CPA Financial Accounting and Reporting Far Quiz: Account For Common And Preferred Stock

What this quiz covers

This quiz focuses on Account For Common And Preferred Stock, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. Debit Cash $90,000; Credit Common Stock$10,000; Credit Additional Paid-In Capital $80,000. (correct answer)
2. Debit Cash $90,000; Credit Common Stock$90,000.
3. Debit Cash $90,000; Credit Common Stock$10,000; Credit Retained Earnings $80,000.
4. Debit Cash $10,000; Credit Common Stock$10,000.

Explanation: When stock is issued above par, cash is debited for total proceeds (5,000 x $18 =$90,000), Common Stock is credited at par value (5,000 x $2 =$10,000), and Additional Paid-In Capital (APIC) is credited for the excess ($90,000 -$10,000 = $80,000). Answer A is correct. Answer B credits the full proceeds to Common Stock, overstating the par value account. Answer C credits Retained Earnings instead of APIC. Answer D records only the par value component.

Question 2

1. Preferred stockholders may vote on all corporate matters in proportion to their ownership percentage.
2. After common stockholders receive a specified dividend, preferred stockholders share in additional dividends beyond their stated rate. (correct answer)
3. Preferred stockholders receive dividends only if declared; unpaid dividends do not accumulate.
4. Preferred stock may be converted into common stock at the holder's option.

Explanation: Participating preferred stock allows preferred holders to share in additional dividends beyond their stated rate, once common stockholders have received a specified return. Answer B is correct. Answer A describes voting rights, not participation features. Answer C describes noncumulative preferred stock. Answer D describes convertible preferred stock.

Question 3

1. Debit Cash $25,000; Credit Common Stock$25,000.
2. Debit Cash $25,000; Credit Common Stock$5,000; Credit Retained Earnings $20,000.
3. Debit Cash $25,000; Credit Common Stock$5,000; Credit Additional Paid-In Capital $20,000. (correct answer)
4. Debit Cash $5,000; Credit Common Stock$5,000.

Explanation: For no-par stock with an assigned stated value, the stated value ($5 x 1,000 =$5,000) is credited to Common Stock, and the excess ($25,000 -$5,000 = $20,000) is credited to Additional Paid-In Capital. Answer C is correct. Answer A credits the full proceeds to Common Stock. Answer B credits Retained Earnings instead of APIC. Answer D records only the stated value amount.

Question 4

1. $4.00 per share (correct answer)
2. $4.40 per share
3. $8.00 per share
4. $50.00 per share

Explanation: The dividend rate on preferred stock is applied to par value, not the issuance price. Annual dividend = $50 par x 8$4.00 per share. Answer A is correct. Answer B applies 8% to the $55 issuance price. Answer C uses the rate without applying it to par value. Answer D confuses par value with the dividend amount.

Question 5

1. Permanent equity, presented after common stock.
2. Temporary equity, presented between liabilities and permanent equity.
3. A financial liability, presented in the liabilities section. (correct answer)
4. Mezzanine equity, always disclosed separately in the equity section.

Explanation: Under ASC 480, mandatorily redeemable preferred stock must be classified as a liability because the issuer is obligated to transfer assets (cash) at a fixed date. Answer C is correct. Answer A places it in permanent equity, which is incorrect for mandatorily redeemable instruments. Answer B describes mezzanine treatment used for conditionally redeemable stock. Answer D describes mezzanine equity, which applies to stock that is redeemable only upon certain contingent events, not mandatory redemption.

Question 6

1. Debit Retained Earnings $5,000; Credit Common Stock Distributable$5,000.
2. Debit Retained Earnings $100,000; Credit Common Stock Distributable$5,000; Credit Additional Paid-In Capital $95,000. (correct answer)
3. Debit Retained Earnings $100,000; Credit Common Stock$5,000; Credit Additional Paid-In Capital $95,000.
4. Debit Retained Earnings $50,000; Credit Common Stock Distributable$5,000; Credit Additional Paid-In Capital $45,000.

Explanation: A stock dividend of 10% or less (small stock dividend) is recorded at fair market value. New shares = 50,000 x 10% = 5,000. FMV = 5,000 x $20 =$100,000 debit to Retained Earnings. Common Stock Distributable is credited at par (5,000 x $1 =$5,000); APIC gets the excess ($95,000). Answer B is correct. Answer A uses only par value. Answer C credits Common Stock directly rather than Common Stock Distributable at declaration. Answer D uses$10 per share instead of $20.

