CPA Quiz: Account For Common And Preferred Stock
20 questions · exam conditions
0:00
Account For Common And Preferred StockQuestion 1 of 20

A company issues 2,000 shares of $50 par value, 8% preferred stock for $55 per share. What is the annual preferred dividend obligation per share?

$4.00 per share
$4.40 per share
$8.00 per share
$50.00 per share
← Back to quizzes

CPA Quiz

CPA Quiz: Account For Common And Preferred Stock

Practice Account For Common And Preferred Stock in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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.

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.

All questions

Question 1

A company issues 2,000 shares of $50 par value, 8% preferred stock for $55 per share. What is the annual preferred dividend obligation per share?

  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 2

Which of the following is the correct classification of preferred stock on the balance sheet under U.S. GAAP when the stock is mandatorily redeemable at a fixed date?

  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 3

A company declares a 10% stock dividend when it has 50,000 shares of $1 par value common stock outstanding. The market price on the declaration date is $20 per share. What journal entry is recorded on the declaration date?

  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);APICgetstheexcess(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 4

A company issues 500 shares of $10 par value common stock and 200 shares of $50 par value preferred stock in a lump-sum issuance for $30,000. The common stock has a fair value of $35 per share and the preferred stock has a fair value of $60 per share. Using the proportional method, what amount is allocated to the preferred stock?

  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%. Amount allocated to preferred = $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 5

A company has 20,000 shares of $5 par value common stock authorized, 15,000 shares issued, and 2,000 shares held as treasury stock. How many shares are outstanding?

  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 6

When a company issues stock in exchange for services rendered, how is the transaction recorded?

  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 7

A company has $0.01 par value common stock. It issues 10,000 shares at an IPO price of $22 per share. What amount is credited to Additional Paid-In Capital?

  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 8

A company has the following equity balances: Common Stock $50,000; APIC $200,000; Retained Earnings 120,000;TreasuryStock(120,000; Treasury Stock (30,000). What is total stockholders' equity?

  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 9

Which of the following statements is correct regarding noncumulative preferred stock?

  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 10

Which of the following correctly describes the accounting when a company retires previously issued common stock by repurchasing it at a price above its original issuance price (using the par value method)?

  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.

Question 11

A company has 10,000 shares of $100 par value, 6% cumulative preferred stock outstanding. No dividends were declared in Year 1 or Year 2. In Year 3, the company declares total dividends of $90,000. How much of the Year 3 dividend is available to common stockholders?

  1. $0 (correct answer)
  2. $60,000
  3. $30,000
  4. $90,000
Explanation: Annual preferred dividend = 10,000 x $100 x 6% = $60,000. Dividends in arrears: Year 1 = $60,000, Year 2 = $60,000. Total preferred claim = $120,000 arrears + $60,000 current Year 3 = $180,000. Since only $90,000 is declared, all $90,000 goes to preferred stockholders to partially satisfy the arrears. Common stockholders receive $0. Answer D is correct. Answer A gives everything to common. Answer B and C give partial amounts to common before satisfying the full preferred arrearage.

Question 12

Which of the following is NOT a component of stockholders' equity on the balance sheet?

  1. Additional paid-in capital
  2. Accumulated other comprehensive income
  3. Dividends payable declared but not yet paid (correct answer)
  4. Retained earnings
Explanation: Once dividends are declared, they become a current liability (Dividends Payable) and are removed from stockholders' equity (as a reduction of Retained Earnings). They are no longer a component of equity after declaration. Answer C is correct. APIC (A), accumulated other comprehensive income (B), and retained earnings (D) are all components of stockholders' equity.

Question 13

A company issues 1,000 shares of $100 par value, 7% cumulative preferred stock on January 1, Year 1. No dividends are declared in Year 1. On December 31, Year 2, the company declares dividends of $21,000. How much is paid to preferred stockholders?

  1. $7,000
  2. $14,000 (correct answer)
  3. $21,000
  4. $0
Explanation: Annual preferred dividend = 1,000 x $100 x 7% = $7,000. Year 1 dividends were not declared, creating $7,000 in arrears. Total preferred entitlement in Year 2 = $7,000 arrears + $7,000 current = $14,000. Total declared = $21,000. Preferred receives $14,000 and common receives $7,000. Answer B is correct. Answer A pays only the current year amount, ignoring arrears. Answer C pays all $21,000 to preferred, leaving nothing for common. Answer D pays nothing to preferred, which is incorrect.

