accounting mid term 15

True or False: The preemptive right allows stockholders the right to vote fro directors of the company

False

• Par value stock

Par value is a nominal value (usually set at a low figure) per share at the initial offering of the stock. It is not the fair market value of the stock. The common or preferred stock accounts are recorded at par value multiplied by the shares issued. The additional paid in capital account represents the excess paid for common or preferred stock beyond par value.

Treasury stock is reported

Stockholders' Equity section as a debit balance and is subtracted from retained earnings and additional paid in capital.

Dividend Policy

The type of shareholder (taxable, nontaxable, retail investor, institutional investor) the company has will have a bearing on its' dividend policy. Dividends are accrued or recorded at date of declaration, and the expense recognized at date of payment. No recording is necessary at date of record. A dividend should never be paid unless both the present and future financials justify a distribution. No distribution is ever made larger than the retained earnings balance ... due to restrictions and other economic reasons.

• Common Stock Class B

These shares are frequently used in family-owned or controlled public companies. The families maintain super voting powers. These shares are often criticized as protecting the owner's interest at the expense of shareholders return.

Lump Sum Sales

This occurs when one or more types of stock are issued at the same time and there is no specified allocated cost.

Purchase of Treasury Stock: Cost Method

Treasury account is debited for the reacquisition cost and credit to cash. It reduces retained earnings and additional paid in capital on the balance sheet.

• Incremental method

When fair market value is not determinable then use market values that are available and the balance is attributable to the stock with no market value. If no market values are available the allocation may be arbitrary

Payout Ratio =

[Cash Dividends / Net Income - Preferred Dividends]

a dividend which is a return to stockholders of a portion of their original investments is a a. liquidation dividend b. property dividend c. liability dividend d. participating dividend

a

the pre-emptive right of a common stockholder is the right to a. share proportionately in corporate assets upon liquidation b. share proportionately in any new issues of stock of the same class c. receive cash dividends before they are distributed to preferred stockholders d.exclude preferred stockholders from voting rights

b

cash dividends are paid on the basis of the number of shared a. authorized b. issued c. outstanding d outstanding less the number of treasury shares

c.

• Sale of Treasury stock is above cost

credit Paid in Capital from Treasury Stock on sale.

True or False: Treasury stock is a company's own stock that has been reacquired and retired

false

payout ratio Measures profitability

how much cash dividends are paid out to net income.

If the credit balance is fully utilized in recording the sale in the Paid in Capital account, ______ can be debited

retained earnings

Measures profitability

reveals how many dollars of net income are earned for each dollar of equity put in by the investors.

Stockholders' equity represents

the cumulative net contribution by shareholders plus the earnings of the company that have been retained. Stockholders' equity equals the difference between total assets minus total liabilities. It is not a claim to specific assets but a claim against a portion of the total assets.

• Property dividends

these are dividends paid in other asset and not cash. It maybe merchandise, real estate, investments etc. When property dividend is declared the company should first restate its asset at fair market value and recognize any gain or loss as the difference between the fair value and the carrying value of the dividend asset. Then debit retained earnings in the amount of the dividend and credit property dividend payable.

True or False: when a corporation sells treasury stock below its cost, it usually debits the difference between cost and selling price to paid-in capital from treasury stock

true

Purchase of Treasury Stock: Par or Stated Value Method

Records the transaction at par value and is a deduction from the capital stock section of the balance sheet.

• Proportional method

The fair market value of each type of share is used to determine how the total lump sum will be proportionately priced.

• Common Stock Class A

The most widely held type of stock. This stock represents the ownership interest in the company, has voting rights in the management of the company, and bears the ultimate risk of loss but also benefits in any profits the company makes. Common stock can be both voting and non-voting ... there are different classes of common stock. Common stockholders generally control the management of a company and benefit the most when the company is successful in terms of stock price appreciation and profit and dividend distribution

total stockholders' equity represents a. a claim to specific assets contributed by the owners b. the maximum amount that can be borrowed by the enterprise c. a claim against a portion of the total assets of the enterprise d. only the amount of earnings that have been retained in the business

c

when treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what accounts(s) should be debited? a. treasury stock for the par value and paid in capital in excess of par for the excess of the purchase price over the par value b. paid-in capital in excess of par for the purchase price c. treasury stock for the purchase price d treasury stock for the par value and retained earnings for the excess of the purchase price over the par value

c

• Preferred Stock

A special stock in that preferred stock holders have a preferential claim on earnings, are assured dividend payments at a stipulated rate or amount, however, do not have any voting rights or rights to share in profits beyond the stated amount or rate.

