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Accounting, Vol. 2, Cdn. 8e (Horngren)
Chapter 13 Corporations: Share Capital and the Balance Sheet
1) A corporation is a separate legal entity apart from its owners.
Answer: TRUE
Diff: 1 Page Ref: 720
2) Shareholders in a corporation are personally liable for the debts of the corporation.
Answer: FALSE
Diff: 1 Page Ref: 721
3) All shares issued by a corporation have voting rights.
Answer: FALSE
Diff: 1 Page Ref: 727
4) Double taxation refers to the fact that a corporation pays tax on its taxable earnings and the
shareholder also pays personal tax on all of the corporation’s taxable income.
Answer: FALSE
Diff: 2 Page Ref: 721
5) It is easier to achieve continuous life using the corporate structure for an organization.
Answer: TRUE
Diff: 2 Page Ref: 720
6) Unlimited liability is one of the advantages of the corporate structure for an organization.
Answer: FALSE
Diff: 2 Page Ref: 721
7) Mutual agency is one of the disadvantages of the corporate structure for an organization.
Answer: FALSE
Diff: 2 Page Ref: 721
8) The most that a shareholder can lose on an investment in a corporation’s shares is the cost of the
investment.
Answer: TRUE
Diff: 2 Page Ref: 721
9) Corporations pay the same taxes as partnerships and proprietorships.
Answer: FALSE
Diff: 1 Page Ref: 721
10) Retained earnings is debited to transfer net income to the retained earnings account during the closing
process.
Answer: FALSE
Diff: 2 Page Ref: 725
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11) Retained earnings represents investments by the shareholders of the corporation.
Answer: FALSE
Diff: 2 Page Ref: 724
12) A debit balance in retained earnings is referred to as a deficit.
Answer: TRUE
Diff: 1 Page Ref: 725
13) Dividends distributed increase the assets and decrease the retained earnings of the business.
Answer: FALSE
Diff: 1 Page Ref: 725
14) No-par-value shares are shares of stock that do not have a value assigned to them by the articles of
incorporation.
Answer: TRUE
Diff: 2 Page Ref: 728
15) Preferred shares normally have no voting rights.
Answer: TRUE
Diff: 1 Page Ref: 730
16) When a corporation issues shares in exchange for noncash assets, the noncash assets are debited for
their book value.
Answer: FALSE
Diff: 2 Page Ref: 729
17) The shareholders’ equity section of a balance sheet lists common shares first, followed by preferred
shares second, and retained earnings last.
Answer: FALSE
Diff: 1 Page Ref: 733
18) Organization costs are intangible assets classified with property, plant and equipment.
Answer: FALSE
Diff: 1 Page Ref: 733
19) Increases in contributed capital and in retained earnings come from producing revenue.
Answer: FALSE
Diff: 1 Page Ref: 724
20) Cash dividends decrease both the assets and the retained earnings of a corporation.
Answer: TRUE
Diff: 2 Page Ref: 725
21) The policy-making body of a corporation is called the board of directors.
Answer: TRUE
Diff: 2 Page Ref: 722
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22) The entry on the payment date for a cash dividend involves a debit to retained earnings and a credit
to cash.
Answer: FALSE
Diff: 2 Page Ref: 736
23) Dividends become a liability of the corporation on the declaration date.
Answer: TRUE
Diff: 2 Page Ref: 735
24) Dividends in arrears on cumulative preferred shares are not a liability to the corporation.
Answer: TRUE
Diff: 3 Page Ref: 737
25) Dividends payable are normally a long-term liability.
Answer: FALSE
Diff: 1 Page Ref: 736
26) In order to receive a cash dividend, an investor must own the share by the payment date.
Answer: FALSE
Diff: 1 Page Ref: 735
27) The declaration date and the payment date of a cash dividend are the same thing.
Answer: FALSE
Diff: 1 Page Ref: 735
28) Dividends cannot accumulate for common shares.
