock Dividends Distributable is classified as a(n) a. asset account.b. stockholders' equity account. c. expense account.d. liability account.

39.The effect of a stock dividend is toa. decrease total assets and stockholders' equity. b. change the composition of stockholders' equity. c. decrease total assets and total liabilities.d. increase the book value per share of common stock.

40.If a corporation declares a 10% stock dividend on its common stock, the account to be debited on the date of declaration isa. Common Stock Dividends Distributable. b. Common Stock.c. Paid-in Capital in Excess of Par. d. Retained Earnings.

41.Which one of the following events would not require a formal journal entry on a corporation's books?a. 2 for 1 stock splitb. 100% stock dividend c. 2% stock dividendd. $1 per share cash dividend

42.Stock dividends and stock splits have the following effects on retained earnings:

Stock Splits a.Increase b. No change c. Decrease d. No changeStock Dividends No changeDecrease Decrease No change

43.Dividends are predominantlypaid in a. scrip.b. property. c. cash.d. stock.

44.If a stockholder receives a dividend consisting of a promissory note, the stockholder has received aa. stock dividend. b. cash dividend.c. contingent dividend. d. scrip dividend.

45.Of the four dividends types, the two most common types in practice are a. cash and scrip.b. cash and property. c. cash and stock.d. property and stock.14 - 8

46.Regular dividends are declared out ofa. Paid-in Capital in Excess of Par Value. b. Treasury Stock.c. Common Stock.d. Retained Earnings.

47.A corporation is committed to a legal obligation when it declares a. a cash dividend.b. either a cash dividend or a stock dividend. c. a stock dividend.d. a stock split.

48.Which of the following is not a significant date with respect to dividends? a. The declaration dateb. The incorporation date c. The record dated. The payment date

49.On the dividend record date,a. a dividend becomes a current obligation. b. no entry is required.c. an entry may be required if it is a stock dividend. d. Dividends Payable is debited.

50.Which of the following statements regarding the date of a cash dividend declaration is not accurate?a. The dividend can be rescinded once it has been declared. b. The corporation is committed to a legal, binding obligation.c. The board of directors formally authorizes the cash dividend. d. A liability account must be increased.

51.Dividends Payable is classified as a a. long-term liability.b. contra stockholders' equity account to Retained Earnings. c. current liability.d. stockholders' equity account.

52.Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections:

Total Assets a.Increase b. No change c. Decrease d. DecreaseTotal Liabilities Decrease Increase Increase No changeTotal Stockholders' Equity No changeDecrease Decrease Increase

53.Which of the following statements about dividends is not accurate? a. Many companies declare and pay cash quarterly dividends.b. Low dividends may mean high stock returns.c. The board of directors is obligated to declare dividends. d. A legal dividend may not be a feasible one.Corporations:Dividends, Retained Earnings, and Income Reporting14 - 9

54.The cumulative effect of the declaration and payment of a cash dividend on a company's balance sheet is toa. decrease current liabilities and stockholders' equity. b. increase total assets and stockholders' equity.c. increase current liabilities and stockholders' equity. d. decrease stockholders' equity and total assets.

55.The declaration and distribution of a stock dividend will a. increase total stockholders' equity.b. increase total assets. c. decrease total assets.d. have no effect on total assets.

56.ABC, Inc. has 1,000 shares of 4%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2008. What is the annual dividend on the preferred stock?a. $40 per share b. $4,000 in total c. $400 in total d. $.40 per share

57.Agler, Inc. has 10,000 shares of 6%, $100 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2008. If the board of directors declares a $50,000 dividend, thea. preferred shareholders will receive 1/10th of what the common shareholders will receive.b. preferred shareholders will receive the entire $50,000.c. $50,000 will be held as restricted retained earnings and paid out at some future date. d. preferred shareholders will receive $25,000 and the common shareholders will receive$25,000.

58.Manner, Inc. has 5,000 shares of 6%, $100 par value, noncumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2008. There were no dividends declared in 2007. The board of directors declares and pays a $55,000 dividend in 2008. What is the amount of dividends received by the common stockholders in 2008?a. $0b. $30,000 c. $55,000 d. $25,000

59.Lopez, Inc. has 2,000 shares of 6%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2007, and December 31, 2008. The board of directors declared and paid a $4,000 dividend in 2007. In 2008, $20,000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholdersin 2008?

Preferred a.$12,000 b.$10,000 c.$8,000 d.$6,000Common $8,000 $10,000 $12,000 $14,00014 - 10

60.Norton, Inc. has 10,000 shares of 6%, $100 par value, noncumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2008, and December 31, 2009. The board of directors declared and paid a $50,000 dividend in 2008. In 2009, $100,000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2009?

Preferred a. $0b. $60,000 c. $50,000 d. $100,000Common $100,000 $40,000 $50,000 $0

61.The board of directors must assign a per share value to a stock dividend declared that is a. greater than the par or stated value.b. less than the par or stated value. c. equal to the par or stated value.d. at least equal to the par or stated value.

62.Corporationsgenerally issue stock dividends in order to a. increase the market price per share.b. exceed stockholders' dividend expectations. c. increase the marketability of the stock.d. decrease the amount of capital in the corporation.

63.A stockholder who receives a stock dividend would a. expect the market price per share to increase. b. own more shares of stock.c. expect retained earnings to increase.d. expect the par value of the stock to change.

64.When stock dividends are distributed,a. Common Stock Dividends Distributable is decreased. b. Retained Earnings is decreased.c. Paid-in Capital in Excess of Par Value is debited if it is a small stock dividend. d. no entry is necessary if it is a large stock dividend.

65.A small stock dividend is defined asa. less than 30% but greater than 25% of the corporation's issued stock. b. between 50% and 100% of the corporation's issued stock.c. more than 30% of the corporation's issued stock.d. less than 2025% of the corporation's issued stock.

66.The per share amount normally assigned by the board of directors to a large stock dividend isa. the market value of the stock on the date of declaration.b. the average price paid by stockholders on outstanding shares. c. the par or stated value of the stock.d. zero.Corporations:Dividends, Retained Earnings, and Income Reporting14 - 11

67.The per share amount normally assigned by the board of directors to a small stock dividend isa. the market value of the stock on the date of declaration.b. the average price paid by stockholders on outstanding shares. c. the par or stated value of the stock.d. zero.

68.Identify the effect the declaration of a stock dividend has on the par value per share and book value per share.

Par Value per Share a.Increaseb.No effect c.Decrease d.No effectBook Value per Share Decrease Increase Decrease Decrease

69.The declaration of a stock dividend will a. increase paid-in capital.b. change the total of stockholders' equity. c. increase total liabilities.d. increase total assets.

70.Which of the following show the proper effect of a stock split and a stock dividend?

Itema.Total paid-in capital b. Total retained earningsc. Total par value (common) d.Par value per shareStock Split IncreaseDecrease Decrease DecreaseStock Dividend Increase Decrease Increase No change

71.A stock splita. may occur in the absence of retained earnings. b. will increase total paid-in capital.c. will increase the total par value of the stock.d. will have no effect on the par value per share of stock.

72.Outstanding stock of the Apex Corporation included 20,000 shares of $5 par common stock and 5,000 shares of 6%, $10 par noncumulative preferred stock. In 2007, Apex declared and paid dividends of $2,000. In 2008, Apex declared and paid dividends of $6,000. How much of the 2008 dividend was distributed to preferred shareholders?a. $4,000 b. $7,000 c. $3,000d. None of the above

73.Outstanding stock of the Bell Corporation included 20,000 shares of $5 par common stock and 10,000 shares of 6%, $10 par noncumulative preferred stock. In 2007, Bell declared and paid dividends of $4,000. In 2008, Bell declared and paid dividends of $12,000. How much of the 2008 dividend was distributed to preferred shareholders?a. $8,000 b. $14,000 c. $6,000d. None of the above14 - 12

74.On January 1, Bluefield Corporation had 800,000 shares of $10 par value common stock outstanding. On March 31, the company declared a 10% stock dividend. Market value of the stock was $15/share. As a result of this event,a. Bluefields Paid-in Capital in Excess of Par Value account increased $400,000. b. Bluefields total stockholders equity was unaffected.c. Bluefields Retained Earnings account decreased $1,200,000. d. All of the above.

