A primary source of stockholders’ equity is

1) Proceeds from an issue of debt securities having stock warrants should NOT be allocated between debt and equity features when

A. the allocation would result in a discount on the debt security.

B. the warrants issued with the debt securities are nondetachable.

C. exercise of the warrants within the next few fiscal periods seems remote.

D. the market value of the warrants is NOT readily available.

2) The conversion of preferred stock may be recorded by the

A. market value method.

B. par value method.

C. book value method.

D. incremental method.

3) The conversion of preferred stock into common stock requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be

A. treated as a prior period adjustment.

B. treated as a direct reduction of retained earnings.

C. reflected currently in income as an extraordinary item.

D. reflected currently in income, but NOT as an extraordinary item.

4) A primary source of stockholders’ equity is

A. contributions by stockholders.

B. both income retained by the corporation and contributions by stockholders.

C. appropriated retained earnings.

D. income retained by the corporation.

5) Stockholders’ equity is generally classified into two major categories:

A. retained earnings and unappropriated capital.

B. earned capital and contributed capital.

C. appropriated capital and retained earnings.

D. contributed capital and appropriated capital.

6) When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the

A. market value of the shares issued.

B. Any of these provides an appropriate basis for recording the transaction.

C. par value of the shares issued.

D. market value of the services received.

7) Treasury shares are

A. shares held as an investment by the treasurer of the corporation.

B. issued but NOT outstanding shares.

C. shares held as an investment of the corporation.

D. issued and outstanding shares.

8) “Gains” on sales of treasury stock (using the cost method) should be credited to

A. paid-in capital from treasury stock.

B. other income.

C. capital stock.

D. retained earnings.

9) How should a “gain” from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?

A. As ordinary earnings shown on the income statement.

B. As an extraordinary item shown on the income statement.

C. As paid-in capital from treasury stock transactions.

D. As an increase in the amount shown for common stock.

10) In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?

A. Annual preferred dividend

B. Annual preferred dividend divided by the income tax rate

C. Annual preferred dividend times (one minus the income tax rate)

D. Annual preferred dividend times the income tax rate

11) When computing diluted earnings per share, convertible bonds are

A. ignored.

B. assumed converted only if they are dilutive.

C. assumed converted whether they are dilutive or antidilutive.

D. assumed converted only if they are antidilutive.

12) What effect will the acquisition of treasury stock have on stockholders’ equity and earnings per share, respectively?

A. Decrease and no effect

B. Increase and decrease

C. Increase and no effect

D. Decrease and increase

13) On May 1, 2007, Kent Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Kent had 100,000 shares of $1 par value common stock issued and outstanding. The fair value of Kent ‘s common stock was $20 per share on May 1, 2007. As a result of this stock dividend, Kent’s total stockholders’ equity

A. did NOT change.

B. increased by $200,000.

C. decreased by $10,000.

D. decreased by $200,000.

14) How would the declaration and subsequent issuance of a 10% stock dividend by the issuer affect each of the following when the market value of the shares exceeds the par value of the stock? Additional Common Stock | Paid-in Capital