Answer: TRUE
Diff: 2 Page Ref: 737
29) If the preferred shares are not designated as cumulative, the corporation is obligated to pay any
dividends in arrears.
Answer: FALSE
Diff: 3 Page Ref: 737
30) Convertible preferred shares must be converted into common shares when the corporation declares
the conversion.
Answer: FALSE
Diff: 2 Page Ref: 731
31) Market value is a term referring to common shares and indicates the amount for which a person
could buy or sell a share.
Answer: TRUE
Diff: 2 Page Ref: 738
32) If a company has both preferred and common shares outstanding, the preferred shareholders have the
first claim to shareholders’ equity.
Answer: TRUE
Diff: 2 Page Ref: 729
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33) Two common profitability measures are rate of return on total assets and rate of return on common
shareholders’ equity.
Answer: TRUE
Diff: 1 Page Ref: 740
34) With respect to share capital, the primary difference between GAAP for private enterprises and
international financial reporting standards (IFRS) is the required disclosure.
Answer: TRUE
Diff: 1 Page Ref: 742
35) The document(s) used by a government to grant permission to form a corporation is called (a):
A) proxy
B) articles of incorporation
C) share certificate
D) bylaw agreement
Answer: B
Diff: 1 Page Ref: 722
36) All of the following represent advantages of corporations over other business entities except:
A) unlimited shareholders’ liability
B) continuity of existence
C) separate legal entity
D) ease of transferring ownership
Answer: A
Diff: 2 Page Ref: 722
37) Which of the following statements describing a corporation is true?
A) Shareholders are the creditors of a corporation.
B) Shareholders own the business and manage its day-to-day operations.
C) A corporation is subject to greater governmental regulation than a proprietorship or a partnership.
D) When ownership of a corporation changes, the corporation terminates.
Answer: C
Diff: 2 Page Ref: 721
38) Which of the following forms of business organizations is a distinct legal entity?
A) partnership
B) corporation
C) proprietorship
D) only proprietorship and partnership
Answer: B
Diff: 1 Page Ref: 720
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39) Shareholders’ liability for corporation debts is generally limited to:
A) the cost of their investment
B) the market value of the shares
C) the par value of the shares
D) total shareholders’ equity
Answer: A
Diff: 1 Page Ref: 721
40) Which of the following is a disadvantage of the corporate form of business organization?
A) mutual agency
B) government regulation
C) limited liability
D) difficulty in transferring ownership
Answer: B
Diff: 1 Page Ref: 722
41) Which of the following forms of business organizations terminates when the ownership structure
changes?
A) corporation
B) partnership
C) share capital
D) shareholders’ equity
Answer: B
Diff: 1 Page Ref: 720
42) Share capital represents:
A) investments by the creditors of a corporation
B) capital that the corporation has earned through profitable operations
C) investments by the shareholders of a corporation
D) retained earnings
Answer: C
Diff: 1 Page Ref: 722
43) Retained earnings:
A) is classified as an asset on the corporate balance sheet
B) is part of contributed capital
C) represents investments by the shareholders of the corporation
D) represents capital earned by profitable operations
Answer: D
Diff: 2 Page Ref: 724
44) The owners of a corporation are referred to as:
A) creditors
B) shareholders
C) partners
D) debtors
Answer: B
Diff: 1 Page Ref: 720
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45) All of the following transactions increase shareholders’ equity except:
A) issuance of common shares
B) profitable operations
C) declaration of a cash dividend
D) issuance of convertible preferred shares
Answer: C
Diff: 2 Page Ref: 736
46) A profitable corporation would close out income summary by:
A) debiting income summary and crediting share capital
B) debiting income summary and crediting retained earnings
C) crediting income summary and debiting retained earnings
D) crediting income summary and debiting share capital
Answer: B
Diff: 2 Page Ref: 725
47) A corporation operating at a loss would close out income summary by:
A) debiting income summary and crediting retained earnings
B) debiting income summary and crediting share capital
C) crediting income summary and debiting retained earnings
D) crediting income summary and debiting share capital
Answer: C
Diff: 2 Page Ref: 725
48) A debit balance in retained earnings is referred to as a(n):
A) normal balance
B) asset
C) deficit
D) liability
Answer: C
Diff: 1 Page Ref: 725
49) Cash dividends:
A) do not affect the retained earnings of a corporation
B) decrease both the assets and the total shareholders’ equity of the corporation
C) increase retained earnings
D) increase the assets and decrease the total shareholders’ equity of the corporation
Answer: B
Diff: 3 Page Ref: 725
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50) All of the following are basic rights of a common shareholder except:
A) the right to receive a proportionate share of the corporate assets remaining after the corporation pays
its liabilities in liquidation
B) the right to receive a proportionate share of the corporate assets prior to the payment of liabilities in
liquidation
C) the right to receive a proportionate share of any dividend
D) the right to vote
Answer: B
Diff: 2 Page Ref: 726
51) Which of the following is a priority granted to preferred shareholders?
