EXTRA PRACTICE PROBLEMS FOR CHAPTERS 15, 16, 17, AND 18

Chapter 15
1. Stockholders' equity is generally classified into two major categories:
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. retained earnings and contributed capital.
e. None of the above.

2. Which of the following type of stock will not increase Additional Paid-in Capital when issued?
A. Par value stock.
B. No-par value stock.
C. Stated value stock.
D. Preferred stock.
E. None of the above.

3. Presented below is information related to Chambers Corporation:

Common Stock, $1 par
Paid-in Capital in Excess of ParCommon Stock
Preferred 8 1/2% Stock, $50 par
Paid-in Capital in Excess of ParPreferred Stock
Retained Earnings
Treasury Common Stock (at cost)

$2,100,000
350,000
1,700,000
950,000
2,350,000
250,000

What is the total stockholders' equity of Chambers Corporation?

4. True or False: Treasury stock is classified on the balance sheet as an asset.

5.

Under the cost method, when treasury stock is sold for more than its cost, the excess is
credited to:
A. Gain on Sale of Treasury Stock.
B. Paid-in Capital in Excess of Par.
C. Paid-in Capital from Treasury Stock.
D. Retained Earnings.
E. None of the above.

6.

Wheeler Company issued 5,000 shares of its $5 par value common stock with a fair value of $25
per share and 7,500 shares of its $15 par value preferred stock with a fair value of $20 per share
for a lump sum of $264,000. What are the proceeds allocated to the preferred stock?

7.

Which of the following best describes a possible result of treasury stock transactions by a
corporation that uses the cost method for treasury stock?
a. May increase but not decrease retained earnings.
b. May increase but not decrease net income.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.

e. None of the above statements are true.

8.

On 9/1/14, Valdez Company reacquired 20,000 shares of its own $10 par value common stock for
$15 per share. Valdez uses the cost method to account for treasury stock. The journal entry to
record the reacquisition of the stock should debit:
a. Treasury Stock for $200,000.
b. Treasury Stock for $200,000 and Paid-in Capital - Treasury Stock for $75,000.
c. Common Stock for $200,000 and Paid-in Capital in Excess of Par for $75,000.
d. Treasury Stock for $300,000.
e. None of the above.

9.

Gannon Company acquired 10,000 shares of its own common stock at $20 per share on February
5, 2014, and sold 5,000 of these shares at $27 per share on August 9, 2015. The fair value of
Gannon's common stock was $24 per share at December 31, 2014, and $25 per share at
December 31, 2015. The cost method is used to record treasury stock transactions. What
account(s) should Gannon credit in the journal entry to record the sale of 5,000 shares in 2015?
a. Treasury Stock for $135,000.
b. Treasury Stock for $100,000 and Paid-in Capital from Treasury Stock for $35,000.
c. Treasury Stock for $100,000 and Retained Earnings for $35,000.
d. Treasury Stock for $120,000 and Retained Earnings for $15,000.

10.

Pember Corporation started business in 2009 by issuing 200,000 shares of $20 par common stock
for $36 each. In 2014, 25,000 of these shares were purchased for $52 per share by Pember
Corporation and held as treasury stock. On June 15, 2015, these 25,000 shares were exchanged
for a piece of property that had an assessed value of $1,010,000. Pembers stock is actively traded
and had a market price of $60 on June 15, 2015. The cost method is used to account for treasury
stock. What is the amount of paid-in capital from treasury stock transactions resulting from the
above events?

11.

An analysis of stockholders' equity of Hahn Corporation as of January 1, 2014, is as

follows:
Common stock, par value $20; authorized 100,000 shares;
issued and outstanding 90,000 shares

$1,800,000

Paid-in capital in excess of par

800,000

Retained earnings

760,000

Total

$3,360,000

Hahn uses the cost method of accounting for treasury stock and during 2014 entered into
the following transactions:
Acquired 2,500 shares of its stock for $75,000.
Sold 2,000 treasury shares at $35 per share.
Sold the remaining treasury shares at $20 per share.
Assuming no other equity transactions occurred during 2014, what should Hahn report at
December 31, 2014, as total additional paid-in capital?

12.

Sosa Co.'s stockholders' equity at January 1, 2014 is as follows:

Common stock, $10 par value; authorized 300,000 shares;
Outstanding 225,000 shares
Paid-in capital in excess of par
Retained earnings
Total

$2,250,000
600,000
2,190,000
$5,040,000

During 2014, Sosa had the following stock transactions:

Acquired 6,000 shares of its stock for $270,000.
Sold 3,600 treasury shares at $50 a share.
Sold the remaining treasury shares at $41 per share.
No other stock transactions occurred during 2014. Assuming Sosa uses the cost method to
record treasury stock transactions, what is the total amount of all additional paid-in
capital accounts at December 31, 2014?

