Ch. 15 End of Chapter Practice

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The following dividends reduce total stockholders' equity

Liquidating dividends; Cash dividends.

Which of the following best describes a possible result of treasury stock transactions by a corporation?

May decrease but not increase retained earnings. Treasury stock transactions by a corporation may decrease but not increase retained earnings.

Preferred stock has no voting rights.

True, in exchange for other preferences, preferred stockholders give up their voting rights

At the date of declaration of a large common stock dividend, the entry should include

a debit to Retained Earnings; At the date of declaration of a large common stock dividend, the entry should include a debit to Retained Earnings.

Cumulative preferred dividends in arrears should be shown in a corporation's financial statements as

a footnote

All of the following statements are true regarding preferred stock except:

a preference as to dividends assures the payment of dividends. A preference as to dividends merely assures that the corporation must pay the stated dividend rate or amount applicable to the preferred stock before paying any dividends on the common stock. It does not assure the payment of dividends. This is the untrue statement.

Treasury stock is classified on the balance sheet as an asset.

False; Treasury stock is a contra-stockholders' equity account, not an asset, on the balance sheet.

Cash dividends are paid on the basis of the number of shares

Outstanding; Dividends are paid on the basis of issued shares less treasury shares (or outstanding shares).

Jackson Corporation issued a 100% stock dividend of its common stock, which had a par value of $.01, and a market value of $123 before the dividend and $62 after the dividend. At what amount should retained earnings be capitalized for the additional shares issued?

Par value; Retained earnings is reduced by an amount equal to the number of shares issued times the par value per share since the stock dividend is considered a large stock dividend.

Which of the following dividends does not reduce total stockholders' equity?

Stock dividends

The residual interest in a corporation belongs to

the common stockholders; The residual interest in a corporation belongs to the common stockholders.

Terpsichore Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock and 200,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. No dividends were paid in 2016. In 2017, $75,000 of dividends are declared and paid. If the preferred stock is nonparticipating, what are the dividends received by the preferred stockholders in 2017?

$10,000. The annual preferred dividend is ($100 par value x 5% = $5 per share X 1,000 shares outstanding) =$5,000, so dividends in arrears at 12/31/2016 would be $5,000. 2017 preferred dividends would be $5,000 dividends in arrears from 2016 + $5,000 Annual preferred dividends for 2017 = $10,000 Preferred stockholders' dividends received in 2017.

In every corporation the one class of stock that represents the basic ownership interest is called

Common stock; the basic ownership of a corporation is represented by common stock

Stock splits increase total stockholders' equity.

False; Stock splits increase the number of shares issued and outstanding and reduce the par or stated value per share. But they do not affect the total amount of stockholders' equity.

Which of the following features of preferred stock makes the security more like debt than an equity instrument?

Redeemable; Redeemable preferred stock is more like debt than the other choices.

The rate of return on common stock equity is computed by dividing:

net income less preferred dividends by average common stockholders' equity.

Which of the following statements related to dividends is incorrect?

Dividends must be paid in the period declared. The payment of a dividend does not have to be in the same period as it was declared. Thus, the incorrect statement is that dividends must paid in the period declared.

Additional paid-in capital is not affected by the issuance of:

No-par stock; the issuance of no-par stock has no effect on additional paid-in capital. The issuance of no par with a stated value, par value and preferred stock may all affect additional paid-in capital at issuance.

Which of the following type of stock will not increase Additional Paid-in Capital when issued?

No-par value stock; No-par value stock does not increase Additional Paid-in Capital because there is no excess over and above a par or stated value to be recorded. The issuance of par value, no par with a stated value, and preferred stock may all increase additional paid-in capital at issuance.

Gulfport Corporation was organized in January 2017 with authorized capital of $.0001 par value common stock. On February 1, 2017, shares were issued at par for cash. On March 1, 2017, the corporation's attorney accepted 5,000 shares of common stock in settlement for legal services with a fair value of $25,250. Additional paid-in capital would increase on 2/1/2017: 1) Yes 2) Yes 3) No 4) No 3/1/2017: 1) No 2) Yes 3) No 4) Yes

4; The first issuance of stock is sold at par so no additional paid-in capital is recorded. The attorney accepted the stock at ($25,250 / 5,000 shares) = $5.05, a value greater than par, so additional paid-in capital is recorded.