A) voting for the corporate board of directors
B) receiving assets before creditors if the corporation liquidates
C) receiving dividends before common shareholders
D) receiving a guaranteed fixed dollar amount of dividends each year
Answer: C
Diff: 2 Page Ref: 729
52) A corporation may issue:
A) common shares and preferred shares
B) preferred shares but not common shares
C) common shares but not preferred shares
D) either common shares or preferred shares but not both
Answer: A
Diff: 1 Page Ref: 727
53) Why might corporations prefer issuing preferred shares to debt?
A) dividends are payable at the discretion of the corporation
B) debt payments are payable at the discretion of the corporation
C) dividends are tax deductible to the corporation
D) interest expense is tax deductible to the corporation
Answer: A
Diff: 1 Page Ref: 730
54) An owner investment of cash in a corporation increases:
A) assets and increases liabilities
B) one asset and decreases another asset
C) assets and decreases shareholders’ equity
D) assets and increases shareholders’ equity
Answer: D
Diff: 2 Page Ref: 724
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55) The entry to record the issuance of 5,000 common shares for $12.50 per share includes a:
A) debit to retained earnings for $62,500
B) debit to cash for $62,500
C) credit to retained earnings for $62,500
D) debit to common shares for $62,500
Answer: B
Diff: 2 Page Ref: 724
56) The entry to record the issuance of 6,000 common shares for $12.50 per share includes a:
A) credit to cash for $75,000
B) debit to common shares for $75,000
C) credit to common shares for $75,000
D) credit to retained earnings for $75,000
Answer: C
Diff: 2 Page Ref: 724
57) The entry to record the issuance of 55,000 common shares at $13.50 per share includes a:
A) credit to retained earnings $742,500
B) credit to cash for $742,500
C) debit to retained earnings for $742,500
D) credit to common shares for $742,500
Answer: D
Diff: 2 Page Ref: 724
58) When 35,000 common shares are issued at $16.50 per share, total contributed capital:
A) increases by $577,500
B) increases by $350,000
C) increases by $227,500
D) decreases by $577,500
Answer: A
Diff: 2 Page Ref: 724
59) Land is acquired by issuing 500 common shares. The land has a current market value of $12,000.
There is no market value for the common shares available. The journal entry requires a:
A) debit to cash for $12,000
B) debit to common shares for $12,000
C) credit to retained earnings for $12,000
D) credit to common shares for $12,000
Answer: D
Diff: 2 Page Ref: 729
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60) A corporation issues common shares in exchange for equipment with a market value of $15,000. This
transaction would:
A) increase retained earnings by $15,000
B) increase liabilities by $15,000
C) increase common shares by $15,000
D) decrease total shareholders’ equity by $15,000
Answer: C
Diff: 2 Page Ref: 729
61) The heading, contributed capital, appears on which section of the balance sheet?
