Accounting Financial Chapter 11

Prior to a $4,000 stock dividend, total stockholders' equity equalled $50,000. After the stock dividend, total stockholders' equity equals _____.

$50,000

Stockable, inc. began business on January 1, by issuing 100,000 shares of $1 par value common stock and 1,000 shares of 6%, $100 par value preferred stock. Stockable declared and paid a $0.50 dividend to its common stockholders. The preferred stockholders must have received ____ per share dividend

$6

Shares outstanding equal shares ____ minus ____ shares

issued treasury

The effect of repurchasing stock using the cost method is to _____

Increase Treasury Stock Decrease stockholders' equity Decrease Assets

Dilution Solutions, Inc. repurchased 500 shares of its $2 par value common stock for $10,000. The journal entry to record this transaction includes a _____.

$10,000 credit to Cash $10,000 debit to Treasury Stock

Wyanot Company issued 1,000 shares of its 5%, $100 par value, cumulative preferred stock for $110 cash per share. The journal entry to record this transaction includes a ____.

$110,000 debit to Cash $10,000 credit to Additional Paid-in Capital - Preferred $100,000 credit to Preferred Stock

Earnings Per Share (EPS)

(net income - Preferred Dividends)/average shares of common stock outstanding

Dividends on preferred stock _____.

May be paid at a fixed rate, such as 7% Are more attractive than common stock dividends to investors who want a stable income Are paid before dividends on common stock

The entry to record the issuance of preferred stock is _____.

Similar to the issuance of common stock Increases stockholders' equity

If a business cannot pay its debts, creditors can expect the owners to pay the debts with personal assets if the business is a _____.

Sole proprietorship General partnership

Identify what is needed to calculate the P/E ratio.

Stock Price/EPS

When does the company record the dividend?

declaration date

A stock dividend causes the stock price per share to ____.

decrease

Stockholders receive a share of the corporation's profits when it distributes ______

dividends

Preferred stockholders ____.

have the right to receive dividends only in the years the board of directors declares dividends

A _____ P/E ratio indicates investors anticipate an improvement in the company's future result.

higher

Accumulated Deficit

indicates accumulated net losses is shown in parentheses on the balance sheet means that retained earnings has a debit balance

When a shareholder of Limited, Inc. sells its shares to another investor on the stock exchange Limited, Inc.'s accounting equation _____

is not affected because the corporation is separate from its owners

A current dividend preference requires that _____.

preferred dividends must be paid before any dividends are paid to common stockholders

A stock dividend

provides no economic value for current stockholders

Treasury Stock _____.

reduces total stockholders' equity is a contra-equity account is shares of stock no longer outstanding

A stock dividend causes a stockholder's percentage ownership in a company to _____.

remain the same

Dividends is closed into ______ at the end of the fiscal year.

retained earnings

The number of shares issued represents the number of shares _____

sold

Seasoned new issues are _____.

the selling of additional new shares

Stock options are expensed ____.

when granted and are recorded at the estimated cost of the options

Preferred stock is advantageous in that it ______.

Has priority over common stock when dividends are declared Has priority over common stock at liquidation

A higher ROE means _____.

-stockholders may enjoy higher returns -the company used financial leverage to its stockholder's advantage

Atomic, Inc. had 10,000 shares of $1 par value common stock outstanding prior to a 2-for-1 stock split. As a result of the stock split ______.

20,000 shares are outstanding with a $0.50 par value

Mega Corporation repurchased 1,000 shares of its $1 par value common stock for $8,000. The effect of this transaction on the accounting equation includes a(n)______.

Decrease in assets decrease in stockholders' equity

The dividend payment date is when _____.

Dividends Payable is decreased Cash is decreased

Which of the following line items amounts would be under the Retained Earnings column of stockholders' equity? Additional Pain-In Capital Net Income Stock Issuances Treasury Stock Dividends: Common Dividends: Preferred

Net Income Dividends: Common Dividends: Preferred

Similar to a stock split, a stock _____ also distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders.

dividend

A corporation _________ have a legal obligation to pay dividends.

does not

A corporation's board of directors could prefer a stock split to a stock dividend because a stock split _____.

does not reduce retained earnings, so it does not reduce the ability to declare a cash dividend in the future.

Dividends Payable is a(n) ______ account with a normal _____ balance and is initially recorded on the ______ date.

liability credit declaration

Advantages of a corporation are _____.

ownership interests are easily transferable it can raise large amounts of money by issuing stock

Large stock dividends are recorded at ____ and small stock dividends are recorded at ____

par value market value

Corporations can raise large amounts of money because ______.

shares of stock can be purchased in small amounts, so even small investors can participate

T/F A corporation exists separate and apart from its owners, which means it doesn't die when its owners die

true

Common Stock (par $1; outstanding, 530,000 shares): $530,000 Preferred stock, 8% (par $10; outstanding, 21,300 shares): 213,000 Retained Earnings: 903,000 Case A: The preferred stock is noncumulative; the total amount of 2018 dividends would be $33,000

Preferred ($10 par * 8% * 21300) Balance to Common ($33,000 - $17,040) Preferred = $17,040 Common = $15,960 Per share= (17040/21300) = .80 (15,960/530000) = .03

A cash dividend differs from a 2-for-1 stock split in that a cash dividend _____.

decreases Retained Earnings decreases current assets

A corporation is a separate _____ entity and can own assets, incur liabilities and enter into contracts.

legal

Nova, Inc. is considering declaring a $100,000 cash dividend. Nova has a cash balance of $20,000 and retained earnings balance of $100,000. Nova should _____.

not declare a cash dividend because it does not have enough cash

Treasury on the balance sheet is ______.

subtracted from total stockholders' equity

Common Stock (par $1; outstanding, 530,000 shares): $530,000 Preferred stock, 8% (par $10; outstanding, 21,300 shares): 213,000 Retained Earnings: 903,000 Case B: The preferred stock is cumulative; the total amount of 2018 dividends would be $33,000. Dividends were not in arrears prior to 2016.

