Question

Which of the following statements is INCORRECT?

Select one:

a. Earned Capital consists of Retained Earnings and Accumulated Other Comprehensive Income.

b. Shares of Treasury Stock cannot be reissued in the stock market.

c. Treasury Stock is comprised of shares that the firm repurchases in the stock market.

d. Unrealized increases and decreases in value on securities held as investments (AFS investments) are included in Accumulated Other Comprehensive Income.

What is the name of a security that has optional annual payments of a fixed amount, does not have to be paid back to the investor, and is second-to-the-last to receive assets from the firm in the case of bankruptcy?

Select one:

a. Mandatorily Redeemable Preferred Stock

b. Preferred Stock

c. Bond

Which of the following statements is INCORRECT?

Select one:

a. Preferred Stocks generally do not have voting rights.

b. The number of outstanding shares is always larger than the number of authorized shares.

c. “Additional Paid in Capital – Common Stock” is the value of common stock issued in excess of the par value.

d. The shareholder’s equity is composed of Contributed Capital, Earned Capital, and Treasury Stock.

d. Convertible Subordinated Debenture

Which of the following journal entries is INCORRECT for the described transaction?

Select one:

a. Buyback 1,000 shares of common stock (par value of $1 and original issue price of $50) at $55 and retire these shares.

Common Stock - Par		1,000
Additional Paid in Capital - Common Stock		49,000
Retained Earnings		5,000
Cash			55,000

b. Declare Large Stock Dividend (>25%) of 20,000 shares with market price of $50 and Par of $1.

Retained Earnings		20,000
Common Stock - Par			20,000

c. Issued 10,0000 common stocks with a par value of $1 for $10 a share.

Cash		100,000
Common Stock - Par			100,000

d. Declare Small Stock Dividend (< 25%) of 1,000 shares with market price of $50 and Par of $1.

Retained Earnings		50,000
Common Stock - Par			1,000
Additional Paid in Capital			49,000

Answer 1

1)Correct option is "B"-Shares of Treasury Stock cannot be reissued in the stock market.

There are two methods to account for treasury stock :

The first method is cost method under which shares are purchased and held in treasury .this shares can be reissue as and when needed

The second method is par value method under which shares are purchased and retired.

2_)correct option is "B"Preferred stock

Preferred stock is a stock which carries a fixed rate of dividend and which has preferential right at time of liquidation.

Thus at time of liquidation ,after payment of all liabilities and debt ,Preferred stock have preferential right over common stockholders in terms of payment

3)correct option is "B"- The number of outstanding shares is always larger than the number of authorized shares.

Outstanding shares are those part of authorized capital which is issued to shareholders and still outstanding at year end .

Authorized shares are the maximum shares which a company can issue .thus authroized is a wider term which includes issued and outstanding shares .so outstanding shares can be greater than authorized shares .

4)corect option is "C" - issued 10,0000 common stocks with a par value of $1 for $10 a share

Account title	Debit	credit
Cash (100000*10)	1000000
common stock (100000*1)		100000
Paid in capital in excess of par -common stock		900000

4)