A) current assets
B) long-term liabilities
C) property, plant and equipment
D) shareholders’ equity
Answer: D
Diff: 1 Page Ref: 739
62) Accounting for the incorporation of an unincorporated going business involves:
A) closing the owner equity accounts of the prior entity and setting up the shareholder equity accounts of
the corporation
B) leaving the owner equity accounts as is and setting up the shareholders’ equity accounts for the
corporation
C) closing the owner equity accounts of the prior entity to the retained earnings account of the
corporation
D) closing the withdrawals accounts to the dividends payable accounts
Answer: A
Diff: 3 Page Ref: 732
63) Organization costs appear on which section of the balance sheet?
A) current assets
B) intangible assets
C) shareholders’ equity
D) long-term liabilities
Answer: B
Diff: 1 Page Ref: 733
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Table 13-1
The following selected list of accounts with their normal balances was taken from the general ledger of
Grant Corporation as of December 31, 2010:
Cash $173,500
Common shares, 100,000 shares authorized, 50,000 shares issued 190,000
Retained earnings 131,500
Cash dividends payable 25,000
Preferred shares, 200,000 shares authorized 100,000 shares issued 500,000
64) Refer to Table 13-1. The average issue price of a common share was:
A) $3.80
B) $1.90
C) $5.00
D) $0.95
Answer: A
Diff: 2 Page Ref: 729
65) Refer to Table 13-1. The average issue price of a preferred share was:
A) $2.50
B) $6.90
C) $5.00
D) $3.80
Answer: C
Diff: 2 Page Ref: 731
66) Refer to Table 13-1. Which account should be listed first in the shareholders’ equity section?
A) Retained earnings
B) Common shares
C) Contributed surplus
D) Preferred shares
Answer: D
Diff: 2 Page Ref: 733
67) Refer to Table 13-1. The total shareholders’ equity as of December 31, 2010 was:
A) $190,000
B) $690,000
C) $881,500
D) $821,500
Answer: D
Diff: 3 Page Ref: 733
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68) Dividends become a liability of the corporation:
A) on the payment date
B) on the date of record
C) on the declaration date
D) on the day immediately following the date of declaration
Answer: C
Diff: 2 Page Ref: 735
69) The dividends payable liability of the corporation is eliminated:
A) on the payment date
B) on the date of record
C) on the declaration date
D) on the day immediately following the date of declaration
Answer: A
Diff: 2 Page Ref: 736
70) The entry to record the declaration of a $0.50 per share dividend on 12,500 outstanding common
shares requires a:
A) credit to cash for $6,250
B) debit to dividends payable for $6,250
C) debit to retained earnings for $6,250
D) credit to retained earnings for $6,250
Answer: C
Diff: 2 Page Ref: 736
71) The entry to pay a previously declared dividend of $0.50 per share on 12,500 outstanding common
shares requires a:
A) debit to cash for $6,250
B) credit to dividends payable for $6,250
C) debit to retained earnings for $6,250
D) debit to dividends payable for $6,250
Answer: D
Diff: 2 Page Ref: 736
72) The declaration of a dividend:
A) increases total shareholders’ equity
B) reduces total assets
C) increases total assets
D) increases total liabilities
Answer: D
Diff: 2 Page Ref: 735
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73) The payment of a dividend:
A) reduces total shareholders’ equity
B) increases total shareholders’ equity
C) reduces total liabilities
D) has no effect on total assets
Answer: C
Diff: 2 Page Ref: 736
74) A dividend is declared by the:
A) president of the corporation
B) board of directors
C) chief financial officer
D) corporate controller
Answer: B
Diff: 1 Page Ref: 735
75) Dividends on cumulative preferred shares of $2,500 are in arrears for 2009. During 2010, the total
dividends declared amount to $10,000. There are 6,000 shares of $1 cumulative preferred shares
outstanding and 10,000 common shares outstanding. The total amount of dividends payable to each class
of shares in 2010 amounts to:
