I. Multiple Choice: (.5 points each)
____1) Dallkin Corporation issued 5,000 shares of common stock on January 1, 2015. The stock has no par value and was sold at $18 per share. The journal entry for this transaction would include a:
A) debit to Cash for $90,000 and a credit to Common Stock—No-Par Value for $90,000.
B) debit to Cash for $90,000 and a credit to Paid-In Capital in Excess of Par—Common for $600,000.
C) credit to Cash for $90,000 and a debit to Common Stock—No-Par Value for $90,000.
D) credit to Cash for $90,000, a debit to Paid-In Capital in Excess of Par—Common for $5,000, and a debit to Common Stock—No-Par Value for $85,000.
____2) Lerner Company had the following transactions in 2015, its first year of operations.
• Issued 20,000 shares of common stock. Stock has par value of $1.00 per share and was issued at $14.00 per share.
• Issued 1,000 shares of $100 par value preferred stock. Shares were issued at par.
• Earned net income of $35,000.
• Paid no dividends.
At the end of 2015, what is the total amount of stockholders’ equity?
____3) Saturn Corporation has 10,000 shares of 10%, $75 par noncumulative preferred stock outstanding and 20,000 shares of no-par common stock outstanding. At the end of the current year, the corporation declares a dividend of $180,000. How is the dividend allocated between preferred and common stockholders?
A) The dividend is allocated $5,000 to preferred shareholders and $115,000 to common shareholders.
B) The dividend is allocated $75,000 to preferred shareholders and $105,000 to common shareholders.
C) The dividend is allocated $60,000 to preferred shareholders and $120,000 to common shareholders.
D) The dividend is allocated $72,000 to preferred shareholders and $108,000 to common shareholders.
____4) Which of the following would be included in the entry to record the payment of a previously declared dividend of $0.25 per share on 12,500 shares of common stock?
A) Retained Earnings would be debited for $3,125.
B) Cash would be debited for $3,125.
C) Retained Earnings would be credited for $3,125.
D) Dividends Payable would be debited for $3,125.
____5) If bonds with a face value of $200,000 are sold at 98, the amount of cash proceeds is:
____6) If a bond’s stated interest rate is lower than the market rate, which of the following is true?
A) The bond will be issued at a premium.
B) The bond will be issued at par.
C) The bond will be issued at a discount.
D) The bond will be issued for an amount higher than the maturity value.
____7) On June 1, 2015, Smith Services issued $36,000 of 8% bonds that mature in five years for $45,000. The bonds pay semiannual interest payments on June 30 and December 31 of each year. On December 31, 2015, how much is the total interest paid to bondholders?
____8) On January 1, 2015, Carter Sales issued $15,000 in bonds for $15,800. They were 8-year bonds with a stated rate of 9%, and pay semiannual interest. Carter Sales uses the straight-line method to amortize the bond premium. On June 30, 2015, when Carter makes the first payment to bondholders, how much will they report as Interest Expense?
____9) Which of the following describes the operating activities section of the statement of cash flows?
A) It includes cash transactions that essentially increase or decrease the long-term assets of a business.
B) It includes cash transactions affecting the capitalization of the business.
C) It includes cash transactions that primarily affect current assets and current liabilities.
D) It shows the beginning and ending balances of cash.
____10) Which of the following statements is true of the direct and indirect methods of preparing the statement of cash flows?
A) The indirect method and the direct method will produce the same amount of net cash flow from operating activities.
B) The direct method begins with Net Income and adjusts to calculate operating and investing cash flows.
C) The indirect method shows three types of cash flows, but the direct method does not.
D) The operating activities section of both the direct and the indirect methods are the same.
____11) Avatar Company uses the indirect method to prepare the statement of cash flows. Refer to the following section of the comparative balance sheet:
How will the change in Accounts Payable be shown on the statement of cash flows?
A) as an addition to Net Income
B) as a deduction from Net Income
C) as a deduction from investing cash flows
D) as an addition to operating cash flows
____12) Felix Company uses the indirect method to prepare the statement of cash flows. Refer to the following income statement:
Additional information provided by the company includes the following:
1) Current assets, other than cash, increased by $24,000
2) Current liabilities decreased by $1,000
How much is the net cash provided by operating activities?
____13) Martin Company is preparing its statement of cash flows using the indirect method. During the year, they sold equipment for $5,990 cash. The net book value of the asset prior to sale was $5,550. Which of the following statements is true?
A) The gain on sale of $440 would be added back to net income in the operating activities section.
B) The book value of the assets sold would be shown as a negative cash flow in the investing activities section.
C) The cash receipt of $5,990 would be shown as a positive cash flow in the investing activities section.
D) The gain on sale of $440 would be shown as a positive cash flow in the financing activities section.
____14) Which of the following is the major difference between the accounting for equity securities and debt securities?
A) Debt securities are classified as liabilities, while equity securities are classified as assets.
B) Most equity securities are classified as held-to-maturity and most debt securities are classified as trading investments.
C) The revenue from debt securities is interest, while revenue from equity securities is dividends.
D) All debt securities have a maturity date whereas only a few equity securities have a maturity date.
____15) Significant interest investments must be accounted for using the:
A) equity method.
B) consolidation method.
C) discounted cash flow method.
D) acquisition method.
____16) Glitter Services owns 30% of voting stock of Grey Investments. During the year 2015, Grey Investments earned profits of $250,000. Under the equity method, which of the following journal entries will Glitter Services record?
|Long-term Investments—Grey Investments||250,000|
|Long-term Investments—Grey Investments||75,000|
|Long-term Investments—Grey Investments||75,000|
|Revenue from Investments||75,000|
II. Short answer: (.5 points each)
1. Angie is studying for her accounting midterm examination. Identify for Angie the advantages and disadvantages of the corporate form of business organization. (Full responses will include a minimum of 4 advantages and two disadvantages.)
2. The board of directors is considering either a stock split or a stock dividend. They understand that total stockholders’ equity will remain the same under either action. However, they are not sure of the different effects of the two types of actions on other aspects of stockholders’ equity. Explain the differences to the directors.
The different effects of a stock split versus a stock dividend are (indicate whether a stock split or stock divided either has no change/increases/decreases each of the stockholder’s equity items):
|Item||Stock Split||Stock Dividend|
|Total paid-in capital
Total retained earnings
Total par value (common stock)
Par value per share
3. (a) As a source of long term financing, what are the major advantages of bonds over common stock?
(b) What are the major disadvantages in using bonds for long-term financing?
4. What are the reasons that corporations invest in securities?