13.

Presented below is the stockholders' equity section of Oaks Corporation at December 31,
2014:
Common stock, par value $20; authorized 75,000 shares;
issued and outstanding 45,000 shares

$ 900,000

Paid-in capital in excess of par value

350,000

Retained earnings

300,000
$1,550,000

During 2015, the following transactions occurred relating to stockholders' equity:

3,000 shares were reacquired at $28 per share.
3,000 shares were reacquired at $35 per share.
1,800 shares of treasury stock were sold at $30 per share.
For the year ended December 31, 2015, Oaks reported net income of $450,000. Assuming Oaks
accounts for treasury stock under the cost method, what should it report as total stockholders'
equity on its December 31, 2015, balance sheet?

Chapter 16
1.

On December 31, 2014, Gonzalez Company granted some of its executives options to purchase
150,000 shares of the companys $10 par common stock at an option price of $50 per share. The
Black-Scholes option pricing model determines total compensation expense to be $1,125,000.
The options become exercisable on January 1, 2015, and represent compensation for executives
services over a three-year period beginning January 1, 2015. At December 31, 2015 none of the
executives had exercised their options. What is the impact on Gonzalezs net income for the year
ended December 31, 2015 as a result of this transaction under the fair value method?
a.
$ 375,000 increase.
b.
$1,125,000 decrease.
c.
$ 375,000 decrease.
d.
$0.
e.
None of the above.

2.

On January 1, 2015 Reese Company granted Jack Buchanan, an employee, an option to buy 300
shares of Reese Co. stock for $40 per share, the option exercisable for 5 years from date of grant.
Using a fair value option pricing model, total compensation expense is determined to be $3,600.
Buchanan exercised his option on September 1, 2015, and sold his 100 shares on December 1,
2015. Quoted market prices of Reese Co. stock during 2015 were:
January 1
September 1
December 1

$40 per share

$48 per share
$54 per share

The service period is for two years beginning January 1, 2015. As a result of the option granted to
Buchanan, using the fair value method, what is the amount that Reese should recognize
compensation expense for 2015 on its books?

3.

On June 30, 2014, Yang Corporation granted compensatory stock options for 25,000 shares of its
$24 par value common stock to certain of its key employees. The market price of the common
stock on that date was $31 per share and the option price was $28. Using a fair value option
pricing model, total compensation expense is determined to be $80,000. The options are
exercisable beginning January 1, 2016, providing those key employees are still in the employ of
the company at the time the options are exercised. The options expire on June 30, 2017.
On January 4, 2016, when the market price of the stock was $36 per share, all options for the
25,000 shares were exercised. The service period is for two years beginning January 1, 2014.
Using the fair value method, what should be the amount of compensation expense recorded by
Yang Corporation for these options on December 31, 2014?

4.

Milo Co. had 700,000 shares of common stock outstanding on January 1, issued 126,000 shares
on May 1, purchased 63,000 shares of treasury stock on September 1, and issued 54,000 shares
on November 1. What is the weighted average shares outstanding for the year?

5.

Hill Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000 shares
on July 1, and had income applicable to common stock of $1,470,000 for the year ending
December 31, 2014. What is earnings per share of common stock for 2014?

6. On 11/1/13, the stockholders of Beazley Company approve a plan that grants the companys five
executives options to purchase 1,000 shares each of the companys $1 par value common stock. The
company grants the options on 1/1/14. The executives may exercise the options at any time within the
next 12 years. The option price per share is $65, and the market price of the shares at the date of grant
is $75 per share. Under the fair value method, the company computes total compensation expense by
applying an acceptable fair value option-pricing model. The fair value option-pricing model
determines Beazleys total compensation expense to be $320,000. Beazleys executives exercise

a.
b.
c.
d.
e.

2,000 of the 5,000 options (40 percent of the options) on 6/1/17. The journal entry to record on 6/1/17
to record the exercise of the options includes
credit cash
debit paid-in capital stock options
debit common stock
debit paid-in capital in excess of par - common
The journal entry would include all of the above.

7.

Compensationexpenseresultingfromacompensatorystockoptionplanisgenerally
a.
b.
c.
d.

8.

recognized in the period of exercise.

recognized in the period of the grant.
allocated to the periods benefited by the employee's required service.
allocated over the periods of the employee's service life to retirement.