Arrears ($10 *8% * 21,300 * 2 years) Preferred = 33,000 Per share: (33,000/21,300) = 1.55

Which of the following line items would be found on a statement of stockholders equity that would not be on the statement of retained earnings?

Common stock Additional Paid-In Capital treasury stock

Canton, Inc issued 10,000 shares of $1 par value common stock at $10 per share. recorded this transaction with a $100,000 debit to cash and $100,000 credit to common stock. As a result this entry?

Common stock is overstated APIC will be understated

Bank, Rupp & Baroque, Inc. began on January 1, 2018 by issuing 100,000 shares of $1 par value common stock and 1,000 shares of $50 par value, 6% cumulative preferred stock. No dividends were declared in 2018. In 2019, Bank, Rupp & Baroque declared and paid a $1.00 dividend to its common stockholders. Which of the following are true?

Dividends in arrears should be disclosed in the notes to the 2018 financial statements

Which type of investment would pay the most dividend?

Income investment

Which type of investment would retirees wanting a stable income prefer?

Income investment

______ represents the earned capital and ______ capital represents the paid-in capital.

Retained Earnings Contributed

Why might a company issue a stock dividend?

To demonstrate commitment to stockholders while conserving cash during difficult times To signal an expression of significant future earnings To lower the market price per share

Which of the following is not a reason a company would repurchase its own stock?

To increase the total stockholders' equity balance and improve the ROE

Why might a corporation want to repurchase its stock from existing stockholders?

To obtain shares from reissue to employees as part of employee stock purchase plans

Shares that were previously issued to and owed by stockholders but have been required and now held by the corporation are called _____ Stock

Treasury

No gain or losses are reported when treasury stock is reissued because GAAP does not consider transactions between a corporation and its owners to be a profit making activities?

True

Under IFRS, if the company issuing preferred stock is contractually obligated to pay dividends or to redeem the shares at a future date, then the preferred stock is classified as

a liability

If a company's EPS falls from $5 to $3, then investors may expect:

a reduction in stock price

Cumulative preferred stock is entitled to received current dividends plus "dividends in _____" before any future common dividends can be paid

arrears

The entry to record the redemption of preferred stock includes a _____.

debit to Preferred stock

Stockit, Inc. issued 100,000 shares of the 1,000,000 shares authorized. Stockit has repurchased 10,000 of its shares. The number of shares authorized represents the _____.

maximum number of shares Stockit is allowed to issue

A corporation that has a loan covenant _____.

may be required to repay the loan immediately if it violates the covenant must disclose the covenant in the notes to the financial statements

ROE relates _____.

net income to the average common stockholders' equity

When a corporate charter does not specify a legal value per share, then the stock issued is referred to as ____.

no-par value stock

The statement of _______ reports the changes in retained earnings as well as paid-in capital.

stockholders' equity

Refurbish, Inc reissued 1,000 shares of its Treasury for $10,000. Prior to reissuance, Treasury was $12,000, which included the $8,000 cost of the 1,000 shares reissued. After recording this transaction_______

$8,000 credit to Treasury Stock $2,000 credit to Additional Paid-in Capital

Common Stock (par $1; outstanding, 530,000 shares): $530,000 Preferred stock, 8% (par $10; outstanding, 21,300 shares): 213,000 Retained Earnings: 903,000 Case C- Preferred is cumulative (total amount to distribute $78,000)

Arrears ($10 * 8% * 21,300 * 2 years = 34080) = $34,080 Current Year ($213,000 * 8%) = $17,040 Balance to Common (78,000- 51,120) = $26,880 Preferred: 34,080+17040 = $51,120 Common: $26,880 Per Share: (34,080/21300) = 2.40 (26880/530000)= 0.5

The entry to record the issuance of 100 shares of 3%, $100 par value preferred stock at a price of $105 is recorded with a debit to _____.

Cash of $10,500 and credit to Preferred Stock of $10,000 and Additional Paid-in Capital-Preferred of $500

Squid Roe inc's ROE increased two percentage points to 12%. This increase may have happened because Squid Roe __________

Generated more profits than the interest incurred on its borrowed funds Replaced its 12% debt with 10% debt

Contributed capital of $1,000,000 is found in the _____ section of the ______.

Stockholders' equity; balance sheet

The statement of ________ reports the changes in retained earnings as well as paid-in capital

stockholders' equity

When a stockholder sells its shares to another person for more than the original cost the corporation _____

does not make a journal entry

An accumulated deficit means a company has _____.

accumulated more net losses than net income

An accumulated deficit means a company has ______.

accumulated more net losses than net income

The effect on the accounting equation of declaring a cash dividend includes _____.

an increase in liabilities a decrease in stockholders' equity

Common stock's par value is _____.

an insignificant amount specified in the corporate charter

Sea the World Cruises issued 400,000, $1 par values shares of the 1,000,000 shares authorized for $1,000,000. The entry to record the issuance of the stock includes ______.

credit Additional Paid-in Capital $600,000 credit Common Stock $400,000 debit Cash $1,000,000

The reacquisition of preferred stock is referred to as a redemption because the stocks are ____.

formally retired

Retained Earnings of $100,000 represent a corporations cumulative earnings _____ and is shown on the _____

kept; balance sheet and statement of retained earnings