75.On January 1, Garrison Corporation had 1,000,000 shares of $10 par value common stock outstanding. On March 31, the company declared a 10% stock dividend. Market value of the stock was $15/share. As a result of this event,a. Garrisons Paid-in Capital in Excess of Par Value account increased $500,000. b. Garrisons total stockholders equity was unaffected.c. Garrisons Retained Earnings account decreased $1,500,000. d All of the above.

76.Sun Inc. has 5,000 shares of 6%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2008. What is the annual dividend on the preferred stock?a. $60 per share b. $30,000 in total c. $3,000 in total d. $0.60 per share

77.Allstate, Inc., has 20,000 shares of 6%, $100 par value, noncumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2008. If the board of directors declares a $200,000 dividend, thea. preferred stockholders will receive 2/10th of what the common stockholders will receive.b. preferred stockholders will receive the entire $200,000.c. $120,000 will be held as restricted retained earnings and paid out at some future date. d. preferred stockholders will receive $120,000 and the common stockholders willreceive $80,000.

78.Archer, Inc., has 10,000 shares of 8%, $100 par value, noncumulative preferred stock and 40,000 shares of $1 par value common stock outstanding at December 31, 2008. There were no dividends declared in 2007. The board of directors declares and pays a $120,000 dividend in 2008. What is the amount of dividends received by the common stockholders in 2008?a. $0b. $80,000 c. $120,000 d. $40,000

79.Luther Inc., has 2,000 shares of 8%, $50 par value, cumulative preferred stock and 100,000 shares of $1 par value common stock outstanding at December 31, 2008, and December 31, 2007. The board of directors declared and paid a $6,000 dividend in 2007. In 2008, $24,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2008?Corporations:Dividends, Retained Earnings, and Income Reporting14 - 13

a. $14,000 b. $12,000 c. $10,000 d. $8,000

`80. Anders, Inc., has 5,000 shares of 6%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at December 31, 2009. There were no dividends declared in 2007. The board of directors declares and pays a $50,000 dividend in 2008 and in 2009. What is the amount of dividends received by the common stockholders in 2009?a. $10,000 b. $30,000 c. $50,000 d. $0

81. Cuther Inc., has 1,000 shares of 8%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2007, and December 31, 2008. The board of directors declared and paid a $3,000 dividend in 2007. In 2008, $12,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2008?a. $7,000 b. $6,000 c. $5,000 d. $4,000

82.On January 1, Brunner Corporation had 60,000 shares of $10 par value common stock outstanding. On March 17, the company declared a 10% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The entry to record the transaction of March 17 would include aa. credit to Retained Earnings for $18,000. b. credit to Cash for $78,000.c. credit to Common Stock Dividends Distributablefor $60,000. d. debit to Common Stock Dividends Distributablefor $60,000.

83.On January 1, Brunner Corporation had 60,000 shares of $10 par value common stock outstanding. On March 17, the company declared a 10% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The stock was distributed on March 30. The entry to record the transaction of March 30 would include aa. credit to Cash for $60,000.b. debit to Common Stock Dividends Distributable for $60,000. c. credit to Paid-in Capital in Excess of Par Value for $18,000. d. debit to Retained Earnings for $18,000.

84.On January 1, Sandford Corporation had 80,000 shares of $10 par value common stock outstanding. On June 17, the company declared a 10% stock dividend to stockholders of record on June 20. Market value of the stock was $15 on June 17. The entry to record the transaction of June 17 would include aa. debit to Retained Earnings for $120,000. b. credit to Cash for $120,000.c. credit to Common Stock Dividends Distributablefor $120,000. d. credit to Common Stock Dividends Distributablefor $40,000.14 - 14

85.On January 1, Sanford Corporation had 80,000 shares of $10 par value common stock outstanding. On June 17, the company declared a 10% stock dividend to stockholders of record on June 20. Market value of the stock was $15 on June 17. The stock was distributed on June 30. The entry to record the transaction of June 30 would include aa. credit to Common Stock for $80,000.b. debit to Common Stock Dividends Distributablefor $120,000. c. credit to Paid-in Capital in Excess of Par Value for $40,000. d. debit to Retained Earnings for $40,000.

86.The following selected amounts are available for Sanders Company.

Retainedearnings (beginning)$1,000 Net loss 100 Cash dividends declared 100 Stock dividends declared 50

What is its ending retained earnings balance? a. $850b. $900 c. $750 d. $800

87.Turquoise and Topaz Sisters had retained earnings of $10,000 on the balance sheet but disclosed in the footnotes that $2,000 of retained earnings was restricted for plant expansion and $1,000 was restricted for bond repayments. Cash of $2,000 had been set aside for the plant expansion. How much of retained earnings is available for dividends?a. $7,000 b. $8,000 c. $10,000 d. $5,000

88.Irwin, Inc. had 300,000 shares of common stock outstanding before a stock split occurred, and 600,000 shares outstanding after the stock split. The stock split wasa. 3 for 6. b. 6 for 1. c. 1 for 6. d. 2 for 1.

89.Restricting retained earnings for the cost of treasury stock purchased is a a. contractual restriction.b. legal restriction. c. stock restriction.d. voluntary restriction.

90.A prior period adjustment that corrects income of a prior period requires that an entry be made toa. an income statement account.b. a current year revenue or expense account. c. the retained earnings account.d. an asset account.Corporations:Dividends, Retained Earnings, and Income Reporting14 - 15

91.If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant expansion, the effect of this action is toa. decrease total assets and total stockholders' equity.b. increase stockholders' equity and decrease total liabilities.c. decrease total retained earnings and increase total liabilities.d. reduce the amount of retained earnings available for dividend declarations.

92.A credit balance in retained earnings represents a. the amount of cash retained in the business. b. a claim on specific assets of the corporation.c. a claim on the aggregate assets of the corporation.d. the amount of stockholders' equity exempted from the stockholders' claim on total assets.

93.A net lossa. occurs if operating expenses exceed cost of goods sold.b. is not closed to Retained Earnings if it would result in a debit balance. c. is closed to Retained Earnings even if it would result in a debit balance.d. is closed to the paid-in capital account of the stockholders' equity section of the balance sheet.

94.Prior period adjustments are reporteda. in the footnotes of the current year's financial statements. b. on the current year's balance sheet.c. on the current year's income statement.d. on the current year's retained earnings statement.

95.Retained earnings are occasionally restricted a. to set aside cash for dividends.b. to keep the legal capital associated with paid-in capital intact. c. due to contractual loan restrictions.d. if preferred dividends are in arrears.

96.Retained earnings is increased by each of the following except a. net income.b. prior period adjustments.c. some disposals of treasury stock.d. All of these increase retained earnings.

97.A prior period adjustment for understatement of net income will a. be credited to the Retained Earnings account.b. be debited to the Retained Earnings account.c. show as a gain on the current year's Income Statement. d. show as an asset on the current year's Balance Sheet.

98.The retained earnings statementa. is the owners' equity statement for a corporation.b. will show an addition to the beginning retained earnings balance for an understate-ment of net income in a prior year.c. will not reflect net losses.d. will, in some cases, fail to reconcile the beginning and ending retained earnings balances.14 - 16

99.In the stockholders' equity section of the balance sheet,a. Common Stock Dividends Distributable will be classified as part of additional paid-in capital.b. Common Stock Dividends Distributable will appear in its own subsection of the stock-holders' equity.c. Additional Paid-in Capital appears under the subsection Paid-in Capital. d. Dividends in arrears will appear as a restriction of Retained Earnings.

100.The return on common stockholders' equity is computed by dividing net income available to common stockholdersbya. ending total stockholders' equity.b. ending common stockholders' equity. c. average total stockholders' equity.d. average common stockholders' equity.

101.The return on common stockholders equity is computed by dividing a. net income by ending common stockholders equity.b. net income by average common stockholdersequity.c. net income less preferred dividends by ending common stockholders equity. d. net income less preferred dividends by average common stockholders equity.

Use the following information for questions 102103.

Carter Corporation had net income of $250,000 and paid dividends of $50,000 to common stockholders and $20,000 to preferred stockholders in 2008. Carter Corporations common stockholders equity at the beginning and end of 2008 was $870,000 and $1,130,000, respectively. There are 100,000 weighted-averageshares of common stock outstanding.

102.Carter Corporations return on common stockholders equity was a. 25%.b. 23%. c. 20%. d. 18%.

103.Carter Corporations earnings per share for 2008 was a. $2.50.b. $2.30. c. $2.00. d. $1.80.