On January 1, 2014, Trent Company granted Dick Williams, an employee, an option to buy 400
shares of Trent Co. stock for $30 per share, the option exercisable for 5 years from date of grant.
Using a fair value option pricing model, total compensation expense is determined to be $3,600.
Williams exercised his option on September 1, 2014, and sold his 400 shares on December 1,
2014. Quoted market prices of Trent Co. stock during 2014 were:
January 1
September 1
December 1

$30 per share

$36 per share
$40 per share

The service period is for two years beginning January 1, 2014. As a result of the option granted to
Williams, using the fair value method, what is the amount that Trent should recognize
compensation expense for 2014 on its books?

9.

On June 30, 2014, Yang Corporation granted compensatory stock options for 25,000 shares of its
$24 par value common stock to certain of its key employees. The market price of the common
stock on that date was $31 per share and the option price was $28. Using a fair value option
pricing model, total compensation expense is determined to be $80,000. The options are
exercisable beginning January 1, 2016, providing those key employees are still in the employ of
the company at the time the options are exercised. The options expire on June 30, 2017.
On January 4, 2016, when the market price of the stock was $36 per share, all options for the
25,000 shares were exercised. The service period is for two years beginning January 1, 2014.
Using the fair value method, what should be the amount of compensation expense recorded by
Yang Corporation for these options on December 31, 2014?

10.

Stine Inc. had 500,000 shares of common stock issued and outstanding at December 31, 2014. On
July 1, 2015 an additional 500,000 shares were issued for cash. Stine also had stock options
outstanding at the beginning and end of 2015 which allow the holders to purchase 150,000 shares
of common stock at $28 per share. The average market price of Stines common stock was $35
during 2015. What is the number of shares to be used in computing diluted earnings per share for
2015?

11.

Kasravi Co. had net income for 2015 of $500,000. The average number of shares outstanding for
the period was 200,000 shares. The average number of shares under outstanding options, at an
option price of $30 per share is 12,000 shares. The average market price of the common stock
during the year was $36. What should Kasravi Co. report for diluted earnings per share for the
year ended 2015?

12.

Fugate Company had 900,000 shares of common stock issued and outstanding at December 31,
2014. On July 1, 2015 an additional 750,000 shares were issued for cash. Fugate also had stock
options outstanding at the beginning and end of 2015 which allow the holders to purchase
225,000 shares of common stock at $20 per share. The average market price of Fugate's common
stock was $25 during 2015. What is the number of shares that should be used in computing
diluted earnings per share for the year ended December 31, 2015?

13.

Colt Corporation purchased Massey Inc. and agreed to give stockholders of Massey Inc. 50,000
additional shares in 2016 if Massey Inc.s net income in 2015 is $600,000 or more; in 2014
Massey Inc.s net income is $615,000. Colt has net income for 2014 of $1,000,000 and has an
average number of common shares outstanding for 2014 of 500,000 shares. What should Colt
report as earnings per share for 2014?

a.
b.
c.
d.

Basic Earnings
Per Share
$2.00
$1.82
$2.00
$1.82

Diluted Earnings
Per Share
$2.00
$2.00
$1.82
$1.82

Chapter 17
1.

During 2012, Moxey Company purchased 10,000 shares of Hanover Corp. common stock for
$415,000 as an available-for-sale investment. The fair value of these shares was $389,000 at
December 31, 2012. During 2013, Moxey sold all of the Hanover stock for $426,000. What
amount should Moxey Company report a realized gain on the sale of stock in 2013?

2.

An unrealized holding gain on a company's available-for-sale securities should be reflected in the

current financial statements as
a. an extraordinary item shown as a direct increase to retained earnings.
b. a current gain resulting from holding securities.
c. a note or parenthetical disclosure only.
d. other comprehensive income and included in the equity section of the balance sheet.
e. None of the above.

3.

True or False: Under the equity method, dividends received by the investor are reported
as dividend revenue on the income statement.

4.

True or False: Holdings between 20% and 50% of another companys voting stock are
accounted for using the equity method.

5.

An ownership interest of 15% in another companys voting stock should be accounted for
using the:
a) consolidation method.
b) equity method.
c) cost method.
d) fair value method.
e) None of the above.

6.

Under the equity method, the investment account is decreased by all of the following
except the investor's proportionate share of:
a) dividends paid by the investee.
b) declines in the fair value of the investment.
c) the losses of the investee.
d) All of the options would decrease the investment account.
e) None of the above.

7.