Question 7

1. $10,000
2. $11,500
3. $12,203 (correct answer)
4. $15,000

Explanation: Total fair values: Common = 500 x $35 =$17,500; Preferred = 200 x $60 =$12,000; Total = $29,500. Preferred proportion =$12,000 / $29,500 = 40.68$30,000 x 40.68% = $12,203. Answer C is correct. Answer A uses par value. Answer B uses an incorrect proportion. Answer D allocates the full par-based amount without applying proportional allocation.

Question 8

1. A gain or loss is recognized based on the difference between the fair value of common stock issued and the carrying amount of preferred stock converted.
2. No gain or loss is recognized; the carrying amount of the preferred stock is reclassified to common stock and APIC. (correct answer)
3. The conversion is recorded at the fair value of the common stock issued, with any excess charged to Retained Earnings.
4. The preferred stock is retired and a new common stock issuance is recorded at par.

Explanation: Under the book value method for conversion of preferred stock, the carrying amount of the preferred stock (including any APIC related to the preferred) is simply reclassified to Common Stock (at par) and APIC. No gain or loss is recognized because this is an equity-to-equity transaction. Answer B is correct. Answer A recognizes a gain or loss, which is not permitted for transactions among stockholders. Answer C uses fair value, which is the market value method rather than the book value method. Answer D ignores APIC and treats it as a new issuance.

Question 9

1. 13,000 (correct answer)
2. 15,000
3. 17,000
4. 20,000

Explanation: Shares outstanding = Shares issued - Treasury shares = 15,000 - 2,000 = 13,000. Answer A is correct. Answer D is authorized shares, which represents the maximum shares the company is permitted to issue, not the shares currently held by investors. Answer B is issued shares, which includes treasury shares still held by the company. Answer C adds treasury shares to issued shares instead of subtracting them.

Question 10

1. Preferred stockholders generally have priority over common stockholders in dividend distributions and in liquidation. (correct answer)
2. Preferred stockholders always have greater voting rights than common stockholders.
3. Preferred stock always carries a mandatory redemption feature.
4. Preferred stock dividends are tax-deductible by the issuing corporation.

Explanation: The defining characteristic of preferred stock is its preferential treatment: preferred stockholders receive dividends before common stockholders and have priority claims on assets in liquidation. Answer A is correct. Answer B is incorrect - preferred stockholders typically have limited or no voting rights. Answer C is incorrect - mandatory redemption is a feature of some preferred stock but not all. Answer D is incorrect - dividends on preferred stock are not tax-deductible (unlike interest); this is a key distinction between debt and equity financing.

Question 11

1. Retained Earnings is reduced by the fair market value of the new shares.
2. Retained Earnings is reduced by the par value of the new shares, with a corresponding credit to Common Stock. (correct answer)
3. No journal entry is required; only a memorandum entry is made.
4. APIC is increased for the excess of market value over par value of the new shares.

Explanation: A stock split effected in the form of a stock dividend requires a formal journal entry: Retained Earnings is debited at par value of the new shares and Common Stock is credited. This differs from a conventional stock split (memorandum only) and from a small stock dividend (recorded at fair value). Answer B is correct. Answer A uses fair market value, which applies to small stock dividends. Answer C describes a conventional stock split, not one effected as a dividend. Answer D incorrectly increases APIC.

Question 12

1. At the par value of the shares issued, debiting the appropriate expense account.
2. At the book value of the services received, with no adjustment for market value.
3. No entry is required until cash is received.
4. At the fair value of the services received or the fair value of the stock issued, whichever is more reliably measurable. (correct answer)

Explanation: Under ASC 505, when stock is issued for noncash consideration such as services, the transaction is recorded at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Answer D is correct. Answer A uses par value, which understates the transaction. Answer B uses book value, which may not reflect fair value. Answer C defers recognition until cash is received, which violates accrual accounting.

Question 13

1. $220,000
2. $219,900 (correct answer)
3. $200,000
4. $100

Explanation: Total proceeds = 10,000 x $22 =$220,000. Common Stock at par = 10,000 x $0.01 =$100. APIC = $220,000 -$100 = $219,900. Answer B is correct. Answer A credits the full proceeds to APIC, ignoring the par value credit to Common Stock. Answer C uses$20 per share as the APIC amount with no basis given. Answer D only records the par value credit.