Use the following information for questions 104105.

The following information pertains to Greenwich Company. Assume that all balance sheet amounts represent average balance figures.

Stockholders equitycommon Total stockholders equity SalesNet incomeNumberof shares of common stock Commonstock dividends Preferredstock dividends$150,000 200,000 100,000 25,000 10,000 10,000 4,000Corporations:Dividends, Retained Earnings, and Income Reporting14 - 17

104.What is the return on common stockholders equity ratio for Greenwich? a. 16.7%b. 14.0% c. 12.7% d. 10.5%

105.What is the earnings per share for Greenwich? a. $2.50b. $2.10 c. $1.50 d. $1.10

106.A corporation differs from a proprietorship and a partnership in thata. assets and liabilities are presented differently on the balance sheet.b. a corporation is considered a separate legal entity for taxation purposes. c. the cost principle only applies to proprietorships and partnerships.d the owners of the corporation do not have a claim on the net assets of the business.

107.Income statements for corporations are the same as the statements for proprietorships exceptfor the reporting ofa. gross profit.b. income from operations. c. income tax expense.d. other revenues and gains.

108.Income statements for corporations are the same as the income statements for proprietorships except for the reporting ofa. cost of goods sold. b. income taxes.c. gross profit.d. other revenues and other expenses.

109.Corporation income tax expense isa. usually accrued in the adjusting entry process.b. not usually accrued because it is not known what the exact liability will be until the tax return is filed.c. not reported in a separate section of a corporate income statement. d. reported similarly for corporations and partnerships.

110.When computing earnings per share,a. an adjustment related to preferred stock dividends is made in the numerator and denominator of the earnings per share formula.b. an adjustment for the preferred dividends is made in the denominator of the earnings per share formula.c. the dividends for cumulative preferred stock are deducted from net income only if the preferred dividends have been declared.d. the dividends for cumulative preferred stock are deducted from net income whether or not preferred dividends have been declared.14 - 18

111.Each of the following statements is correct except that earnings per share is reported a. below net income.b. for both common and preferred stock. c. on the face of the income statement.d. based on the weighted-averagenumber of common shares outstanding.

112.West, Inc. has a net income of $400,000 for 2008, and there are 200,000 weighted-average shares of common stock outstanding. Dividends declared and paid during the year amounted to $80,000 on the preferred stock and $120,000 on the common stock. The earnings per share for 2008 isa. $2.00. b. $.60. c. $1.60. d. $1.00.

113.The formula for computing earnings per share is net income a. divided by the ending common shares outstanding.b. divided by the weighted-averagenumber of common shares outstanding.c. less preferred dividends divided by the ending common shares outstanding.d. less preferred dividends divided by the weighted-average number of common shares outstanding.

Additional Multiple Choice Questions

114.Which of the following statements about a cash dividend is incorrect? a. The legality of a cash dividend depends on state corporation laws.b. The legality of a dividend does not indicate a company's ability to pay a dividend. c. Dividends are not a liability until declared.d. Shareholders usually vote to determine the amount of income to be distributed in the form of a dividend.

115.The date a cash dividend becomes a binding legal obligation to a corporation is the a. declaration date.b. earnings date. c. payment date. d. record date.

116.Abbott Corporation splits its common stock 4 for 1, when the market value is $40 per share. Prior to the split, Abbott had 50,000 shares of $10 par value common stock issued and outstanding. After the split, the par value of the stocka. remains the same.b. is reduced to $2 per share.c. is reduced to $2.50 per share. d. is reduced to $10 per share.Corporations:Dividends, Retained Earnings, and Income Reporting14 - 19

117.Which of the following statements about retained earnings restrictions is incorrect?a. Many states require a corporation to restrict retained earnings for the cost of treasury stock purchased.b. Long-term debt contracts may impose a restriction on retained earnings as a condition for the loan.c. The board of directors of a corporation may voluntarily create retained earnings restrictions for specific purposes.d. Retained earnings restrictions are generally disclosed through a journal entry on the booksof a company.

118.Prior period adjustmentsa. may only increase retained earnings. b. may only decrease retained earnings.c. may either increase or decrease retained earnings. d. do not affect retained earnings.

119.Jennifer Company reports the following amounts for 2008:

Net income Averagestockholders' equity PreferreddividendsPar value preferred stock$125,000 500,000 35,000 100,000

The 2008 rate of return on common stockholders' equity is a. 18.0%.b. 22.5%. c. 25.0%. d. 31.3%.

120.The return on common stockholders' equity is computed by dividing a. net income by ending common stockholders' equity.b. net income by average common stockholders'equity.c. net income minus preferred dividends by ending common stockholders'equity. d. net income minus preferred dividends by average common stockholders' equity.

121.Milner Corporation had 200,000 shares of common stock outstanding during the year. Milner 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 Milners earnings per share?a. $2.60 b. $3.40 c. $3.60 d. $4.40

122.When a corporation has both preferred and common stock outstanding, earnings per share is computed by dividing net incomea. by ending common shares outstanding.b. by weighted average common shares outstanding.c. less preferred dividends by ending common shares outstanding.d. less preferred dividends by the weighted average of common shares outstanding.14 - 20

123.In determining earnings per share, dividends for the current year on noncumulative preferred stock should bea. disregarded.b. added back to net income whether declared or not. c. deducted from net income only if declared.d. deducted from net income whether declared or not.

BRIEFEXERCISES

BE 124

On November 27, the board of directors of India Star Company declared a $.35 per share dividend. The dividend is payable to shareholders of record on December 7 on December 24. India Star has 25,500 shares of $1 par common stock outstanding at November 27. Journalize the entries needed on the declaration and payment dates.

BE 125

On October 10, the board of directors of Pitcher Corporation declared a 5% stock dividend. On October 10, the company had 10,000 shares of $1 par common stock issued and outstanding with a market price of $15 per share. The stock dividend will be distributed on October 31 to shareholders of record on October 25. Journalize the entries needed for the declaration and distribution of the stock dividend.

BE 126

Devons Company has 24,000 shares of $1 par common stock issued and outstanding. The company also has 2,000 shares of $100 par 3% cumulative preferred stock outstanding. The company did not pay the preferred dividends in 2007 or 2008. What amount of dividends must the company pay the preferred shareholders in 2009 if they wish to pay the common stockholders a dividend?

BE 127

On November 1, 2008, Mates Corporations stockholders equity section is as follows:

Commonstock, $10 par valuePaid-in capital in excess of par value RetainedearningsTotal stockholders equity$600,000 180,000 200,000 $980,000

On November 1, Mates declares and distributes a 10% stock dividend when the market value of the stock is $14 per share.

Instructions

Indicate the balances in the stockholders equity accounts after the stock dividend has been distributed.

BE 128

Match each item/event pair below with the indicated change in the item. An individual classification may be used more than once, or not at all. For each dividend, assume that both declaration and payment or distribution has occurred.

ClassificationsA. Item increases B. Item decreasesC. Item is unchangedD. Direction of change cannot be determined

Item

1.Book value per share

2.Total retained earningsEvent Stock DividendStock Split

3.Total stockholders equity

4.Earningsper common share 5.Total retained earnings6.Total paid-in capitalPrior period adjustment increases last years net income

Restrictionof retained Earnings Cash dividendStock dividend

BE 129

Identify which of the following items would be reported as additions (A) or deductions (D) in a RetainedEarnings Statement.1. Net Income 2. Net Loss3. Cash Dividends 4. Stock Dividends5. Prior period adjustments to correct for overstatement of prior years net income 6. Prior period adjustments to correct for understatement of prior years net incomeCorporations:Dividends, Retained Earnings, and Income Reporting14 - 23

BE 130

The balance in retained earnings on January 1, 2008, for Ettenger Inc, was $600,000. During the year, the corporation paid cash dividends of $70,000 and distributed a stock dividend of $8,000. In addition, the company determined that it had overstated its depreciation expense in prior years by $50,000. Net income for 2008 was $100,000.

Instructions

Preparethe retained earnings statement for 2008.

BE 131

The following information is available for Wheeler Corporation

Averagecommon stockholders equity Averagetotal stockholders equity Commondividends declared and paid Preferreddividends declared and paid Net income2008 $1,500,000 2,000,000 72,000 30,000 300,0002007 $1,000,000 1,500,000 50,000 30,000 250,000

InstructionsComputethe return on common stockholders equity ratio for both years. Briefly comment on your findings.