A) $8,500 to preferred, $1,500 to common
B) $6,000 to preferred, $4,000 to common
C) $5,000 to preferred, $5,000 to common
D) $10,000 to preferred, $0 to common
Answer: A
Diff: 3 Page Ref: 737
76) Dividends on cumulative preferred shares of $2,500 are in arrears for 2008 and 2009. During 2010, the
total dividends declared amount to $10,000. There are 3,000 shares of $1 cumulative preferred shares
outstanding and 10,000 common shares outstanding. The total amount of dividends payable to each class
of shares in 2010 amounts to:
A) $5,500 to preferred, $4,500 to common
B) $3,000 to preferred, $7,000 to common
C) $8,000 to preferred, $2,000 to common
D) $10,000 to preferred, $0 to common
Answer: C
Diff: 3 Page Ref: 737
77) Dividends on cumulative preferred shares of $2,500 are in arrears for 2007, 2008, and 2009. During
2010, the total dividends declared amount to $10,000. There are 3,000 shares of $1 cumulative preferred
shares outstanding and 10,000 common shares outstanding. The total amount of dividends payable to
each class of shares in 2010 amounts to:
A) $5,500 to preferred, $4,500 to common
B) $3,000 to preferred, $7,000 to common
C) $8,000 to preferred, $2,000 to common
D) $10,000 to preferred, $0 to common
Answer: D
Diff: 3 Page Ref: 737
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78) Dividends were not declared by Royal Inc. in 2008 or 2009. During 2010, total dividends declared
amount to $20,000. There are 6,000 shares of $1 cumulative preferred shares outstanding and 10,000
common shares outstanding. The total amount of dividends payable to each class of shares in 2010
amounts to:
A) $18,000 to preferred, $2,000 to common
B) $6,000 to preferred, $14,000 to common
C) $12,000 to preferred, $8,000 to common
D) $10,000 to preferred, $10,000 to common
Answer: A
Diff: 3 Page Ref: 737
79) Dividends were not declared by Royal Inc. in 2009. During 2010, total dividends declared amount to
$20,000. There are 6,000 shares of $1 cumulative preferred shares outstanding and 10,000 common shares
outstanding. The total amount of dividends payable to each class of shares in 2010 amounts to:
A) $18,000 to preferred, $2,000 to common
B) $6,000 to preferred, $14,000 to common
C) $12,000 to preferred, $8,000 to common
D) $10,000 to preferred, $10,000 to common
Answer: C
Diff: 3 Page Ref: 737
80) During 2010, total dividends declared by Par Corporation amounted to $29,000. There were 5,000
shares of $2 noncumulative preferred shares outstanding and 10,000 common shares outstanding. No
dividends were declared in 2008 or 2009. The total amount of dividends payable to each class of shares in
2010 amounted to:
A) $19,000 to preferred, $10,000 to common
B) $0 to preferred, $29,000 to common
C) $10,000 to preferred, $19,000 to common
D) $29,000 to preferred, $0 to common
Answer: C
Diff: 2 Page Ref: 737
81) During 2010, total dividends declared by Par Corporation amounted to $29,000. There were 5,000
shares of $2 cumulative preferred shares outstanding and 10,000 common shares outstanding. No
dividends were declared in 2008 or 2009. The total amount of dividends payable to each class of shares in
2010 amounted to:
A) $19,000 to preferred, $10,000 to common
B) $0 to preferred, $29,000 to common
C) $10,000 to preferred, $19,000 to common
D) $29,000 to preferred, $0 to common
Answer: D
Diff: 2 Page Ref: 737
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82) During 2010, total dividends declared by Jackson Corp. amounted to $29,000. There were 5,000 shares
of $2 cumulative preferred shares outstanding and 10,000 common shares outstanding. No dividends
were declared in 2009. The total amount of dividends payable to each class of shares in 2010 amounted to:
A) $10,000 to preferred, $19,000 to common
B) $20,000 to preferred, $9,000 to common
C) $29,000 to preferred, $0 to common
D) $9,000 to preferred, $20,000 to common
Answer: B
Diff: 2 Page Ref: 737
83) During 2010, total dividends declared by Jackson Corp. amounted to $29,000. There were 5,000 shares