Blowing Rock Inc. has 5,000 shares of 5%, $100 par value, cumulative preferred stock and 30,000 shares of $1 par value common stock outstanding at December 31, 2017. There were no dividends declared in 2015. The board of directors declares and pays a $45,000 dividend in 2016 and in 2017. What is the amount of dividends received by the common stockholders in 2017?

$15,000 The annual preferred dividend is ($100 par value x 5% = $5 per share X 5,000 shares) = $25,000. The $45,000 dividend payment in 2016 consists of $25,000 annual preferred dividend from 2015 and $20,000 of the $25,000 of the 2016 annual preferred dividend and would leave $5,000 in arrears. In 2017, the preferred shareholders would get $30,000, ($5,000 in arrears + $25,000 annual preferred dividend for 2017), and the common shareholders would get $15,000 = ($45,000 total declared/paid dividend - $30,000 for the 2017 annual preferred dividend).

Camden Inc. has 2,000 shares of 5%, $100 par value, cumulative preferred stock and 200,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. No dividends were paid in 2016. In 2017, $85,000 of dividends are declared and paid. If the preferred stock is nonparticipating, what are the dividends received by the preferred stockholders in 2017?

$20,000. The annual preferred dividend is ($100 par value x 5% = $5 per share X 2,000 shares outstanding) = $10,000; so dividends in arrears at 12/31/2016 would be $10,000. 2017 preferred dividends would be $10,000 Dividends in arrears from 2016 + $10,000 Annual preferred dividend for 2017 = $20,000 Preferred stockholders' dividends received in 2017.

Presented below is information related to Polaris Corporation: Common Stock, $1 par $10,350,000 Paid-in Capital in Excess of Par—Common Stock 6,520,000 Paid-in Capital from Treasury Stock 400,000 Retained Earnings 9,543,000 Treasury Common Stock (at cost) 695,000 The total stockholders' equity of Polaris Corporation is

$26,118,000. Common Stock, $10,350,000 + Paid-in Capital in Excess of Par - Common Stock, $6,520,000 + Paid-in Capital from Treasury Stock, $400,000 + Retained Earnings, $9,543,000 - Treasury Stock, $695,000 = $26,118,000, Total Stockholders' Equity.

McCaffrey Corporation owned 15,000 shares of Harper Corporation's $5 par value common stock. These shares were purchased in 2015 for $326,000. On May 4, 2017, McCaffrey declared a property dividend of one share of Harper for every twenty shares of McCaffrey stock held by a stockholder. On that date, when the market price of Harper was $34 per share, there were 280,000 shares of McCaffrey outstanding. What net reduction in retained earnings would result from this property dividend?

$304,220; The fair value of the shares distributed is: 280,000 McCaffrey shares / 20 = 14,000 shares of Harper issued, times $34 current market price equals $476,000. Retained earnings is increased by the unrealized gain of $150,000 ($476,000-$326,000) and decreased by the fair value of the shares distributed for a net reduction of $326,000.

Durango Inc. had net income for 2017 of $2,120,000 and earnings per share on common stock of $5. Included in the net income was $300,000 of bond interest expense related to its long-term debt. The income tax rate for 2017 was 30%. Dividends on preferred stock were $400,000. The payout ratio on common stock was 25%. What were the dividends for common stock in 2017?

$430,000. ($2,120,000 net income - $400,000 P/S dividends) X 25% payout ratio equals $430,000 in dividends for common stock.

Duszynski Company issues 20,000 shares of its $0.50 par value common stock having a market value of $25 per share and 6,000 shares of its $25 par value preferred stock having a market value of $50 per share for a lump sum of $750,000. The proceeds allocated to the common stock is

$468,750; Using the proportional method, the proceeds of the issuance are allocated on a proportional basis. First the fair value of the commons shares is determined as $500,000 (20,000 shares x $25 market value. Then the fair value of the preferred shares is determined as $300,000 (6,000 shares x $50 market value). [$500,000 fair value of common shares/ $800,000 ($500,000 fair value of common shares + $300,000 fair value of preferred shares)] X $750,000 issuance proceeds= $468,750 proceeds allocated to common shares.

Hise Inc., has 4,000 shares of 9%, $100 par value, cumulative preferred stock and 200,000 shares of $1 par value common stock outstanding at December 31, 2017, and December 31, 2016. The board of directors declared and paid a $25,000 dividend in 2016. In 2017, $74,000 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2017?