BE 132

The following information is available for Ryder Corporation for the year ended December 31, 2008:

Correctedoverstatement of 2007 depreciation expense Cost of goods soldDeclaredcash dividends OperatingexpensesOther expenses and losses Other revenues and gains SalesTax rate$ 15,000 600,000 50,000 170,000 40,000 50,000 1,000,000 30%

Instructions

Preparea corporate income statement in good form.

EXERCISES

Ex. 133

The stockholders' equity section of Ellis Corporation at December 31, 2007, included the following:

6% preferred stock, $100 par value, cumulative,10,000 shares authorized, 8,000 shares issued and outstanding.......$ 800,000

Commonstock, $10 par value, 250,000 shares authorized,200,000shares issued and outstanding ............................................$2,000,000

Dividendswere not declared on the preferred stock in 2007 and are in arrears.

On September 15, 2008, the board of directors of Ellis Corporation declared dividends on the preferred stock for 2007 and 2008, to stockholders of record on October 1, 2008, payable on October 15, 2008.

On November 1, 2008, the board of directors declared a $.90 per share dividend on the common stock, payable November 30, 2008, to stockholders of record on November 15, 2008.

InstructionsPrepare the journal entries that should be made by Ellis Corporation on the dates indicated below:September 15, 2008November 1, 2008 October 1, 2008November 15, 2008 October 15, 2008November 30, 2008

Ex. 134

Richman Corporation has 120,000 shares of $5 par value common stock outstanding. It declared a 15% stock dividend on June 1 when the market price per share was $12. The shares were issued on June 30.

Instructions

Preparethe necessary entries for the declarationand payment of the stock dividend.

Ex. 135

Irving Corporation's stockholders' equity section at December 31, 2007 appears below:

Stockholders' equity Paid-in capitalCommonstock, $10 par, 60,000 outstanding Paid-in capital in excess of parTotal paid-in capital RetainedearningsTotal stockholders' equity

$600,000 150,000

$750,000 150,000 $900,000

On June 30, 2008, the board of directors of Irving Corporation declared a 15% stock dividend, payable on July 31, 2008, to stockholders of record on July 15, 2008. The fair market value of Irving Corporation's stock on June 30, 2008, was $15.

On December 1, 2008, the board of directors declared a 2 for 1 stock split effective December 15, 2008. Irving Corporation's stock was selling for $20 on December 1, 2008, before the stock split was declared. Par value of the stock was adjusted. Net income for 2008 was $190,000 and there were no cash dividends declared.

Instructions

(a) Prepare the journal entries on the appropriate dates to record the stock dividend and the stock split.

(b) Fill in the amount that would appear in the stockholders' equity section for Irving Corporation at December 31, 2008, for the following items:

1. Commonstock$

2. Numberof shares outstanding

3. Par value per share$

4. Paid-in capital in excess of par$

5. Retainedearnings$

6. Total stockholders' equity$Corporations:Dividends, Retained Earnings, and Income Reporting14 - 27

Ex. 136

Derek Corporation was organized on January 1, 2007. During its first year, the corporation issued 40,000 shares of $5 par value preferred stock and 400,000 shares of $1 par value common stock. At December 31, the company declared the following cash dividends:

2007$10,000 2008$30,000 2009$70,000

Instructions

(a) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 6% and not cumulative.

(b) Show the allocation of dividends to each class of stock, assuming the preferred stock dividend is 8% and cumulative.

(c) Journalize the declaration of the cash dividend at December 31, 2009 using the assumption of part (b).

Ex. 137

On November 1, 2008, Lambert Corporation's stockholders' equity section is as follows:

Commonstock, $10 par valuePaid-in capital in excess of par value RetainedearningsTotal stockholders' equity$ 600,000 205,000240,000 $1,045,000

On November 1, Lambert declares and distributes a 10% stock dividend when the market value of the stock is $13 per share.

Instructions(a)Compute the book value per share (1) before the stock dividend and (2) after the stock dividend.

(b)Indicate the balances in the stockholders' equity accounts after the stock dividend has been distributed.

Ex. 138

During 2008, Pine Corporation had the following transactions and events: 1. Issued par value preferred stock for cash at par value.2. Issued par value common stock for cash at an amount greater than par value.3. Completed a 2 for 1 stock split in which the $10 par value common stock was changed to $5 par value stock.4. Declared a small stock dividend when the market value was higher than the par value. 5. Declared a cash dividend.6. Made a prior period adjustment for understatementof net income. 7. Issued par value common stock for cash at par value.8. Paid the cash dividend.9. Issued the shares of common stock required by the stock dividend declaration in 4. above.

Instructions

Indicate the effect(s) of each of the foregoing items on the subdivisions of stockholders' equity. Present your answers in tabular form with the following columns. Use (I) for increase, (D) for decrease, and (NE) for no effect.

Item

Ex. 139

The following information is available for Ellis Corporation:

Common Stock ($5 par) RetainedEarnings$1,500,000 600,000

A 10% stock dividend is declared and paid when the market value was $15 per share.

InstructionsComputeeach of the following after the stock dividend. (a) Total stockholders' equity.(b) Number of shares outstanding. (c) Book value per share.

Ex. 140

On January 1, 2008, Bolten Corporation had $2,000,000 of $10 par value common stock outstanding that was issued at par and retained earnings of $1,000,000. The company issued 200,000 shares of common stock at $13 per share on July 1. On December 15, the board of directors declared a 10% stock dividend to stockholders of record on December 31, 2008, payable on January 15, 2009. The market value of Bolten Corporation stock was $15 per share on December 15 and $16 per share on December 31. Net income for 2008 was $500,000.

Instructions(1) Journalize the issuance of stock on July 1 and the declaration of the stock dividend on December15.

(2) Prepare the stockholders' equity section of the balance sheet for Bolten Corporation at December31, 2008.

Ex. 141

On January 1, 2008, Dolan Corporation had 60,000 shares of $1 par value common stock issued and outstanding. During the year, the following transactions occurred:

Mar.1Issued 20,000 shares of common stock for $400,000.

June1Declareda cash dividend of $2.00 per share to stockholders of record on June 15. June 30Paid the $2.00 cash dividend.Dec.1Purchased4,000 shares of common stock for the treasury for $22 per share.

Dec. 15Declared a cash dividend on outstanding shares of $2.25 per share to stockholders of record on December 31.

Instructions

Preparejournal entries to record the above transactions.

Ex. 142

Recordthe following transactions for Harper Corporation on the dates indicated.

1. On March 31, 2008, Harper Corporation discovered that Depreciation Expense on factory equipment for the year ended December 31, 2007, had been recorded twice, for a total amount of $50,000 instead of the correct amount of $25,000.

2. On June 30, 2008, the company's internal auditors discovered that the April 2008 telephone bill for $2,500 had erroneously been charged to the Interest Expense account.

3. On August 14, 2008, cash dividends on preferred stock of $110,000 declared on July 1, 2008, were paid.

Ex. 143

The following information is available for Orson Corporation:

RetainedEarnings, December 31, 2008Net Income for the year ended December 31, 2009

$1,500,000 $ 250,000

The company accountant, in preparing financial statements for the year ending December 31, 2009, has discovered the following information:

The company's previous bookkeeper, who has been fired, had recorded depreciation expense on a machine in 2007 and 2008 using the double-declining-balance method of depreciation. The bookkeeper neglected to use the straight-line method of depreciation which is the company's policy. The cumulative effects of the error on prior years was $15,000, ignoring income taxes. Depreciation was computed by the straight-line method in 2009.

Instructions

(a) Prepare the entry for the prior period adjustment. (b) Prepare the retained earnings statement for 2009.

Ex. 144

The following information is available for Sanders Inc.:

Beginningretained earnings Cash dividends declared Net income for 2008Stock dividend declaredUnderstatementof last year's depreciation expense

$600,000 50,000 120,000 10,000 40,000

Instructions

Based on the preceding information, prepare a retained earnings statement for 2008.

Ex. 145

On January 1, 2008, Windom Corporation had Retained Earnings of $378,000. During the year, Windom had the following selected transactions:1. Declared stock dividends of $40,000. 2. Declared cash dividends of $90,000.3. A 2 for 1 stock split involving the issuance of 200,000 shares of $5 par value common stock for 100,000 shares of $10 par value common stock.4. Suffered a net loss of $70,000.5. Corrected understatementof 2007 net income because of an inventory error of $68,000.

