Question 1

Which of the following statements about the par value of common stock is not correct?

Accepted Answer

The par value is not credited to common stock when treasury stock is reissued. When treasury stock is reissued, the amount received by the company is recorded as an increase in cash and an increase in common stock for the amount received, but this does not involve the par value.

Question 2

Which of the following statements about stock options is not correct?

Accepted Answer

To encourage employees to work hard for a corporation,employee pay packages often include a combination of base pay,cash bonuses,and stock options.Stock options give employees the option of acquiring the company's stock at a predetermined price,often equal to the then-current market price.Accounting rules require that,at the time the company grants stock options (rather than when the stock options are exercised),an expense must be reported for the estimated cost associated with stock options,even if the option price equals the current stock price.

Question 3

Which of the following statements about treasury stock is correct?

Accepted Answer

When a company reissues shares previously reported as treasury stock,it does not report a gain or loss on sale,even if it issues the shares for more or less than they cost when the company reacquired them.Treasury stock is not an asset.It is a permanent account that is reported as contra-equity,subtracted from total stockholders' equity.Outstanding shares are issued shares that are currently held by stockholders and not the corporation itself.Treasury stock is issued,but is not outstanding.

Question 4

Use the information above to answer the following question.What journal entry will record the purchase of the stock on January 20?

Accepted Answer

The purchase of stock is recorded by debiting Treasury Stock and crediting Cash for the total purchase amount.

Question 5

Ambiance Inc.buys back 3,000 shares of its $10 par value common stock from investors at $45 per share.This stock repurchase would be recorded with a debit to:

Accepted Answer

When a company buys back its own stock, it is recorded as a Treasury Stock transaction. The company pays cash to buy back the shares, which is recorded with a credit to Cash. The shares are then taken out of circulation and recorded as a debit to Treasury Stock, which is a contra-equity account that reduces stockholders' equity. In this case, Ambiance Inc. is buying back 3,000 shares at $45 per share, which gives a total cost of $135,000. Therefore, the correct journal entry would be a debit to Treasury Stock and a credit to Cash for $135,000. Option A is incorrect because it records a credit to Treasury Stock, which would increase stockholders' equity. Option B is incorrect because it records a credit to Cash for only $30,000, which is the par value of the shares, but the actual price paid was $45 per share. Option D is incorrect because it records a debit to Additional Paid-in Capital, which is not necessary in this case since the shares were originally issued at par value.

Question 6

A company sells 1 million shares of common stock with no par value for $15 a share.In recording the transaction,it would debit:

Accepted Answer

The sale of 1 million shares of common stock with no par value for $15 a share would result in a debit to Cash for $15 million and a credit to Common Stock for $15 million. There is no "Additional Paid-in Capital" account needed in this transaction since the stock was sold at its par value of $15.

Question 7

A company issues 1 million shares of common stock with a par value of $0.02 for $15 a share.The entry to record this transaction includes a debit to Cash for:

Accepted Answer

The entry to record the issuance of 1 million shares of common stock with a par value of $0.02 for $15 a share includes a debit to Cash for $15,000,000 (or 1,000,000 shares × issue price of $15.00 per share),a credit to Common Stock for $20,000 (or 1,000,000 shares × par value of $0.02 per share),and a credit to Additional Paid-in Capital for $14,980,000 [or 1,000,000 shares × (issue price of $15 per share − par value of $0.02 per share)].

Question 8

Which of the following statements would not explain why a company may want to repurchase its stock?

Accepted Answer

Repurchasing stock would not increase the number of shares of outstanding stock. In fact, the purpose of stock buybacks is often to decrease the number of outstanding shares, which can then increase the value of each remaining share.

Question 9

What effect does the purchase of treasury stock have on the balance sheet?

Accepted Answer

The answer of What effect does the purchase of treasury...

Question 10

A company issued 600 shares of $50 par value stock for $45,000.What is the total amount of contributed capital?

Accepted Answer

The total amount of contributed capital is the sum of the par value of the shares issued, which in this case is:

600 shares x $50 par value per share = $30,000

Since the shares were issued for $45,000, this amount exceeds the total contributed capital, but it represents the total amount of cash received by the company from the sale of its stock. Therefore, the correct answer is (C) $45,000.

Question 11

An Additional Paid-in Capital account could be used with all of the following transactions except:

Accepted Answer

An Additional Paid-in Capital account is used to record the amount over and above the par or stated value of stock that is received when shares are issued. Since no-par stock does not have a set par or stated value, there is nothing to go above and beyond, and therefore an Additional Paid-in Capital account is not necessary.