Question 14

1. $400,000
2. $370,000
3. $350,000
4. $340,000 (correct answer)

Explanation: Total stockholders' equity = Common Stock + APIC + Retained Earnings - Treasury Stock = $50,000 +$200,000 + $120,000 -$30,000 = $340,000. Answer D is correct. Answer A sums all four without deducting Treasury Stock. Answer B deducts only$30,000 from $400,000 incorrectly. Answer C uses$350,000, omitting the Treasury Stock deduction from a different subtotal.

Question 15

1. A cash dividend
2. A property dividend
3. A liquidating dividend
4. A small stock dividend (correct answer)

Explanation: A small stock dividend reduces Retained Earnings (debited at fair market value) and increases Common Stock Distributable and APIC by the same total. The net effect on total stockholders' equity is zero - it is a reclassification within equity. Answer D is correct. Cash dividends (A) and property dividends (B) reduce total stockholders' equity by distributing assets. A liquidating dividend (C) reduces paid-in capital and also reduces total equity.

Question 16

1. Total stockholders' equity is unaffected because the debit to cash offsets the credit to equity.
2. Total stockholders' equity decreases by the par value of shares issued.
3. Total stockholders' equity increases only by the par value of the shares issued.
4. Total stockholders' equity increases by the full proceeds received from the issuance. (correct answer)

Explanation: When a company issues common stock, it receives cash and credits equity components (Common Stock at par and APIC for the excess). Total stockholders' equity increases by the full proceeds received. Answer D is correct. Answer A confuses the balance sheet equation - issuing stock increases both assets (cash) and equity simultaneously. Answer B counts only par value. Answer C also counts only par value, ignoring APIC.

Question 17

1. Par value decreases to $2 per share; total par value remains unchanged at$600,000. (correct answer)
2. Par value remains $6 per share; total par value increases to$1,800,000.
3. Par value decreases to $2 per share; total par value decreases to$200,000.
4. Par value decreases to $2 per share; total par value increases to$1,800,000.

Explanation: In a stock split, the number of shares increases proportionally and par value per share decreases proportionally. After a 3-for-1 split: shares = 300,000, par = $6 / 3 =$2. Total par value = 300,000 x $2 =$600,000, unchanged. No journal entry is required. Answer A is correct. Answer B does not adjust par value. Answer C reduces total par value incorrectly. Answer D increases total par value, which does not occur in a stock split.

Question 18

1. Dividends not declared in a given year accumulate and must be paid before any common dividend.
2. The stock must be redeemed by the issuer within a specified period.
3. Noncumulative preferred stockholders have the same voting rights as common stockholders.
4. If dividends are not declared in a given year, preferred stockholders lose the right to that year's dividend permanently. (correct answer)

Explanation: Noncumulative preferred stock does not carry forward unpaid dividends. If the board does not declare a dividend in a given year, preferred stockholders forfeit that year's dividend permanently. Answer D is correct. Answer A describes cumulative preferred stock. Answer B describes redeemable preferred stock. Answer C is incorrect; preferred stockholders typically have limited or no voting rights unless dividends are in arrears.

Question 19

1. Secured creditors, unsecured creditors, preferred stockholders, common stockholders. (correct answer)
2. Preferred stockholders, secured creditors, unsecured creditors, common stockholders.
3. Secured creditors, preferred stockholders, unsecured creditors, common stockholders.
4. Common stockholders, preferred stockholders, unsecured creditors, secured creditors.

Explanation: In liquidation, the priority of claims is: (1) secured creditors (up to the value of their collateral), (2) unsecured creditors (including unsecured portions of secured debt), (3) preferred stockholders, (4) common stockholders. Answer A is correct. Answers B and C elevate preferred stockholders above unsecured creditors, which is incorrect. Answer D inverts the priority order.

Question 20

1. A loss is recognized on the income statement for the excess paid over the original issuance price.
2. APIC is credited for any excess paid above par value.
3. Common Stock is debited at par, APIC is debited for the original premium, and any remaining excess is charged to Retained Earnings. (correct answer)
4. The entire repurchase price is debited to Treasury Stock.

Explanation: Under the par value method for retirement of stock, Common Stock is debited at par value, APIC is debited for the original premium received at issuance, and any excess of repurchase price over original issuance price is charged to Retained Earnings. No gain or loss is recorded on the income statement. Answer C is correct. Answer A records a loss, which is not permitted for equity transactions. Answer B credits rather than debits APIC. Answer D describes the cost method for treasury stock, not retirement.