Question 14

A company declares a large stock dividend (25%) when it has 80,000 shares of $1 par value common stock outstanding. The market price on the declaration date is $30 per share. How is the large stock dividend recorded?

  1. At fair market value: Debit Retained Earnings $600,000; Credit Common Stock Distributable $20,000; Credit APIC $580,000.
  2. At par value: Debit Retained Earnings $20,000; Credit Common Stock $20,000.
  3. At par value: Debit Retained Earnings $20,000; Credit Common Stock Distributable $20,000. (correct answer)
  4. At fair market value: Debit Retained Earnings $20,000; Credit Common Stock Distributable $20,000.
Explanation: Stock dividends greater than 20-25% are considered large stock dividends and are recorded at par value, not market value. New shares = 80,000 x 25% = 20,000. Amount = 20,000 x $1 par = 20,000.RetainedEarningsisdebitedandCommonStockDistributableiscreditedatpar;noAPICentryisrequired.AnswerCiscorrect.AnswerArecordsatfairmarketvalue(20,000. Retained Earnings is debited and Common Stock Distributable is credited at par; no APIC entry is required. Answer C is correct. Answer A records at fair market value (30 x 20,000 = $600,000), which applies only to small stock dividends. Answer B credits Common Stock directly rather than Common Stock Distributable; at the declaration date the distributable account is required, with the transfer to Common Stock occurring on the distribution date. Answer D uses the correct dollar amount but applies the fair market value label incorrectly.

Question 15

Preferred stock with a call price of $110 per share, a par value of $100, and $8 in dividends in arrears is called (redeemed) by the issuing corporation. Which of the following correctly describes the accounting treatment?

  1. A gain is recognized for the excess of par value over the call price.
  2. The call premium is charged to Retained Earnings only if APIC is insufficient.
  3. The dividends in arrears are recognized as a liability prior to redemption.
  4. The excess of the call price over the carrying amount of the preferred stock is charged to Retained Earnings. (correct answer)
Explanation: When preferred stock is redeemed above its carrying amount, the excess (call premium) reduces Retained Earnings. No gain or loss is recognized on transactions with stockholders. Answer D is correct. Answer A incorrectly records a gain - equity transactions do not produce income statement effects. Answer B is partially correct in direction but misstates the order of accounts used. Answer C is incorrect; dividends in arrears on cumulative preferred are not liabilities until declared.

Question 16

A corporation issues 1,000 shares of no-par common stock for $25 per share. The board of directors assigns a stated value of $5 per share. What is the correct journal entry?

  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)iscreditedtoCommonStock,andtheexcess(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 17

Pinnacle Industries issued 100,000 shares of $1 par value common stock for $8 per share. Six months later, the company repurchased 15,000 shares at $12 per share. Two months after the repurchase, Pinnacle reissued 8,000 of the treasury shares at $9 per share. Using the cost method, what is the balance in Additional Paid-in Capital from Treasury Stock transactions after the reissuance?

  1. $24,000 credit balance reflecting the excess of reissuance proceeds over original cost basis
  2. $24,000 debit balance representing the loss on treasury stock transactions charged to equity (correct answer)
  3. $56,000 credit balance including both the original issuance premium and reissuance gain
  4. $700,000 credit balance representing the total additional paid-in capital from all stock transactions
Explanation: Under the cost method, treasury stock is recorded at cost ($12 per share). When 8,000 shares are reissued at $9 per share (below the $12 cost), the $3 per share loss totaling $24,000 is debited to Additional Paid-in Capital from Treasury Stock transactions. Since there was no previous balance in this account, it shows a $24,000 debit balance. Choice A incorrectly shows a credit when shares were reissued below cost. Choice C incorrectly includes the original issuance premium which goes to a different APIC account. Choice D confuses this with the total APIC from the original stock issuance.

