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5 questions

ACC 101

Middlesex County College

1. Which statement correctly describes stockholders’ equity accounts?
Answer and explanation

They normally have credit balances and are permanent balance-sheet accounts.

Stockholders’ equity accounts normally carry credit balances, increase with credits, decrease with debits, and remain as permanent balance-sheet accounts.

2. A corporation issues 12,000 shares of common stock for cash at its $8 par value. What journal entry should the corporation record?
Answer and explanation

Debit Cash $96,000; credit Common Stock $96,000

The total cash received is 12,000 shares × $8 per share = $96,000. Cash increases with a debit, and Common Stock increases with an equal credit when shares are issued at par value.

3. What does the change in Jonick Company’s vertical analysis indicate about its 2019 performance relative to 2018?
Answer and explanation

Gross profit improved as a percentage of sales, but net income declined as a percentage of sales.

Cost of merchandise sold fell from 47.5% to 41.6% of sales, raising gross profit from 52.5% to 58.4%. However, net income fell from 27.9% to 24.9% of sales, partly because the gain on sale of investments declined as a percentage of sales.

4. A company resells treasury stock for $24 per share that it originally purchased for $20 per share. How should the resale be accounted for, per share?
Answer and explanation

Credit Treasury Stock $20 and Paid-in Capital from Sale of Treasury Stock $4.

Treasury Stock is credited only for its original cost. Because the resale price exceeds that cost, the $4 excess is credited to Paid-in Capital from Sale of Treasury Stock; par value and a gain in net income are not used.

5. Jonick Company reports net income of $248,000, beginning total stockholders’ equity of $2,447,000, and ending total stockholders’ equity of $2,675,000. What is the company’s return on stockholders’ equity?
Answer and explanation

9.7%

First calculate average total stockholders’ equity: ($2,447,000 + $2,675,000) ÷ 2 = $2,561,000. Then divide net income by average equity: $248,000 ÷ $2,561,000 = 9.7%.