Direct costs incurred to sell stock such as underwriting costs should be accounted for as a. a reduction of additional paid in capital b. an expense of the period in which the stock is issues c. an intangible asset d. a or c.

a

which of the following represents the total number of shares that a corporation may issue under the terms of its charter a. authorized shares b. issued shares c. unissued shares d. outstanding shares

a

Preemptive rights

are rights that shareholders have to protect them from dilution of their shares should the company issue additional new shares without their knowledge and option to purchase additional shares to maintain their percentage ownership. Shares are normally transferable and can be sold in the open market or exchange

and entry is NOT made on the a. date of declaration b. date of record c. date of payment d. and entry is made on all of these dates

b

"gains" on sales of treasury stock (using the cost method) should be credited to a. paid in capital from treasure stock b. capital stock c. retained earnings d. other income

c

• Contributed (paid in) capital is made up of

capital stock and additional paid in capital accounts. It represents the total amount paid in by the shareholders for (outstanding) capital stock to be used by the company. That is, the par value per share and any discount or premium below or above par value paid.

the account problem in a lump sum issuance is the allocation of proceeds between the classes of securities. an acceptable method of allocation is the a. pro forma method b. proportional method c. incremental method d. either the proportional method or the incremental method

d

• Sale of Treasury stock is below

debit Paid in Capital from Treasury Stock on sale.

• Cash dividends

debit retained earnings and credit dividends payable account to record the accrual or declaration of a dividend.

True or False: all dividends except for liquidating dividends, reduce the total stockholders' equity of the corporation

false

True or False: companies allocate the proceeds received from a lump-sum sale of securities based on the securities par values

false

True or False: the cost method records all transactions in treasury shares at their cost and reports the treasury stock as a deduction from capital stock

false

Disclosure presentation

financials must contain: dividend and liquidation preferences, participating rights, call prices and dates, conversion or exercise prices and dates, sinking fund requirements, unusual voting rights, and significant terms of agreements to issue additional shares

Treasury stock is____an asset of the company, and therefore, does not have any voting rights, rights to earnings, dividends et cetera.

not

Stock split

requires no entry only notes to financial statement disclosure. In this situation, which is different from a stock dividend ... the par value has been changed or decreased. The SEC has ruled that if the stock distribution is 25% or more of the outstanding common stock, then a split-up should be recognized in the form of a dividend. This result is a debit to Paid in Capital instead of Retained Earnings ... no reduction of retained earnings is required.

• Retained earnings account represents

the earned capital from the undistributed earnings of the company.

If held for reissue the shares are called

treasury stock

True or False: Common stock is the residual corporate interest that bears the ultimate risks of loss

true

True or False: companies should record stock issued for services or non-cash property at either the fair value of the stock issued or the fair value of the consideration

true

True or False: dividends payable in assets of the corporation other than cash are called property dividends or dividends in kind

true

Book Value per Share =

[Common Stockholders' Equity / Outstanding Shares]

Rate of Return on Common Stock Equity =

[Net Income - Preferred Dividends/Ave. Common Stockholders Equity]

• Liquidating dividends

any dividend not based on the company's earnings is a liquidating dividend. It will result in a debit to or a reduction of paid in capital and retained earnings..

treasure shares are a. shares held as an investment by the treasurer of the corporation b. shared held as an investment of the corporation c. issued and outstanding d. issued by not outstanding shares

d

• No-Par stock - No-Par stock

has no stated par value on the stock certificate. No recognition of any discount or premium on stock sale as sale is at market, and therefore, carried on the books at issue price. Some States require no-par stock to have a minimum price per share called a stated value price.

Stockholders' Equity

section in a corporation is basically made up of retained earnings, common stock, preferred stock, additional paid-in-capital, treasury stock etc. The number, shares, and type or class of stock provides certain rights and privileges to the share holders. Shares are equal in unit value and share proportionately in profits or losses of the company, voting rights for directors, liquidation value of the company's assets, and preemptive rights on new issues of stock

• Stock dividend

when a stock dividend is declared management is capitalizing part of earnings and keeping the earnings in the company instead of paying it out in cash. No assets are distributed and the shareholders get stock on a proportionate basis. If the stock dividend is less than 20-25% of the common shares outstanding at the time of dividend declaration the fair market value of the stock issued needs to be transferred from retained earnings. Entry is merely a reclassification entry and no asset or liability account has been affected nor has the total stockholders' equity account.