Gise Corporation purchased 35,000 shares of common stock of the Wagner Corporation
for $52 per share on January 2, 2010. During 2012, Wagner Corporation had 140,000
shares of common stock outstanding, paid cash dividends of $88,000, and reported net
income of $320,000. What amount should Gise Corporation report revenue from
investment for 2012?

8.

Judd, Inc., owns 35% of Cosby Corporation and has significant influence over Cosby. During the
calendar year 2014, Cosby had a net profit of $300,000 and paid dividends of $30,000. Judd
mistakenly recorded these transactions using the fair value method rather than the equity method
of accounting. What effect would this mistake have on the investment asset account, net income,
and retained earnings, respectively?
a.
Understate, overstate, overstate
b.
Overstate, understate, understate
c.
Overstate, overstate, overstate
d.
Understate, understate, understate
e.
None of the above

9.

On January 2, 2015 Pod Company purchased 25% of the outstanding common stock of Jobs, Inc.
and subsequently used the equity method to account for the investment. During 2015 Jobs, Inc.
reported net income of $840,000 and distributed dividends of $360,000. The ending balance in
the Investment in Pod Company account at December 31, 2015 was $640,000 after applying the
equity method during 2015. What was the purchase price Pod Company paid for its investment in
Jobs, Inc?

10.

Ziegler Corporation purchased 25,000 shares of common stock of the Sherman Corporation for
$40 per share on January 2, 2014. Sherman Corporation had 100,000 shares of common stock
outstanding during 2015, paid cash dividends of $90,000 during 2015, and reported net income of
$300,000 for 2015. What amount should Ziegler Corporation report revenue from investment for
2015?

11.

Kramer Company's trading securities portfolio which is appropriately included in current assets is
as follows:
December 31, 2014

Catlett Corp.
Lyman, Inc.

Cost
$260,000
245,000
$505,000

Fair
Value
$205,000
265,000
$470,000

Unrealized
Gain (Loss)
$(55,000)
20,000
$(35,000)

Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2014
income statement if 2014 is Kramer's first year of operation?
a.
$0.
b.
$20,000 gain.
c.
$35,000 loss.
d.
$55,000 loss.
e.
None of the above.

12.

At December 31, 2015, Atlanta Company has a stock portfolio of available-for-sale securities
valued at $80,000. Its cost was $66,000. Which of the following journal entries is required at
December 31, 2015?
a.
b.
c.
d.
e.

Fair Value Adjustment (available-for-sale)

Unrealized Holding Gain-Income

14,000

Fair Value Adjustment (available-for-sale)

Unrealized Holding Gain-Equity

14,000

Unrealized Holding Loss-Income

Investment Asset (available-for-sale)

14,000

Unrealized Holding Loss-Equity

Fair Value Adjustment (available-for-sale)

14,000

None of the above.

14,000
14,000
14,000
14,000

13.

During 2012 Logic Company purchased 6,000 shares of Midi, Inc. for $30 per share. The
investment was classified as a trading security. During the year Logic Company sold 1,500 shares
of Midi, Inc. for $35 per share. At December 31, 2012 the market price of Midi, Inc.s stock was
$28 per share. What is the total amount of gain/(loss) that Logic Company will report in its
income statement for the year ended December 31, 2012 related to its investment in Midi, Inc.
stock?
a.
$9,000 loss
b.
$7,500 gain
c.
$4,500 loss
d.
$1,500 loss
e.
None of the above

14.

On its December 31, 2012, balance sheet, Trump Co. reported its investment in available-for-sale
securities, which had cost $600,000, at fair value of $550,000. At December 31, 2013, the fair
value of the securities was $585,000. What should Trump report on its 2013 income statement as
a result of the increase in fair value of the investments in 2013?
a.
$0.
b.
Unrealized loss of $15,000.
c.
Realized gain of $35,000.
d.
Unrealized gain of $35,000.
e.
None of the above

15.

Valet Corp. began operations in 2013. An analysis of Valets equity securities portfolio acquired
in 2013 shows the following totals at December 31, 2013 for trading and available-for-sale
securities:

Aggregate cost
Aggregate fair value

Trading
Securities
$90,000
70,000

Available-for-Sale
Securities
$110,000
95,000

In its 2013 income statement, how much should Valet report as an unrealized holding loss of?

16.

Santo Corporation declares and distributes a cash dividend that is a result of current earnings.
How will the receipt of those dividends affect the investment account of the investor under each
of the following accounting methods?
a.
b.
c.
d.

17.