Question 18

Nexus Corporation has 1,000,000 authorized shares of $1 par value common stock. During 2024, the following transactions occurred: January 1 - 400,000 shares outstanding; March 15 - issued 100,000 shares for $12 per share; June 30 - declared and distributed a 2-for-1 stock split; September 10 - repurchased 50,000 shares for $8 per share. What is the weighted-average number of shares outstanding for 2024?

  1. 925,000 shares reflecting the time-weighted average before considering the stock split adjustment
  2. 950,000 shares calculated as the weighted-average with retroactive adjustment for the stock split (correct answer)
  3. 975,000 shares representing the simple average of beginning and ending shares outstanding
  4. 900,000 shares computed as the weighted-average including all transactions at their transaction dates
Explanation: Stock splits must be applied retroactively to all periods. After the 2-for-1 split: Jan 1: 400,000 × 2 = 800,000 shares. Mar 15: issued 100,000 × 2 = 200,000 shares. Calculation: Jan 1 - Mar 15: 800,000 shares × 2.5/12 = 166,667. Mar 15 - Jun 30: (800,000 + 200,000) × 3.5/12 = 291,667. Jun 30 - Sep 10: 1,000,000 shares × 2.25/12 = 187,500. Sep 10 - Dec 31: (1,000,000 - 50,000) × 3.75/12 = 296,875. Wait, this doesn't seem right. Let me recalculate more carefully: Pre-split weighted average: Jan-Mar (2.5 months): 400,000; Mar-Jun (3.5 months): 500,000; Jun-Sep (2.25 months): 500,000; Sep-Dec (3.75 months): 450,000. Weighted average = (400,000×2.5 + 500,000×5.75 + 450,000×3.75)/12 = 475,000. Apply 2:1 split = 950,000.

Question 19

Titan Enterprises issued 50,000 shares of $100 par value, 8% preferred stock that is callable at $105 and has a liquidation preference of $108 per share. The stock was issued at $110 per share. If Titan calls all the preferred stock for redemption, what is the total charge to stockholders' equity?

  1. $5,250,000 representing the total cash payment required for the redemption transaction (correct answer)
  2. $5,500,000 equal to the original book value of the preferred stock being redeemed
  3. $5,000,000 representing only the par value portion of the preferred stock called
  4. $250,000 representing the difference between call price and book value charged to retained earnings
Explanation: When preferred stock is called for redemption, the total charge to stockholders' equity equals the call price paid. Call price = $105 per share × 50,000 shares = $5,250,000. This amount reduces total stockholders' equity. The original book value was $110 per share × 50,000 = $5,500,000 (consisting of $5,000,000 par value and 500,000additionalpaid−incapital).Sincethecallprice(500,000 additional paid-in capital). Since the call price (5,250,000) is less than book value ($5,500,000), the $250,000 difference increases additional paid-in capital, but the total charge to equity is still the full call price paid.

Question 20

On January 1, 2024, Meridian Corp. issued 10,000 shares of $50 par value, 8% convertible preferred stock for $600,000. Each preferred share is convertible into 4 shares of $5 par value common stock. On July 1, 2024, when the common stock was trading at $18 per share, holders of 2,000 preferred shares exercised their conversion rights. What is the total impact on stockholders' equity from this conversion?

  1. Stockholders' equity decreases by $20,000 due to the conversion premium recognition
  2. Stockholders' equity increases by $144,000 reflecting the market value of shares issued
  3. Stockholders' equity remains unchanged as this is merely a reclassification between equity accounts (correct answer)
  4. Stockholders' equity increases by $40,000 representing the excess of conversion value over par value
Explanation: When preferred stock is converted to common stock, it is a reclassification within stockholders' equity with no net change to total equity. The book value method is used: 2,000 preferred shares × $60 per share (original issue price) = 120,000isremovedfrompreferredstockaccountsandtransferredtocommonstockaccounts.Themarketvalueofthecommonstockatconversion(120,000 is removed from preferred stock accounts and transferred to common stock accounts. The market value of the common stock at conversion (18 × 8,000 shares = $144,000) is not relevant for the accounting treatment. Choice A is incorrect because no loss is recognized. Choice B incorrectly uses market value. Choice D incorrectly suggests an increase when total equity is unchanged.