of $2 noncumulative preferred shares outstanding and 10,000 common shares outstanding. No dividends
were declared in 2009. The total amount of dividends payable to each class of shares in 2010 amounted to:
A) $10,000 to preferred, $19,000 to common
B) $20,000 to preferred, $9,000 to common
C) $29,000 to preferred, $0 to common
D) $9,000 to preferred, $20,000 to common
Answer: A
Diff: 2 Page Ref: 737
84) Passed dividends on cumulative preferred shares:
A) remain a liability of the corporation until they are paid
B) are forever lost by the preferred shareholders
C) are referred to as dividends in arrears
D) are paid after common shareholders receive their dividends
Answer: C
Diff: 3 Page Ref: 737
85) Dividends in arrears:
A) are a liability on the balance sheet
B) are passed dividends on cumulative preferred shares
C) are never reported in the notes to the financial statements
D) are forever lost by the preferred shareholders
Answer: B
Diff: 2 Page Ref: 737
86) Magic Corp. has 20,000 shares of noncumulative, $5 preferred shares outstanding as well as 100,000
common shares. The board of directors have declared and distributed the required dividends for the past
three years, not counting the current year. The board wants to give the common shareholders a $1.25
dividend per share for the current year. The total dividends to be declared must be:
A) $225,000
B) $125,000
C) $525,000
D) $250,000
Answer: A
Diff: 3 Page Ref: 737
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87) Newco Corporation has 20,000 shares of cumulative, $5 preferred shares outstanding as well as
100,000 common shares. As of the beginning of this fiscal year, there were three years of dividends in
arrears on the preferred shares. The board of directors wants to give the common shareholders a $1.25
dividend per share. The total dividends to be declared must be:
A) $225,000
B) $400,000
C) $525,000
D) $200,000
Answer: C
Diff: 3 Page Ref: 737
88) Resco Corporation has had 10,000 shares of $3, cumulative preferred shares outstanding as well as
35,000 common shares since it was incorporated. During the first, second, and third years of operations,
$15,000, $18,000 and $50,000 in dividends, respectively, were paid. The dividends paid to the common
shareholders in year three amounted to:
A) $30,000
B) $0
C) $27,000
D) $18,000
Answer: B
Diff: 3 Page Ref: 737
89) Resco Corporation has had 10,000 shares of $3, cumulative preferred shares outstanding as well as
35,000 common shares since it was incorporated. During the first, second, and third years of operations,
$10,000, $20,000 and $80,000 in dividends, respectively, were paid. The dividends paid to the common
shareholders in year three amounted to:
A) $30,000
B) $0
C) $20,000
D) $18,000
Answer: C
Diff: 3 Page Ref: 737
Table 13-2
Falcon Corporation has 12,000 shares of $5, noncumulative preferred shares outstanding and 16,000
common shares outstanding. At the end of the current year, Falcon Corporation declares a dividend of
$120,000.
90) Refer to Table 13-2. How is the dividend allocated between preferred and common shareholders?
A) $12,000 to preferred, $108,000 to common
B) $80,000 to preferred, $40,000 to common
C) $60,000 to preferred, $60,000 to common
D) $40,000 to preferred, $80,000 to common
Answer: C
Diff: 3 Page Ref: 737
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91) Refer to Table 13-2. What is the dividend per share to preferred and common shareholders?
A) $5.00 to preferred, $3.75 to common
B) $3.75 to preferred, $5.00 to common
C) $6.67 to preferred, $1.50 to common
D) $1.00 to preferred, $6.75 to common
Answer: A
Diff: 3 Page Ref: 737
Table 13-3
Spencer Corporation has 15,000 shares of $5, cumulative preferred shares outstanding and 25,000
common shares. At the end of the current year, Spencer Corporation declares a dividend of $120,000.
Dividends of $37,500 are in arrears as of January 1 of the current year.
92) Refer to Table 13-3. How is the dividend allocated between preferred and common shareholders?