Instructions

Preparea retained earnings statement for the year.

Ex. 146

The following accounts appear in the ledger of Norland Inc. after the books are closed at December31, 2008.

CommonStock, $1 par value, 500,000 shares authorized, 400,000 shares issuedCommonStock Dividends DistributablePaid-in Capital in Excess of Par ValueCommonStockPreferredStock, $100 par value, 8%, 10,000 shares authorized; 2,000 shares issuedRetainedEarningsTreasuryStock (10,000 common shares)Paid-in Capital in Excess of Par ValuePreferredStock

$400,000 80,000 650,000

200,000 950,000 85,000 310,000

InstructionsPrepare the stockholders' equity section at December 31, 2008, assuming that retained earnings is restrictedfor plant expansion in the amount of $200,000.

Ex. 147

The following information is available for Wenger Corporation:

Beginningstockholders' equity Dividendspaid to common stockholders Dividendspaid to preferred stockholders Ending stockholders' equityNet income$700,000 50,000 30,000 800,000 165,000

Instructions

Based on the preceding information, calculate return on common stockholders' equity.

Ex. 148

Preparea 2008 income statement for Carney Corporation based on the following information:

Cost of goods sold OperatingexpensesOther expenses and losses SalesTax rate$420,000 100,000 30,000 700,000 30%

Ex. 149

Feldman Corporation gathered the following information for the fiscal year ended December 31, 2008:Sales$1,600,000 Selling and administrative expenses 160,000 Cost of goods sold 1,040,000 Loss on sale of equipment 40,000

FeldmanCorporation is subject to a 30% income tax rate.

Instructions

Preparea partial income statement, beginning with income from operations.

Ex. 150

At December 31, 2008, Rossi Company has $500,000 of $100 par value, 8%, cumulative preferred stock outstanding and $2,000,000 of $10 par value common stock issued. Rossi's net income for the year is $500,000.

Instructions

Compute earnings per share of common stock for 2008 under the following independent situations. (Round to two decimals.)

(a) The dividend to preferred stockholders was declared, and there has been no change in the number of shares of common stock outstanding during the year.

(b) The dividend to preferred stockholders was not declared, and 10,000 shares of common treasury stock were held throughout the year. The preferred stock is cumulative.

Ex. 151

The following information is available for Vincent Corporation:

Dividendspaid to common stockholders Dividendspaid to preferred stockholders Net incomeWeightedaverage common shares outstanding$ 45,000 20,000 145,000 100,000

InstructionsComputethe earnings per share of common stock.

COMPLETION STATEMENTS

152. Three important dates associated with dividends are the: (1), (2), and (3).

153. The entry to record the declaration of a stock dividend increases , and decreases .

154. Both a stock split and a stock dividend will the number of shares outstanding and have on total stockholders' equity.

155. Corporationssometimessegregateretainedearningsintotwocategories: (1) retained earnings and (2) retained earnings.

156. The correction of an error in previously issued financial statements is known as a

.

157. The return on shows how many dollars of net income were earned for each dollar invested by owners.

158. The return on common stockholders equity is computed by dividing minus dividends by average common stockholders equity.

159. Income statements for corporations report in a separate section before net income.

160. Earnings per share is reported only for .

161. Earnings per share is calculated by dividingavailable for common stockholders by the number of common shares outstanding.

MATCHING

162. Match the items below by entering the appropriate code letter in the space provided.

A. DeficitB. Prior period adjustment C. LiquidatingdividendD. Retainedearnings restrictions E. Earningsper shareF.Return on common stockholders equity G. Cash dividendH. Declarationdate I.Stock dividend J.Stock split

1.A dividend declared out of paid-in capital.

2.Retained earnings currently unavailable for dividends.

3.The correction of an error in previously issued financial statements.

4.A pro rata distribution of cash to stockholders.

5.A debit balance in retained earnings.

6.A pro rata distribution of the corporation's own stock to stockholders.

7.Shows how many dollars of net income were earned for each dollar invested by the owners.

8.The date the board of directors formally declares the dividend and announces it to stockholders.

9.The issuance of additional shares of stock to stockholders accompanied by a reduction in the par or stated value per share.

10.Widely used by stockholders and potential investors in evaluating the profitability of a company.

SHORT-ANSWERESSAY QUESTIONS S-AE 163The ultimate effect of incurring an expense is to reduce stockholders' equity. The declaration of a cash dividend also reduces stockholders' equity. Explain the difference between an expense and a cash dividend and explain why they have the same effect on stockholders' equity.

S-AE 164

A large stock dividend and stock split can frequently have the same effect on the market price of a corporation's stock. Explain how stock dividends and stock splits affect the market price of a corporation's stock.

S-AE 165

Whymust a corporation have sufficient retained earnings before it may declare cash dividends?

S-AE 166 (Ethics)

Jake Hightower, the president and CEO of Earth Systems, Inc., a waste management firm, was recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading activity became almost nonexistent. The primary reason for this was concern expressed in the media over a new untested waste management system implemented by the company. Mr. Hightower had been unwilling to submit the procedure to testing before implementation, but he reluctantly agreed to limited tests after the system was operational. No problems have been identified by the tests to date.

The other members of management called a meeting to determine what they should do. Roger Donovan, the marketing manager, suggested that the company purchase a large number of shares of treasury stock. In that way, investors might notice that activity had picked up, and might decide to buy some more shares. This plan would use up most of the company's available cash, so that there will be no money available for a cash dividend. Earth Systems has paid cash dividends every quarter for over ten years.

Required:

1. Is Mr. Donovans suggestion ethical? Explain.2. Is it ethical to discontinue the cash dividend? Explain.

S-AE 167 (Communication)

As part of a Careers in Accounting program sponsored by accounting organizations and supported by your company, you will be taking a group of high-school students through the accounting department in your company. You will also provide them with various materials to explain the work of an accountant. One of the materials you will provide is the Stockholders Equity section of a recent balance sheet.

S-AE 167 (cont.)

Required:Prepare a sentence or two explaining each major section: Common Stock, Additional Paid-in Capital, and Retained Earnings. You should try to be brief but clear.

CHAPTER 15

LONG-TERMLIABILITIES

CHAPTERSTUDY OBJECTIVES

1. Explain why bonds are issued.

2. Prepare the entries for the issuance of bonds and interest expense.

3. Describe the entries when bonds are redeemed or converted.

4. Describe the accounting for long-term notes payable.

5. Contrast the accounting for operating and capital leases.

6. Identify the methods for the presentation and analysis of long-term liabilities.

7. Compute the market price of a bond.

8. Apply the effective-interest method of amortizing bond discount and bond premium.

a9. Apply the straight-line method of amortizing bond discount and bond premium.

TRUE-FALSESTATEMENTS

1.Each bondholder may vote for the board of directors in proportion to the number of bonds held.

2.Bond interest paid by a corporation is an expense, whereas dividends paid are not an expense of the corporation.

3.Registered bonds are bonds that are delivered to owners by U.S. registered mail service.

4.A debenture bond is an unsecured bond which is issued against the general credit of the borrower.

5.Bonds are a form of interest-bearingnotes payable.

6.Neither corporate bond interest nor dividends are deductible for tax purposes.

7.A 10% stock dividend is the equivalent of a $1,000 par value bond paying annual interest of 10%.

8.The holder of a convertible bond can convert an interest payment received into a cash dividend paid on common stock if the dividend is greater than the interest payment.

9.The board of directors may authorize more bonds than are issued.

10.The contractual interest rate is always equal to the market interest rate on the date that bonds are issued.

11.If $150,000 face value bonds are issued at 102, the proceeds received will be $102,000.

12.Discount on bonds is an additional cost of borrowing and should be recorded as interest expense over the life of the bonds.

13.If a corporation issued bonds at an amount less than face value, it indicates that the corporation has a weak credit rating.Long-Term Liabilities15 - 5

14.A corporation that issues bonds at a discount will recognize interest expense at a rate which is greater than the market interest rate.

15.If bonds are issued at a discount, the issuing corporation will pay a principal amount less than the face amount of the bonds on the maturity date.

16.If bonds are issued at a premium, the carrying value of the bonds will be greater than the face value of the bonds for all periods prior to the bond maturity date.

17.If the market interest rate is greater than the contractual interest rate, bonds will sell at a discount.

18.If $800,000, 8% bonds are issued on January 1, and pay interest semiannually, the amount of interest paid on July 1 will be $32,000.

