Introductory Financial Accounting for Business 1st Edition By Thomas Edmonds – Test Bank

Chapter 11 Proprietorships, Partnerships, and Corporations

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter dollar amounts. (Note that “Not Affected” means that the event does not affect that element of the financial statements or the event causes an increase in that element that is offset by a decrease in the same element.)

Increase = I Decrease = D Not Affected = NA

1) Cooper Corporation purchased 500 shares of its own stock as treasury stock for $35 per share. The no-par stock had originally been issued by Cooper at $26 per share.

Assets Liabilities Stk. Equity Revenues Expenses Net Stmt. of
Income Cash Flows

Answer: (D) (NA) (D) (NA) (NA) (NA) (D)
Purchasing treasury stock decreases assets (cash) and decreases stockholders’ equity by increasing the contra equity account treasury stock. It is reported as a cash outflow in the financing activities section of the statement of cash flows.
Difficulty: 2 Medium
Topic: Treasury Stock
Learning Objective: 11-05 Show how treasury stock affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking

2) Miller Co. declared and distributed a stock dividend.

Assets Liabilities Stk. Equity Revenues Expenses Net Stmt. of
Income Cash Flows

Answer: (NA) (NA) (NA) (NA) (NA) (NA) (NA)
Declaring and distributing stock dividends increases one stockholders’ equity account, common stock (and possibly paid-in capital in excess of par value—common) and decreases another stockholders’ equity account, retained earnings, so it has no net effect on the elements of Miller’s financial statements.
Difficulty: 1 Easy
Topic: Stock Dividends and Splits
Learning Objective: 11-07 Show how stock dividends and stock splits affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking

3) Fort Worth Co. declared a cash dividend but has not yet paid the money to the shareholders.

Assets Liabilities Stk. Equity Revenues Expenses Net Stmt. of
Income Cash Flows

Answer: (NA) (I) (D) (NA) (NA) (NA) (NA)
Declaring a cash dividend increases liabilities (dividends payable) and decreases stockholders’ equity by increasing dividends. Declaring a cash dividend has no effect on the statement of cash flows.
Difficulty: 1 Easy
Topic: Cash Dividends
Learning Objective: 11-06 Show how declaring and paying cash dividends affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking

4) Atlantic Oil Company had 10,000,000 common shares outstanding. The shares had been issued at $14 per share. The stock of Atlantic Oil Co. was trading at $14 per share on March 27 when the company announced that it had recently discovered a large oil reserve. The market value of the company’s stock immediately went up to $28 per share.

Assets Liabilities Stk. Equity Revenues Expenses Net Stmt. of
Income Cash Flows

Answer: (NA) (NA) (NA) (NA) (NA) (NA) (NA)
The price an investor must pay to purchase a share of stock is the market value. Published financial statements report historical information; in this case, the company’s paid-in capital is recorded at the issue price of $14 per share. A change in the market price of the company’s common stock has no impact on the elements of the company’s financial statements.
Difficulty: 2 Medium
Topic: Accounting for Stock Transactions on the Day of Issue; Stock Investment Decisions
Learning Objective: 11-04 Show how issuing different classes of stock affects financial statements.; 11-09 Show how accounting information is used to make stock investment decisions.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

5) Sierra Co. issued 10,000 shares of common stock for $45 per share. The stock has a par value of $10.

Assets Liabilities Stk. Equity Revenues Expenses Net Stmt. of
Income Cash Flows

Answer: (I) (NA) (I) (NA) (NA) (NA) (I)
The stock issuance will increase assets (cash) and increase stockholders’ equity (common stock and paid-in capital in excess of par value—common). It is reported as a cash inflow in the financing activities section of the statement of cash flows.
Difficulty: 2 Medium
Topic: Accounting for Stock Transactions on the Day of Issue
Learning Objective: 11-04 Show how issuing different classes of stock affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking

6) Grover Co. declared a 2-for-1 stock split. Before that announcement, Grover had 40,000 shares of outstanding common stock.

Assets Liabilities Stk. Equity Revenues Expenses Net Stmt. of
Income Cash Flows

Answer: (NA) (NA) (NA) (NA) (NA) (NA) (NA)
Stock splits have no effect on the dollar amounts of assets, liabilities, and stockholders’ equity. They only affect the number of shares of stock outstanding and the par value per share.
Difficulty: 1 Easy
Topic: Stock Dividends and Splits
Learning Objective: 11-07 Show how stock dividends and stock splits affect financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking

7) Vancouver Co. paid a $50,000 cash dividend to its shareholders two months after Vancouver declared the dividend.

Assets Liabilities Stk. Equity Revenues Expenses Net Stmt. of
Income Cash Flows

Answer: (D) (D) (NA) (NA) (NA) (NA) (D)
Paying a dividend that was declared at an earlier date decreases assets (cash) and decreases liabilities (dividends payable). It is reported as a cash outflow in the financing activities section of the statement of cash flows.
Difficulty: 1 Easy
Topic: Cash Dividends
Learning Objective: 11-06 Show how declaring and paying cash dividends affect financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking

8) Jack Grimes agreed to purchase 8% of Preston Corporation’s outstanding common stock from Todd Barbour, one of Preston’s major stockholders. (Note: Consider the effects of the transaction on the elements of Preston’s financial statements.)

Assets Liabilities Stk. Equity Revenues Expenses Net Stmt. of
Income Cash Flows

Answer: (NA) (NA) (NA) (NA) (NA) (NA) (NA)
A corporation is a separate legal entity created by the authority of a state government. This transaction is between Grimes and Barbour; it is not between either of those parties and Preston Corporation. As such, this transaction has no effect on the elements of Preston’s financial statements. Stock trades on the secondary market have no impact on a company’s financial statements.
Difficulty: 2 Medium
Topic: Forms of Business Organizations
Learning Objective: 11-01 Identify the primary characteristics of sole proprietorships, partnerships, and corporations.
Bloom’s: Understand
AACSB: Reflective Thinking
AICPA: FN Measurement; BB Critical Thinking

9) Wheaton Company reissued 100 shares of treasury stock, which had been purchased by Wheaton at $18 per share. The treasury shares were reissued at a price of $20 per share.

Assets Liabilities Stk. Equity Revenues Expenses Net Stmt. of
Income Cash Flows

Answer: (I) (NA) (I) (NA) (NA) (NA) (I)
When treasury stock is reissued at a price greater than its cost, assets (cash) increase and stockholders’ equity increases (treasury stock decreases by the amount of the original cost and paid-in capital in excess of cost of treasury stock increases for the difference). It is reported as a cash inflow in the financing activities section of the statement of cash flows.
Difficulty: 2 Medium
Topic: Treasury Stock
Learning Objective: 11-05 Show how treasury stock affects financial statements.
Bloom’s: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking

10) The board of directors of Moreno Company restricts the amount of retained earnings available to pay dividends.

Assets Liabilities Stk. Equity Revenues Expenses Net Stmt. of
Income Cash Flows

Answer: (NA) (NA) (NA) (NA) (NA) (NA) (NA)
A retained earnings restriction, often called an appropriation, is an equity exchange event. It transfers a portion of existing retained earnings to appropriated retained earnings. Total stockholders’ equity (that is, total retained earnings) remains unchanged.
Difficulty: 1 Easy
Topic: Appropriation of Retained Earnings
Learning Objective: 11-08 Show how the appropriation of retained earnings affects financial statements.
Bloom’s: Understand
AACSB: Analytical Thinking
AICPA: FN Measurement; BB Critical Thinking