Fair Value Method

No Effect
Increase
No Effect
Decrease

Equity Method
Decrease
Decrease
No Effect
No Effect

Ziegler Corporation purchased 25,000 shares of common stock of the Sherman Corporation for
$40 per share on January 2, 2014. Sherman Corporation had 100,000 shares of common stock
outstanding during 2015, paid cash dividends of $90,000 during 2015, and reported net income of
$300,000 for 2015. What amount should Ziegler Corporation report as revenue from investment
for 2015?

Use the following information for the next two questions: Harrison Company owns 20,000 of the 50,000
outstanding shares of Taylor, Inc. common stock. During 2015, Taylor earns $1,000,000 and pays cash
dividends of $800,000.
18.

If the beginning balance in the investment account was $625,000, what is the balance at
December 31, 2015?

19.

What should Harrison report as investment revenue for 2015?

Chapter 18

1.

The first step in the process for revenue recognition is to

a.
b.
c.
d.

2.

The third step in the process for revenue recognition is to

a.
b.
c.
d.

3.

determine the transaction price.

identify the separate performance obligations in the contract.
allocate transaction price to the separate performance obligations.
recognize revenue when each performance obligation is satisfied.

The last step in the process for revenue recognition is to

a.
b.
c.
d.

4.

determine the transaction price.

identify the contract with customers.
allocate transaction price to the separate performance obligations.
identify the separate performance obligations in the contract.

allocate transaction price to the separate performance obligations.

recognize revenue when each performance obligation is satisfied.
determine the transaction price.
identify the contract with customers.

New Age Computers manufactures and sells pagers and radio paging systems which include a
180 day warranty on product defects. It also sells an extended warranty which provides an
additional two years of protection. On May 10, it sold a paging system for $3,850 and an
extended warranty for another $1,200. The journal entry to record this transaction would include
a.
a credit to Service Revenue of $5,050.
b.
a credit to Service Revenue of $1,200
c.
a credit to Sales of $3,850 and a credit to Service Revenue of $1,200
d.
a credit to Unearned Service Revenue of $1,200.

5.

Seadrill Engineering licensed software to oil-drilling firms for 5 years. In addition to providing
the software, the company also provides consulting services and support to ensure smooth
operation of the software. The total transaction price is $350,000. Based on standalone values, the
company estimates the consulting services and support have a value of $100,000 and the software
license has a value of $250,000. Assuming the performance obligations are not interdependent,
the journal entry to record the transaction includes
a.
a credit to Sales Revenue for $250,000 and a credit to Unearned Service Revenue of
$100,000.
b.
a credit to Service Revenue of $100,000.
c.
a credit to Unearned Service Revenue of $100,000.
d.
a credit to Sales Revenue of $350,000.

6.

Entertainment Tonight, Inc. manufactures and sells stereo systems that include an assurance-type
warranty for the first 90 days. Entertainment Tonight also offers an optional extended coverage
plan under which it will repair or replace any defective part for 2 years beyond the expiration of
the assurance-type warranty. The total transaction price for the sale of the stereo system and the
extended warranty is $3,000. The standalone price of each is $2,300 and $800, respectively. The
estimated cost of the assurance-warranty is $350. The accounting for warranty will include a
a.
debit to Warranty Expense, $800.
b.
debit to Warranty Liability, $350
c.
credit to Warranty Liability, $800
d.
credit to Unearned Warranty Revenue, $800

7.

Bella Pool Company sells prefabricated pools that cost $100,000 to customers for $180,000. The
sales price includes an installation fee, which is valued at $25,000. The fair value of the pool is
$160,000. The installation is considered a separate performance obligation and is expected to take
3 months to complete. How much of the transaction price should be allocated to the pool and the
installation, respectively?

8.

On November 1, 2014, Green Valley Farm entered into a contract to buy a $75,000 harvester
from John Deere. The contract required Green Valley Farm to pay $75,000 in advance on
November 1, 2014. The harvester (cost of $55,000) was delivered on November 30, 2014. The
journal entry to record the contract on November 1, 2014 includes a
a.
credit to Accounts Receivable for $75,000.
b.
credit to Sales Revenue for $75,000.
c.
credit to Unearned Sales Revenue for $75,000.
d.
debit to Unearned Sales Revenue for $75,000.

9.

On November 1, 2014, Green Valley Farm entered into a contract to buy a $75,000 harvester
from John Deere. The contract required Green Valley Farm to pay $75,000 in advance on
November 1, 2014. The harvester (cost of $55,000) was delivered on November 30, 2014. The
journal entry to record the delivery of the equipment includes a
a.
debit to Unearned Sales Revenue for $75,000.
b.
credit to Unearned Sales Revenue for $75,000.
c.
credit to Cost of Goods Sold for $55,000.
d.
debit to Inventory for $55,000.