19.If bonds sell at a premium, the interest expense recognized each year will be greater than the contractual interest rate.

20.The carrying value of bonds is calculated by adding the balance of the Discount on Bonds Payable account to the balance in the Bonds Payable account.

21.The loss on bond redemption is the difference between the cash paid and the carrying value of the bonds.

22.If $200,000 par value bonds with a carrying value of $190,400 are redeemed at 97, a loss on redemption will be recorded.

23.Gains and losses are not recognized when convertible bonds are converted into common stock.

24.Generally, convertible bonds do not pay interest.

25.Each payment on a mortgage note payable consists of interest on the original balance of the loan and a reduction of the loan principal.

26.A long-term note that pledges title to specific property as security for a loan is known as a mortgage payable.

27.A capital lease requires the lessee to record the lease as a purchase of an asset.

28.The times interest earned ratio is computed by dividing net income by interest expense.

a29.The present value of a bond is a function of two variables: (1) the payment amounts and (2) the interest (discount) rate.

a30.The effective-interest method of amortization results in varying amounts of amortization and interest expense per period but a constant interest rate.

Additional True-False Questions

31.Bonds that mature at a single specified future date are called term bonds.15 - 6

32.The terms of the bond issue are set forth in a formal legal document called a bond indenture.

33.The carrying value of bonds at maturity should be equal to the face value of the bonds.

34.Premium on Bonds Payable is a contra account to Bonds Payable.

35.When bonds are converted into common stock, the carrying value of the bonds is transferred to paid-in capital accounts.

36.Operating leases are leases that the lessee must capitalize on its balance sheet as an asset.

37.Under a capital lease, the lease/asset is reported on the balance sheet under plant assets.

38.Long-term liabilities are reported in a separate section of the balance sheet immediately following current liabilities.

MULTIPLECHOICE QUESTIONS

39.Each of the following is correct regarding bonds except they are a. a form of interest-bearing notes payable.b. attractive to many investors.c. issued by corporations and governmentalagencies. d. sold in large denominations.

40.From the standpoint of the issuing company, a disadvantage of using bonds as a means of long-term financing is thata. bond interest is deductible for tax purposes.b. interest must be paid on a periodic basis regardless of earnings.c. income to stockholders may increase as a result of trading on the equity. d. the bondholders do not have voting rights.

41.If a corporation issued $2,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?a. $2,000,000 b. $60,000c. $200,000 d. $140,000Long-Term Liabilities15 - 7

42.Secured bonds are bonds thata. are in the possession of a bank.b. are registered in the name of the owner.c. have specific assets of the issuer pledged as collateral. d. have detachable interest coupons.

43.A legal document which summarizes the rights and privileges of bondholders as well as the obligations and commitmentsof the issuing company is calleda. a bond indenture. b. a bond debenture.c. trading on the equity. d. a term bond.

44.Stockholders of a company may be reluctant to finance expansion through issuing more equity becausea. leveraging with debt is always a better idea. b. their earnings per share may decrease.c. the price of the stock will automaticallydecrease. d. dividends must be paid on a periodic basis.

45.Which of the following is not an advantage of issuing bonds instead of common stock? a. Stockholder control is not affected.b. Earnings per share on common stock may be lower. c. Income to common shareholdersmay increase.d. Tax savings result.

46.Bonds that are secured by real estate are termed a. mortgage bonds.b. serial bonds. c. debentures. d. bearer bonds.

47.Bonds that mature at a single specified future date are called a. coupon bonds.b. term bonds. c. serial bonds. d. debentures.

48.Bonds that may be exchanged for common stock at the option of the bondholders are calleda. options.b. stock bonds.c. convertible bonds. d. callable bonds.

49.Bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer are calleda. callable bonds.b. early retirement bonds. c. options.d. debentures.15 - 8

50.Investors who receive checks in their names for interest earned on bonds must hold a. registered bonds.b. coupon bonds. c. bearer bonds. d. direct bonds.

51.A bondholder that sends in a coupon to receive interest payments must have a(n) a. unsecured bond.b. bearer bond.c. mortgage bond. d. serial bond.

52.Bonds that may be directly transferred to another party by delivery are a. coupon bonds.b. debentures.c. registered bonds.d. transportable bonds.

53.Bonds that must be cancelled and reissued as new bonds in order to have ownership interest transferred area. coupon bonds. b. bearer bonds. c. serial bonds.d. registered bonds.

54.Corporations are granted the power to issue bonds through a. tax laws.b. state laws.c. federal security laws. d. bond debentures.

55.The party who has the right to exercise a call option on bonds is the a. investment banker.b. bondholder. c. bearer.d. issuer.

56.A major disadvantageresulting 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.

57.Bonds will always fall into all but which one of the following categories? a. Callable or convertibleb. Term or serialc. Registered or bearer d. Secured or unsecuredLong-Term Liabilities15 - 9

58.Which of the following statements concerning bonds is not a true statement? a. Bonds are generally sold through an investment company.b. The bond indenture is prepared after the bonds are printed.c. The bond indenture and bond certificate are separate documents. d. The trustee keeps records of each bondholder.

59.A bond trustee does not a. issue the bonds.b. keep a record of each bondholder.c. hold conditional title to pledged property. d. maintain custody of unsold bonds.

60.The contractual interest rate is always stated as a(n) a. monthly rate.b. daily rate.c. semiannual rate. d. annual rate.

61.When authorizing bonds to be issued, the board of directors does not specify the a. total number of bonds authorized to be sold.b. contractual interest rate. c. selling price.d. total face value of the bonds.

Use the following exhibit for questions 6263.

BondsClose K mart 8 3/8 17 100YieldVolume 8.4 35Net Change +7/8

62.The contractual interest rate of the K mart bonds is a. greater than the market interest rate.b. less than the market interest rate. c. equal to the market interest rate. d. not determinable.

63. On the day of trading referred to above, a. no K mart bonds were traded.b. bonds with market prices of $3,500 were traded.c. at closing, the selling price of the bond was higher than the previous day's price. d. the bond sold for $100.25

64.A $1,000 face value bond with a quoted price of 98 is selling for a. $1,000.b. $980. c. $908. d. $98.

65.A bond with a face value of $100,000 and a quoted price of 102 has a selling price of a. $120,225.b. $102,025. c. $100,225. d. $102,250.15 - 10

66.Premium on Bonds Payable a. has a debit balance.b. is a contra account.c. is considered to be a reduction in the cost of borrowing. d. is deducted from bonds payable on the balance sheet.

67.If the market interest rate is greater than the contractual interest rate, bonds will sell a. at a premium.b. at face value. c. at a discount.d. only after the stated interest rate is increased.

68.On January 1, 2008, Grant Corporation issued $3,000,000, 10-year, 8% bonds at 102. Interest is payable semiannually on January 1 and July 1. The journal entry to record this transaction on January 1, 2008 isa. Cash.................................................................................... 3,000,000Bonds Payable............................................................3,000,000

b. Cash.................................................................................... Bonds Payable............................................................

c. Premiumon Bonds Payable................................................ Cash.................................................................................... Bonds Payable............................................................

d. Cash.................................................................................... Bonds Payable............................................................ Premiumon Bonds Payable.......................................3,060,000

60,000 3,000,000

3,060,000

3,060,000

3,060,000

3,000,000 60,000

69.The total cost of borrowing is increased only if the a. bonds were issued at a premium.b. bonds were issued at a discount. c. bonds were sold at face value.d. market interest rate is less than the contractual interest rate on that date.

70.If the market interest rate is 10%, a $10,000, 12%, 10-year bond, that pays interest semiannually would sell at an amounta. less than face value. b. equal to face value.c. greater than face value.d. that cannot be determined.

71.The present value of a $10,000, 5-year bond, will be less than $10,000 if the a. contractual interest rate is less than the market interest rate.b. contractual interest rate is greater than the market interest rate. c. bond is convertible.d. contractual interest rate is equal to the market interest rate.

72.Gomez Corporation issues 1,000, 10-year, 8%, $1,000 bonds dated January 1, 2008, at 98. The journal entry to record the issuance will show aa. debit to Cash of $1,000,000.b. credit to Discount on Bonds Payable for $20,000. c. credit to Bonds Payable for $980,000.d. debit to Cash for $980,000.Long-Term Liabilities15 - 11

73.The market interest rate is often called the a. stated rate.b. effective rate. c. coupon rate.d. contractual rate.