Question 12

If shares of common stock are issued at a market price greater than par value,the amount in excess of par should be credited to:

Accepted Answer

The amount received in excess of the par value of shares issued is called the additional paid-in capital. It represents the amount shareholders paid in excess of the nominal value of the shares. Therefore, the excess amount should be credited to Additional Paid-in Capital.

Question 13

Treasury stock:

Accepted Answer

Treasury stock is a contra-equity account because it is a reduction in the total shareholder equity of a company. It represents the amount the company paid to buy back its own shares and is therefore deducted from the total equity on the balance sheet. Treasury stock is not listed as an asset because it does not represent ownership in the company, but rather represents shares that have been repurchased by the company. It is also not recorded as additional paid-in capital because it is not new capital that is being invested in the company.

Question 14

Use the information above to answer the following question.What journal entry will record the reissuance on July 3?

Accepted Answer

When treasury stock is reissued, the transaction must be recorded at the original cost of the shares ($16,000) and any excess over the original cost should be credited to the additional paid-in capital account ($4,000). Therefore, the journal entry would be to debit cash for $20,000, credit treasury stock for $16,000, and credit additional paid-in capital for $4,000.

Question 15

The following data are taken from the stockholders' equity section of the balance sheet of a company:

What was the average issue price per share of the common stock?

Accepted Answer

The answer of The following data are taken from the...

Question 16

GE buys back 300,000 shares of its stock from investors at $45 a share.Two years later it reissues this stock for $65 a share.The stock reissue would be recorded with a debit to Cash for:

Accepted Answer

When GE buys back shares from investors, it records a debit to Treasury Stock and a credit to Cash. In this case, GE bought back 300,000 shares for $45 a share, so it would have debited Treasury Stock for $13.5 million and credited Cash for $13.5 million ($45/share x 300,000 shares).

Two years later when GE reissues these shares for $65 a share, it will debit cash for the total amount received ($65/share x 300,000 shares = $19.5 million). It will also need to credit Treasury Stock for the original cost of the shares ($13.5 million) and credit Additional Paid-in Capital for the difference between the original cost and the reissue price ($6 million). Therefore, the full journal entry will be:

Debit Cash: $19.5 million
Credit Treasury Stock: $13.5 million
Credit Additional Paid-in Capital: $6 million

Question 17

Anthem Inc.issues 200,000 shares of stock with a par value of $0.01 for $150 per share.Three years later,it repurchases these shares for $80 per share.Anthem records the repurchase in which of the following ways?

Accepted Answer

When a company repurchases its own shares, it records the transaction by debiting Treasury Stock and crediting Cash for the amount paid to repurchase the shares. Therefore, the correct option is B. Option A is incorrect because it includes an additional credit to Additional Paid-in Capital, which is not necessary for this transaction. Option C is incorrect because it only credits Cash for $16 million, whereas the repurchase price is $80 per share, resulting in a total of $16 million (200,000 shares x $80 per share). Option D is incorrect because it incorrectly credits Additional Paid-in Capital for the full $30 million when only $16 million was used to repurchase the shares.

Question 18

Ms.Jessica Duffy purchased 1 share of $10 par value common stock from Ohio Corporation for $50 per share.Ms.Duffy sold that share to Mike Truesdale for $60 per share.As a result of the sale by Duffy to Truesdale sale,Ohio Corporation would:

Accepted Answer

Ohio Corporation would not record a journal entry on its books.Ms.Duffy received cash for the shares and Mr.Truesdale received stock for the cash he paid.Ohio Corporation did not receive or pay anything.These transactions involve only the owners of the company and not the corporation itself.(Remember the separate entity assumption,which states that owners' transactions are recorded only if they directly involve the corporation. )

Question 19

The following information is available from the accounting records of the First Corporation:

What is the amount of stockholders' equity for First Corporation?

Accepted Answer

The stockholders' equity can be calculated by adding the common stock, additional paid-in capital, retained earnings, and treasury stock.

Common stock: $100,000 
Additional paid-in capital: $200,000 
Retained earnings: $200,000 
Treasury stock: $0

Total Stockholders' Equity: $100,000 + $200,000 + $200,000 + $0 = $500,000

Question 20

Which of the following is correct about reissuing treasury stock?

Accepted Answer

When a company reissues shares previously reported as treasury stock,it does not report a gain or loss on sale,even if it issues the shares for more or less than they cost when the company reacquired them.

Quiz 11: Reporting and Interpreting Stockholders Equity