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Tandem Corporation, Ricochet Corporation, Red Hot Foods, and Frazer Corporation

1. Tandem Corporation issued 200,000 shares of $2 par value capital
stock at date of incorporation for cash at a price of $7 per share.
During the first year of operations, the company earned $80,000 and
declared a dividend of $25,000. At the end of this first year of
operations, the balance of the Common Stock account is:
a. $1,400,000.
b. $1,480,000.
c. $400,000.
d. $1,455,000.
Use the following to answer questions 9-10:
On January 1, 2000, Ricochet Corporation issued 100,000 shares of
its total 500,000 authorized shares of $5 par value common stock for
$7 per share. On December 31, 2000, Ricochet Corporation's
common stock is trading at $10 per share.
2. Refer to the above data. Assuming Ricochet Corporation did not
issue any more common stock in 2000, how does the increase in
value of its outstanding stock affect Ricochet?
a. Ricochet should recognize additional net income for 2000 of $3
per share, or $300,000.
b. Paid-in capital at December 31, 2000, is $1,000,000 (i.e. 100,000
shares times $10 per share).
c. This increase in market value of outstanding stock is not
recorded in the financial statements of Ricochet Corporation.
d. Each shareholder must pay an additional $3 per share to
3. Refer to the above data. Assume Ricochet Corporation decides to
issue an additional 10,000 shares of its common stock on December
31, 2000. How will the above increase in value affect Ricochet?
a. Ricochet can issue the 10,000 shares at a higher price than the
initial 100,000 shares.
b. Ricochet can sell the 10,000 shares for $10 each, as well as
collect an additional $3 per share for each of the 100,000 shares
sold initially.
c. Ricochet reports a gain of $3 per share on all stock sold during
the year.
d. Paid-in capital at the end of 2000 will be $1,100,000 (i.e.,
110,000 shares times $10 per share).
4. Red Hot Foods suffered a $2,000,000 loss (net of tax) when the FDA
prohibited the sale of food products containing red dye no. 3. On its
other products, Red Hot Foods had net sales of $7,080,000 and costs
and other expenses of $7,005,000. Which of the following statements
is not true?
a. Red Hot Foods reports a net loss of $1,925,000 for the current
b. Red Hot Foods reports income before extraordinary items of
c. Red Hot Foods combines the $2,000,000 loss with its other costs
and expenses of $7,005,000, since this item does not qualify for
any special disclosure.
d. Red Hot Foods shows the $2 million loss in a separate section of
the income statement as an extraordinary item.
Use the following to answer questions 18-22:
The stockholders' equity section of the balance sheet of Frazer
Corporation at December 31, 2001, appears as follows:
Stockholders' equity:
$5 preferred stock, $100 par, callable at $115,
10,000 shares authorized, 8,000 shares issue $800,000
Common stock, $2 par, 100,000 shares authorized,
60,000 shares issued, of which 6,000 are held
in treasury 120,000
Additional paid-in capital:
From issuance of preferred stock 80,000
From issuance of common stock 300,000
From treasury stock transactions 3,000
From common stock dividends 50,000
Total paid-in capital $1,353,000
Retained earnings ($48,000 equal to cost of
treasury stock is not available for dividends) 340,000
Less: Treasury stock (at cost: 6,000 common shares) 48,000)
Total stockholders' equity $1,645,000
5. Refer to the above data. What was the average issue price per share
of preferred stock?
a. $88
b. $100
c. $110
d. $108
6. Refer to the above data. How many shares of common stock are
a. 60,000
b. 54,000
c. 100,000
d. 48,000
7. Refer to the above data. A small stock dividend of 5,000 shares was
declared and distributed during 2001. What was the market price
per share on the date of declaration?
a. $12 per share
b. $10 per share
c. $2 per share
d. $8 per share
8. A statement of cash flows would be least useful in answering which
of the following questions?
a. What was the average balance in the Cash account during the
b. Did operating activities result in a positive or negative net cash
c. How much cash was provided or used by financing activities
during the period?
d. Were cash dividends paid by the company more or less than the
net cash flow from operations?
9. The principal purpose of a statement of cash flows is which of the
a. To measure the profitability of a business that maintains its
accounting records on the cash basis.
b. To show the average amount of cash in the register.
c. To provide information about the cash receipts and cash
payments of a business entity during an accounting period.
d. To show the amount of revenue.

Solution Preview

1 c. the common stock account is not affected by the share premium or the retained earnings. These are usually shown separately.
2. c The increases in the price of the stock is not reflected in the books.
3. a. the issue price can be higher than the previous but it may not be $3, usually it is lower than $3.
4. c. if Red Hot foods combines ...

Solution Summary

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