Goodwin Enterprises had a gross profit of $2,500,000 for the year. Operating expenses and interest expense incurred

Goodwin Enterprises had a gross profit of $2,500,000 for the year. Operating expenses and interest expense incurred in that same year were $595,000 and $362,000, respectively. Goodwin had 200,000 shares of common stock and 180,000 shares of preferred stock outstanding. Management declared a $2.50 dividend per share on the common and a $1.50 dividend per share on the preferred. Securities purchased at a cost of $37,500 in a previous year were resold at a price of $50,500. Compute the taxable income and the resulting tax liability for Goodwin Enterprises for the year.

Use the following tax rates:

                 Income                   Tax rate

              $0-$50,000                     15%

        $50,001-$75,000                25%

       $75,001-$100,000               34%

      $100,001-$335,000              39%

           over $335,001                  34%

Answer: 

Gross profit                    $2,500,000

Operating expenses        (595,000)

Interest expense               (362,000)

Income before tax         $1,543,000

Add: Gain on sales              13,000

Taxable Income             $1,556,000

        Income          Marginal Tax Rate             Tax Liability

       $50,000       ×                 15%                                   $7,500

       $25,000       ×                 25%                                   $6,250

       $25,000       ×                 34%                                   $8,500

     $235,000       ×                 39%                                $91,650

  $1,221,000       ×                 34%                              $415,140

  $1,556,000                                                                $529,040

By design, the marginal and the average tax rates are the same, 34%, for corporate incomes between $335,000 and $10,000,000.

A company issued 1,000 shares of $1 par value preferred stock for $5 per share. What is true about the journal entry to record the issuance?

A) Debit Preferred Stock $5,000.

B) Credit Cash $5,000.

C) Credit Preferred Stock $5,000.

D) Credit Additional Paid-In Capital $4,000.

Answer: D

Which of the following has the lowest expected return to the investor?

A) Bonds.

B) Preferred Stock.

C) Common Stock.

D) They all have similar expected returns.

Answer: A

Which of the following is not a potential feature of preferred stock?

A) Convertible.

B) Redeemable.

C) Cumulative.

D) They all are potential features of preferred stock.

Answer: D

Hayes Corporation issues 100 shares of its $1 par value common stock for $15 per share. The entry to record the issuance will not include a:

A) Debit to Cash $1,500.

B) Credit to Additional Paid-In Capital $1,400.

C) Credit to Common Stock of $100.

D) All of the other answer choices are correct.

Answer: D

Which of the following is the most likely to have voting rights?

A) Common Stock.

B) Preferred Stock.

C) Bonds.

D) They all have similar voting rights.

Answer: A

Preferred stock:

A) Is always recorded as a liability.

B) Is always recorded as part of stockholders' equity.

C) Can have features of both liabilities and stockholders' equity.

D) Is not included in either liabilities or stockholders' equity.

Answer: C

In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator

In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?

a. Annual preferred dividend
b. Annual preferred dividend times (one minus the income tax rate)
c. Annual preferred dividend times the income tax rate
d. Annual preferred dividend divided by the income tax rate


Answer: Annual preferred dividend

In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are

a. weighted by the number of days outstanding.
b. weighted by the number of months outstanding.
c. considered outstanding at the beginning of the year.
d. considered outstanding at the beginning of the earliest year reported.


Answer: considered outstanding at the beginning of the earliest year reported

In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the

a. preferred dividends in arrears.
b. preferred dividends in arrears times (one minus the income tax rate).
c. annual preferred dividend times (one minus the income tax rate).
d. none of these.


Answer: none of these

The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount

The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be

a. reflected currently in income, but not as an extraordinary item.
b. reflected currently in income as an extraordinary item.
c. treated as a prior period adjustment.
d. treated as a direct reduction of retained earnings.


Answer: treated as a direct reduction of retained earnings.

The conversion of preferred stock may be recorded by the

a. incremental method.
b. book value method.
c. market value method.
d. par value method.


Answer: book value method.

When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited to

a. additional paid-in capital from stock warrants.
b. retained earnings.
c. a liability account.
d. premium on bonds payable.


Answer: premium on bonds payable

Younger Company has outstanding both common stock and nonparticipating, non-cumulative preferred stock

Younger Company has outstanding both common stock and nonparticipating, non-cumulative preferred stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common stock is unaffected by

a. the declaration of a stock dividend on preferred payable in preferred stock when the market price of the preferred is equal to its par value.
b. the declaration of a stock dividend on common stock payable in common stock when the market price of the common is equal to its par value.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2-for-1 split of the common stock.


Answer: the payment of a previously declared cash dividend on the common stock

How should cumulative preferred dividends in arrears be shown in a corporation's statement of financial position?

a. Note disclosure
b. Increase in stockholders' equity
c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within the year or operating cycle, and increase in long-term liabilities for the balance


Answer: Note disclosure

Assume common stock is the only class of stock outstanding in the Manley Corporation. Total stockholders' equity divided by the number of common stock shares outstanding is called

a. book value per share.
b. par value per share.
c. stated value per share.
d. market value per share.


Answer: book value per share