Study Guide 2

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1. Total stockholders' equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.

2. A primary source of stockholders' equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.

3. Which of the following is not a legal restriction related to profit distributions by a corporation?
a. The amount distributed to owners must be in compliance with the state laws governing corporations.
b. The amount distributed in any one year can never exceed the net income reported for that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to preferences and participation.

4. When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited?
a. Treasury stock for the par value and paid-in capital in excess of par for the excess of the purchase price over the par value.
b. Paid-in capital in excess of par for the purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained earnings for the excess of the purchase price over the par value.

5. A feature common to both stock splits and stock dividends is
a. a transfer to earned capital of a corporation.
b. that there is no effect on total stockholders' equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.

6. At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.

7. An example of a correction of an error in previously issued financial statements is a change
a. from the FIFO method of inventory valuation to the LIFO method.
b. in the service life of plant assets, based on changes in the economic environment.
c. from the cash basis of accounting to the accrual basis of accounting.
d. in the tax assessment related to a prior period.

Use the following information for questions 18 and 19.

Waeglein Corporation purchased machinery on January 1, 2006 for $630,000. The company used the straight-line method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. In 2008, Waeglein changed to the sum-of-the-years'-digits depreciation method for this asset. The following facts pertain:

2006 2007
Straight-line $105,000 $105,000
Sum-of-the-years'-digits $180,000 $150,000

8. Waeglein is subject to a 40% tax rate. The cumulative effect of this accounting change on beginning retained earnings is
a. $135,000.
b. $120,000.
c. $72,000.
d. $0.

9. The amount that Waeglein should report for depreciation expense on its 2008 income statement is
a. $168,000.
b. $105,000.
c. $75,000.
d. none of the above.

10. Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses as other comprehensive income and as a separate component of stockholders' equity are
a. available-for-sale securities where a company has holdings of less than 20%.
b. trading securities where a company has holdings of less than 20%.
c. c securities where a company has holdings of between 20% and 50%.
d. securities where a company has holdings of more than 50%.