A) $112,500 to preferred, $7,500 to common
B) $75,000 to preferred, $45,000 to common
C) $120,000 to preferred, $0 to common
D) $0 to preferred, $120,000 to common
Answer: A
Diff: 3 Page Ref: 737
93) Refer to Table 13-3. What is the dividend per share to preferred and common shareholders?
A) $5.00 to preferred, $1.80 to common
B) $7.50 to preferred, $0.30 to common
C) $5.00 to preferred, $0 to common
D) $1.80 to preferred, $5.00 to common
Answer: B
Diff: 3 Page Ref: 737
94) The following information is available for the Barber Corporation as of December 31, 2010:
Preferred shares, cumulative, $10, 1,000 shares authorized and issued $100,000
Common shares, 4,000 shares authorized and issued 400,000
Retained earnings 100,000
Barber Corporation did not declare a dividend in 2009 or 2010. The liquidation value of the preferred
shares is $100 per share. Prior to 2009, there were no dividends in arrears. Compute book value per share
for preferred shares and common shares.
A) $110 for preferred, $185 for common
B) $120 for preferred, $182.50 for common
C) $100 for preferred, $187.50 for common
D) $120 for preferred, $120 for common
Answer: D
Diff: 3 Page Ref: 739
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95) The following information is available for the Frasier Corporation as of December 31, 2010:
Preferred shares, $10, cumulative, 1,000 shares authorized and issued $100,000
Common shares, 6,000 shares authorized and issued 500,000
Retained earnings 750,000
Frasier Corporation declared a dividend in 2010 amounting to $5,000. No dividends were declared in
2009. The liquidation value of the preferred stock is $100 per share. Prior to 2009, there were no dividends
in arrears. Compute book value for preferred shares and common shares in total.
A) $125,000 for preferred, $1,225,000 for common
B) $105,000 for preferred, $1,245,000 for common
C) $120,000 for preferred, $1,230,000 for common
D) $115,000 for preferred, $1,235,000 for common
Answer: D
Diff: 3 Page Ref: 739
96) For a company that has only common shares outstanding, dividing total shareholders’ equity by the
number of shares outstanding determines the:
A) book value per share
B) liquidation value per share
C) redemption value per share
D) market value per share
Answer: A
Diff: 2 Page Ref: 739
97) The book value of preferred shares is equal to:
A) liquidation value minus any dividends in arrears
B) liquidation value plus any dividends in arrears
C) market value minus any dividends in arrears
D) market value plus any dividends in arrears
Answer: B
Diff: 2 Page Ref: 739
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Table 13-4
The shareholders’ equity section of the balance sheet of Cresco Corporation follows:
Contributed capital:
Preferred shares, cumulative, $3.50, 4,000 shares outstanding,
liquidation value $56 per share $210,000
Common shares, 20,000 shares outstanding 397,500
Retained earnings 138,250
Note: There are two years dividends in arrears on the preferred shares, including the current year.
98) Refer to Table 13-4. The book value per share for preferred shares is:
A) $57.00
B) $56.00
C) $63.00
D) $59.50
Answer: C
Diff: 3 Page Ref: 739
99) Refer to Table 13-4. The book value per share for common shares is:
A) $25.89
B) $24.69
C) $26.09
D) $25.39
Answer: B
Diff: 3 Page Ref: 739
100) Pratt Corporation’s balance sheet for 2010 reveals total shareholders’ equity of $2,500,000. There are
10,000 shares of cumulative, $10 preferred shares outstanding and 50,000 common shares outstanding. To
date, dividends in arrears for the preferred shares amount to $25,000. The liquidation value of the
preferred shares is $105 per share. Book value per share of common shares is:
A) $28.75
B) $29.50
C) $28.50
D) $29.00
Answer: C
Diff: 3 Page Ref: 739
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101) Cooper Corporation’s balance sheet for 2010 reveals total shareholders’ equity of $2,500,000. There
are 10,000 shares of noncumulative, $10 preferred shares outstanding and 50,000 common shares
outstanding. The liquidation value of the preferred shares is $105 per share. Book value per share of
common shares is:
A) $29.00
B) $29.50
C) $28.50
D) $28.75
Answer: A
Diff: 3 Page Ref: 739
102) The ________ measures a company’s success in using its assets to earn income for the stakeholders
who are financing the business.