74.If bonds are issued at a discount, it means that the a. financial strength of the issuer is suspect.b. market interest rate is higher than the contractual interest rate. c. market interest rate is lower than the contractual interest rate.d. bondholder will receive effectively less interest than the contractual interest rate.

75.Each of the following accounts is reported as long-term liabilities except a. Bond Interest Payable.b. Bonds Payable.c. Discount on Bonds Payable. d. Premium on Bonds Payable.

76.The statement that "Bond prices vary inversely with changes in the market interest rate" means that if thea. market interest rate increases, the contractual interest rate will decrease. b. contractual interest rate increases, then bond prices will go down.c. market interest rate decreases, then bond prices will go up.d. contractual interest rate increases, the market interest rate will decrease.

77.The carrying value of bonds will equal the market price a. at the close of every trading day.b. at the end of the fiscal period. c. on the date of issuance.d. every six months on the date interest is paid.

78.The sale of bonds above face value a. is a rare occurrence.b. will cause the total cost of borrowing to be less than the bond interest paid. c. will cause the total cost of borrowing to be more than the bond interest paid. d. will have no net effect on Interest Expense by the time the bonds mature.

79.In the balance sheet, the account, Premium on Bonds Payable, is a. added to bonds payable.b. deducted from bonds payable.c. classified as a stockholders' equity account. d. classified as a revenue account.

80.Two thousand bonds with a face value of $1,000 each, are sold at 103. The entry to record the issuance isa. Cash .................................................................................... 2,060,000Bonds Payable ...........................................................2,060,000

b. Cash .................................................................................... 2,000,000 Premiumon Bonds Payable ................................................60,000Bonds Payable ...........................................................2,060,00015 - 12

c. Cash ................................................................................... 2,060,000 Premiumon Bonds Payable ......................................Bonds Payable ...........................................................

60,000 2,000,000

d. Cash ................................................................................... 2,060,000 Discounton Bonds Payable .......................................Bonds Payable ...........................................................

60,000 2,000,000

81.Bond interest paid isa. higher when bonds sell at a discount. b. lower when bonds sell at a premium.c. the same whether bonds sell at a discount or a premium.d. higher when bonds sell at a discount and lower when bonds sell at a premium.

82.Mendez Corporation issues 2,000, 10-year, 8%, $1,000 bonds dated January 1, 2008, at 103. The journal entry to record the issuance will show aa. debit to Cash of $2,000,000.b. credit to Premium on Bonds Payable for $60,000. c. credit to Bonds Payable for $2,030,000.d. credit to Cash for $2,060,000.

Use the following information for questions 8386.

Golden Company received proceeds of $94,250 on 10-year, 8% bonds issued on January 1, 2007. The bonds had a face value of $100,000, pay interest semi-annually on June 30 and December31, and have a call price of 101. Golden uses the straight-line method of amortization.

83.What is the amount of interest Golden must pay the bondholders in 2007? a. $7,540b. $8,000 c. $8,575 d. $7,425

a84.What is the amount of interest expense Golden will show with relation to these bonds for the year ended December 31, 2008?a. $8,000 b. $7,540 c. $8,575 d. $7,425

a85.What is the carrying value of the bonds on January 1, 2009? a. $100,000b. $95,400 c. $98,850 d. $94,825

86.Golden Company decided to redeem the bonds on January 1, 2009. What amount of gain or loss would Golden report on its 2009 income statement?a. $4,600 gain b. $5,600 gain c.$5,600 loss d. $4,600 lossLong-Term Liabilities15 - 13

87.Bryce Company has $500,000 of bonds outstanding. The unamortized premium is $7,200. If the company redeemed the bonds at 101, what would be the gain or loss on the redemption?a. $2,200 gain b. $2,200 loss c. $5,000 gain d. $5,000 loss

88.The current carrying value of Jensens $600,000 face value bonds is $597,750. If the bonds are retired at 102, what would be the amount Jensen would pay its bondholders? a. $597,750b. $600,000 c. $603,000 d. $612,000

89.Lahey Corporation retires its $500,000 face value bonds at 105 on January 1, following the payment of annual interest. The carrying value of the bonds at the redemption date is $518,725. The entry to record the redemption will include aa. credit of $18,725 to Loss on Bond Redemption. b. debit of $18,725 to Premium on Bonds Payable. c. credit of $6,275 to Gain on Bond Redemption. d. debit of $25,000 to Premium on Bonds Payable.

90.A $900,000 bond was retired at 103 when the carrying value of the bond was $933,000. The entry to record the retirement would include aa. gain on bond redemption of $27,000. b. loss on bond redemption of $6,000. c. loss on bond redemption of $27,000. d. gain on bond redemption of $6,000.

91.If forty $1,000 convertible bonds with a carrying value of $46,000 are converted into 6,000 shares of $5 par value common stock, the journal entry to record the conversion isa. Bonds Payable ....................................................................46,000 CommonStock ........................................................... 46,000

b. Bonds Payable ....................................................................40,000 Premiumon Bonds Payable ................................................ 6,000CommonStock ...........................................................46,000

c. Bonds Payable ....................................................................40,000 Premiumon Bonds Payable ................................................ 6,000CommonStock ...........................................................30,000 Paid-in Capital in Excess of Par .................................16,000

d. Bonds Payable ....................................................................46,000Discount on Bonds Payable .......................................6,000 CommonStock ........................................................... 30,000 Paid-in Capital in Excess of Par ................................. 10,000

92.A corporation recognizes a gain or lossa. only when bonds are converted into common stock. b. only when bonds are redeemed before maturity.c. when bonds are redeemed at or before maturity.d. when bonds are converted into common stock and when they are redeemed before maturity.15 - 14

93.If there is a loss on bonds redeemed early, it is a. debited directly to Retained Earnings.b. reported as an "Other Expense" on the income statement.c. reported as an "Extraordinary Item" on the income statement. d. debited to Interest Expense, as a cost of financing.

94.If bonds can be converted into common stock,a. they will sell at a lower price than comparable bonds without a conversion feature.b. they will carry a higher interest rate than comparable bonds without the conversion feature.c. they will be converted only if the issuer calls them in for conversion.d. the bondholder may benefit if the market price of the common stock increases substantially.

95.When bonds are converted into common stock,a. the market price of the stock on the date of conversion is credited to the Common Stock account.b. the market price of the bonds on the date of conversion is credited to the Common Stock account.c. the market price of the stock and the bonds is ignored when recording the conversion. d. gains or losses on the conversion are recognized.

96.If bonds with a face value of $90,000 are converted into common stock when the carrying value of the bonds is $81,000, the entry to record the conversion will include a debit toa. Bonds Payable for $90,000. b. Bonds Payable for $81,000.c. Discount on Bonds Payable for $9,000.d. Bonds Payable equal to the market price of the bonds on the date of conversion.

97.A $900,000 bond was retired at 98 when the carrying value of the bond was $888,000. The entry to record the retirement would include aa. gain on bond redemption of $12,000. b. loss on bond redemption of $6,000. c. loss on bond redemption of $12,000. d. gain on bond redemption of $6,000.

98.Twenty $1,000 bonds with a carrying value of $25,600 are converted into 2,000 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 isa. Bonds Payable ...................................................................25,600 CommonStock .......................................................... 10,000 Paid-in Capital in Excess of Par.................................. 15,600b. Bonds Payable ...................................................................20,000 Premiumon Bonds Payable ............................................... 5,600CommonStock ..........................................................18,000 Paid-in Capital in Excess of Par ................................. 7,600c. Bonds Payable ...................................................................20,000 Premiumon Bonds Payable ............................................... 5,600CommonStock ..........................................................10,000 Paid-in Capital in Excess of Par..................................15,600d. Bonds Payable ...................................................................25,600 CommonStock .......................................................... 18,000 Paid-in Capital in Excess of Par.................................. 7,600Long-Term Liabilities15 - 15

99.Which one of the following amounts increases each period when accounting for long-term notes payable?a. Cash payment b. Interest expensec. Principal balanced. Reduction of principal

100.In the balance sheet, mortgage notes payable are reported as a. a current liability only.b. a long-term liability only.c. both a current and a long-term liability.d. a current liability except for the reduction in principal amount.

101.A mortgage note payable with a fixed interest rate requires the borrower to make installment payments over the term of the loan. Each installment payment includes interest on the unpaid balance of the loan and a payment on the principal. With each installment payment, indicate the effect on the portion allocated to interest expense and the portion allocated to principal.

