Multiple-Choice Questions

1. Which of the following is not a direct nor indirect component of stockholders' equity?

a. Dividends payable

b. Loss on sale of equipment

c. Retained earnings

d. Net income

2. Which of the following statements is true with regard to contributed capital?

a. Preferred stock is stock that has been retired.

b. It is very unlikely corporations may have more than one class of stock outstanding.

c. The outstanding number of shares is the maximum number of shares that can be issued by a corporation.

d. The shares that are in the hands of the stockholders are said to be outstanding.

3. Authorized stock represents the:

a. Maximum number of shares that can be issued.

b. Number of shares that have been sold.

c. Number of shares that are currently held by stockholders.

d. Number of shares that have been repurchased by the corporation.

4. Harvey Corporation shows the following in the stockholders' equity section of its balance sheet: The par value of its common stock is $0.50 and the total balance in the common stock account is $37,500. Also noted is that 5,000 shares are currently designated as treasury stock. The number of shares outstanding is:

a. 80,000.

b. 75,000.

c. 72,500.

d. 70,000.

5. With regard to preferred stock,

a. Its issuance provides no flexibility to the issuing company because its terms always require mandatory dividend payments.

b. No dividends are expected by the stockholders.

c. Its stockholders may have the right to participate, along with common stockholders, if an extra dividend is declared.

d. There is a legal requirement for a corporation to declare a dividend on preferred stock.

6. Murphy Parts Shop began business on January 1, 2007. The corporate charter authorized issuance of 10,000 shares of $2 par value common stock and 4,000 shares of $8 par value, 6 percent cumulative preferred stock. Murphy issued 2,400 shares of common stock for cash at $20 per share on January 2, 2007. What effect does the entry to record the issuance of stock have on total stockholders' equity?

a. Increase of $4,800

b. Decrease of $4,800

c. Decrease of $48,000

d. Increase of $48,000

7. Marx Company began business on January 1, 2007. The corporate charter authorized issuance of 5,000 shares of $1 par value common stock, and 4,000 shares of $8 par value, 6 percent cumulative preferred stock, of which none were issued. On July 1, Marx issued 1,000 shares of common stock in exchange for two years rent on a retail location. The cash rental price is $2,400 per month and the rental period begins on July 1. What is the correct entry to record the July 1 transaction?

a. Debit to Cash, $57,600; Credit to Prepaid Rent, $57,600

b. Debit to Prepaid Rent, $57,600; Credit to Common Stock, $57,600

c. Debit to Prepaid Rent, $57,600; Credit to Common Stock, $1,000; Credit to Additional Paid-In Capital-Common, $56,600

d. Debit to Prepaid Rent, $57,600; Credit to Common Stock, $5,000; Credit to Additional Paid-In Capital-Common, $52,600