A) return on assets
B) return on equity
C) current ratio
D) debt-to-equity ratio
Answer: A
Diff: 1 Page Ref: 740
103) The formula for computing return on assets is:
A) (net income plus interest expense)/average total assets
B) (net income plus preferred dividends)/average total assets
C) (net income less total assets)/average shareholders’ equity
D) (net income plus total assets)/average shareholders’ equity
Answer: A
Diff: 2 Page Ref: 741
104) The formula for computing return on equity is:
A) (net income less interest expense)/average shareholders’ equity
B) (net income less preferred dividends)/average common shareholders’ equity
C) (net income plus preferred dividends)/shareholders’ equity at the end of the period
D) (net income plus interest expense)/average common shareholders’ equity
Answer: B
Diff: 2 Page Ref: 741
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Table 13-5
The following information is available for Jansen Corporation for the current year:
Net income $156,000
Preferred dividends 24,000
Interest expense 17,500
Beginning of year:
Total assets 850,000
Total liabilities 375,000
Total common shareholders’ equity 395,000
End of year:
Total assets 930,000
Total liabilities 405,000
Total common shareholders’ equity 435,000
105) Refer to Table 13-5. The return on assets for Jansen Corporation was:
A) 19.5%
B) 18.7%
C) 17.5%
D) 16.8%
Answer: A
Diff: 3 Page Ref: 741
106) Refer to Table 13-5. The return on equity for Jansen Corporation was:
A) 30.3%
B) 31.8%
C) 35.9%
D) 37.6%
Answer: B
Diff: 3 Page Ref: 741
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Table 13-6
The following selected list of accounts with their normal balances was taken from the general ledger of
Gore Ltd. as of December 31, 2010:
Cash $199,000
Common shares, 10,000 shares authorized, 5,000 shares issued 265,000
Retained earnings 131,500
Cash dividends payable 20,000
Preferred shares, 500,000 shares authorized 100,000 shares issued 800,000
107) Refer to Table 13-6. The average issue price of a common share was:
A) $20.00
B) $2.00
C) $53.00
D) $30.00
Answer: C
Diff: 2 Page Ref: 729
108) Refer to Table 13-6. The average issue price of a preferred share was:
A) $1.60
B) $20.00
C) $40.00
D) $8.00
Answer: D
Diff: 2 Page Ref: 729
109) Refer to Table 13-6. Which account should be listed first in the shareholders’ equity section?
A) Retained earnings
B) Common shares
C) Contributed surplus
D) Preferred shares
Answer: D
Diff: 2 Page Ref: 733
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Match the following.
A) organization costs
B) record date
C) return on equity
D) outstanding shares
E) President
F) book value
G) retained earnings
H) shareholders’ equity
I) common shares
J) articles of incorporation
K) limited liability
L) liquidation value
M) board of directors
N) no-par-value shares
O) return on assets
P) cumulative preferred shares
Q) payment date of dividend
R) preferred shares
S) authorization of shares
T) dividend
U) declaration date of dividend
V) deficit
W) market value
110) Documents used by a government to grant its permission to form a corporation
Diff: 2 Page Ref: 720
111) Shares that do not have a value assigned to them by the articles of incorporation
Diff: 2 Page Ref: 728
112) Shares of stock that gives its owners certain advantages over the common shareholders.
Diff: 2 Page Ref: 729
113) Chief operating officer in charge of managing the day-to-day operations of a corporation.
Diff: 2 Page Ref: 722
114) Owners’ equity of a corporation
Diff: 2 Page Ref: 724
115) Shares in the hands of shareholders
Diff: 2 Page Ref: 723
116) Group elected by the shareholders to set policy for a corporation and to appoint its officers.
Diff: 2 Page Ref: 722