Portion Allocated to Interest Expensea.Increases b.Increases c.Decreases d.DecreasesPortion Allocated to Payment of PrincipalIncreases Decreases Decreases Increases

102.The entry to record an installment payment on a long-term note payable is a. Mortgage Notes PayableCashb. Interest Expense Cashc. Mortgage Notes Payable Interest ExpenseCashd. Bonds Payable Cash

Use the following information for questions 103104.

Delmar Company purchased a building on January 2 by signing a long-term $840,000 mortgage with monthly payments of $7,700. The mortgage carries an interest rate of 10 percent.

103.The entry to record the first monthly payment will include a a. debit to the Cash account for $7,700.b. credit to the Cash account for $7,000.c. debit to the Interest Expense account for $7,000. d. credit to the Mortgage Payable account for $7,700.

104.The amount owed on the mortgage after the first payment will be a. $840,000.b. $839,300. c. $833,000. d. $832,300.15 - 16

Use the following information for questions 105106.

Diamond Company borrowed $500,000 from BankTwo on January 1, 2007 in order to expand its mining capabilities. The five-year note required annual payments of $130,218 and carried an annual interest rate of 9.5%.

105.What is the amount of expense Diamond must recognize on its 2008 income statement? a. $47,500b. $39,642 c. $35,129 d. $31,037

106.What is the balance in the notes payable account at December 31, 2008? a. $500,000b. $326,706 c. $417,282 d. $405,000

107.The lessee has substantially all of the benefits and risks of ownership in a(n) a. apartment lease.b. capital lease.c. operating lease.d. operating lease and a capital lease.

108.A lease where the intent is temporary use of the property by the lessee with continued ownership of the property by the lessor is calleda. off-balance sheet financing. b. an operating lease.c. a capital lease.d. a purchase of property.

109.Which of the following is not a condition which would require the recording of a lease contract as a capital lease?a. The lease transfers ownership of the property to the lessee. b. The lease contains a bargain purchase option.c. The lease term is less than 75% of the economic life of the leased property.d. The present value of the lease payments equals or exceeds 90% of the fair market value of the leased property.

110.In a lease contract,a. the owner of the property is called the lessee.b. the presence of a bargain purchase option indicates that it is a capital lease. c. the renter of the property is called the lessor.d. there is always a transfer of ownership at the end of the lease term.

111.Which of the following statements concerning leases is true? 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.Long-Term Liabilities15 - 17

112.If the present value of lease payments equals or exceeds 90% of the fair market value of the leased property, thea. conditions are met for the lease to be considered a capital lease. b. lease is uneconomical and should not be entered into.c. lease may be classified as an operating lease.d. recording of a lease liability is optionalthat is, the off-balance sheet approach can be elected.

113.Each of the following may be shown in a supporting schedule instead of the balance sheet exceptthea. current maturities of long-term debt. b. conversion privileges.c. interest rates. d. maturity dates.

114.The times interest earned ratio is computed by dividing a. net income by interest expense.b. income before income taxes by interest expense.c. income before interest expense by interest expense.d. income before income taxes and interest expense by interest expense.

115.The discount on bonds payable or premium on bonds payable is shown on the balance sheet as an adjustment to bonds payable to arrive at the carrying value of the bonds. Indicate the appropriateaddition or subtraction to bonds payable:

Premiumon Bonds Payablea.Add b. Deduct c.Add d. DeductDiscounton Bonds Payable Add Add Deduct Deduct

116.In a recent year Dart Corporation had net income of $140,000, interest expense of $30,000, and tax expense of $20,000. What was Dart Corporations times interest earned ratio for the year?a. 6.33 b. 4.66 c. 5.33 d. 6.00

117.In a recent year Day Corporation had net income of $150,000, interest expense of $30,000, and a times interest earned ratio of 9. What was Day Corporations income before taxes for the year?a. $300,000 b. $270,000 c. $240,000d. None of the above.15 - 18

118.The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2008, contained the following accounts.

5-year Bonds Payable 8% Bond Interest Payable Premiumon Bonds Payable Notes Payable (3 mo.) Notes Payable (5 yr.)MortgagePayable ($15,000 due currently) Salaries PayableTaxes Payable (due 3/15 of 2009)$1,000,000 50,000 100,000 40,000 165,000 200,000 18,000 25,000

The total long-term liabilities reported on the balance sheet are a. $1,365,000.b. $1,350,000. c. $1,465,000. d. $1,450,000.

119.The 2008 financial statements of Shadow Co. contain the following selected data (in millions).

Current Assets$ 75 Total Assets 120 Current Liabilities 40 Total Liabilities 85 Cash 8

The debt to total assets ratio is a. 70.8%.b. 53.3%. c. 29.2%. d. 1.41%.

a120. The present value of a bond is also known as its a. face value.b. market price. c. future value. d. deferred value.

a121. $3 million, 10%, 10-year bonds are issued at face value. Interest will be paid semi-annually. When calculating the market price of the bond, the present value ofa. $300,000 received for 10 periods must be calculated. b. $3 million received in 10 periods must be calculated. c. $3 million received in 20 periods must be calculated. d. $150,000 received for 10 periods must be calculated.

a122. Either the straight-line method or the effective-interest method of amortization will always result ina. the same amount of interest expense being recognized over the term of the bonds. b. the same amount of interest expense being recognized each year.c. more interest expense being recognized than if premium or discounts were not amortized.d. the same carrying value each year during the term of the bonds.Long-Term Liabilities15 - 19

a123. A corporation issued $300,000, 10%, 5-year bonds on January 1, 2008 for $324,333, which reflects an effective-interest rate of 8%. Interest is paid semiannually on January 1 and July 1. If the corporation uses the effective-interest method of amortization of bond premium, the amount of bond interest expense to be recognized on July 1, 2008, isa. $15,000. b. $12,000. c. $16,217. d. $12,973.

a124. A bond discount musta. always be amortized using straight-line amortization.b. always be amortized using the effective-interest method.c. be amortized using the effective-interest method if it yields annual amounts that are materially different than the straight-line method.d. be amortized using the straight-line method if it yields annual amounts that are materially different than the effective-interestmethod.

a125. When the effective-interestmethod of bond discount amortization is used,a. the applicable interest rate used to compute interest expense is the prevailing market interest rate on the date of each interest payment date.b. the carrying value of the bonds will decrease each period.c. interest expense will not be a constant dollar amount over the life of the bond.d. interest paid to bondholders will be a function of the effective-interest rate on the date the bonds are issued.

a126. When the effective-interest method of bond premium amortization is used, the a. amount of premium amortized will get larger with successive amortization. b. carrying value of the bonds will increase with successive amortization.c. interest paid to bondholders will increase after each interest payment date. d. interest rate used to calculate interest expense will be the contractual rate.

Use the following information for questions 127129.

Silcon Company issued $800,000 of 6%, 10-year bonds on one of its interest dates for $690,960 to yield an effective annual rate of 8%. The effective-interest method of amortization is to be used.

a127. What amount of discount (to the nearest dollar) should be amortized for the first interest period?a. $22,542 b. $10,904 c. $14,554 d. $7,277

a128. The journal entry on the first interest payment date, to record the payment of interest and amortization of discount will include aa. debit to Bond Interest Expense for $48,000. b. credit to Cash for $55,277.c. credit to Discount on Bonds Payable for $7,277. d. debit to Bond Interest Expense for $64,000.15 - 20

a129. How much bond interest expense (to the nearest dollar) should be reported on the income statement for the end of the first year?a. $55,422 b. $55,277 c. $55,131 d. $48,000

a130. On January 1, Jean Loptein Inc. issued $3,000,000, 9% bonds for $2,817,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Jean Loptein uses the effective-interest method of amortizing bond discount. At the end of the first year, Jean Loptein should report unamortized bond discount ofa. $164,700. b. $171,300. c. $154,830. d. $153,000.

a131. On January 1, Cleopatra Corporation issued $2,000,000, 14%, 5-year bonds with interest payable on December 31. The bonds sold for $2,144,192. The market rate of interest for these bonds was 12%. On the first interest date, using the effective-interest method, the debit entry to Bond Interest Expense is fora. $240,000. b. $251,162. c. $257,304. d. $280,000.

a132. On January 1, Hurley Corporation issues $1,000,000, 5-year,