$47,000 The annual preferred dividend is ($9 X 4,000) =$36,000 so dividends in arrears at 12/31/2016 would be $11,000 (Annual preferred dividend, $36,000 - Declared dividend 2016, $25,000). The 2017 preferred dividends would be: Dividends in arrears from 2016, $11,000 + 2017 Annual preferred dividends, $36,000 = $47,000, Preferred dividends for 2017.

Presented below is information related to Schoenthaler Corporation: Common Stock , $5 par $1,100,000 Paid-in Capital in Excess of Par - Common Stock. 400,000 Preferred 5 ½% Stock, $100 par 1,500,000 Paid-in Capital in Excess of Par—Preferred Stock. 500,000 Retained Earnings 2,000,000 Paid-in Capital from Treasury Stock 150,000 The total stockholders' equity of Schoenthaler Corporation is

$5,650,000; Total stockholders' equity is (Common Stock, $1,100,000 + Paid-in Capital in Excess of Par - Common Stock, $400,000 + Preferred Stock, $1,500,000 + Paid-in Capital in Excess of Par-Preferred Stock, $500,000 + Retained Earnings, $2,000,000 + Paid-in Capital from Treasury Stock, $150,000) = $5,650,000.

Presented below is information related to Kaenzig Corporation: Common Stock , $1 par $2,100,000 Paid-in Capital in Excess of Par - Common Stock 550,000 Preferred 8 ½% Stock, $50 par 1,700,000 Paid-in Capital in Excess of Par—Preferred Stock 950,000 Retained Earnings 2,350,000 Treasury Common Stock (at cost) 250,000 The total stockholders' equity of Kaenzig Corporation is

$7,400,000; Total stockholders' equity is (Common Stock, $2,100,000 + Paid-in Capital in Excess of Par-Common Stock, $550,000 + Preferred Stock, $1,700,000 + Paid-in Capital in Excess of Par-Preferred Stock, $950,000 + Retained Earnings, $2,350,000 - Treasury Stock, $250,000) = $7,400,000.

On January 1, 2017, Vancleave Corporation had 110,000 shares of its $.001 par value common stock outstanding. On November 27, when the market price of the stock was $8, the corporation declared a 10% stock dividend to be issued to stockholders of record on December 28, 2017. What was the impact of the 10% stock dividend on the balance of the retained earnings account?

$88,000 decrease; The amount transferred from retained earnings in a small stock dividend is based on the fair value of the stock: (110,000 original shares X .10 stock dividend) = 11,000 stock dividend shares X $8 market price = $88,000.

The type of preferred stock that would generate a dividend in arrears is:

Cumulative preferred stock; Any passed dividend on cumulative preferred stock constitutes a dividend in arrears.

On October 31, 2017, Lexington Corp. declared and issued a 12% common stock dividend. Prior to this dividend, Lexington had 302,000 shares of $.001 par value common stock issued and outstanding. The fair value of Lexington's common stock was $16.75 per share on October 31, 2017. As a result of this stock dividend, the company's total stockholders' equity

Did not change; As a result of this stock dividend, Lexington's total stockholders' equity did not change.

The following statements related to dividends is correct

Distributions to owners must be in compliance with the state laws; Dividends must be declared by the Board of Directors; Before declaring a dividend, management must consider availability of funds to pay the dividend.

Treasury stock sold for less than its cost decreases net income.

False; The excess of cost of treasury stock over proceeds is debited to Paid-in Capital from Treasury Stock to the extent that the account has a sufficient balance. If there is not a sufficient balance in the Paid-in Capital from Treasury Stock, then any remaining amount is then debited to Retained Earnings, which reduces the balance in the Retained Earnings account, not net income.

Which of the following country systems of finance have relied more heavily on debt financing, interlocking stock ownership, banker/directors, and worker/shareholder rights?

Japan and Germany; The German & Japanese systems have relied more on debt financing, interlocking stock ownership, banker/directors, and worker/shareholder rights than the U.S and British systems.

Which one of the following is not a right of common stockholders?

To share proportionately in all management decisions. Common stockholders do not have the right to share in all management decisions.

The following are rights of common stockholders

To share proportionately in profits and losses; To share proportionately in corporate assets upon liquidation; To share proportionately in any new issues of stock of the same class.

On September 14, 2017, Gayot Company reacquired 12,000 shares of its $1 par value common stock for $40 per share. Gayot uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit

Treasury Stock for $480,000. Treasury Stock is debited for the cost of the stock (not for par value): 12,000 shares X $40 = $480,000.

Redeemable preferred stock should be classified as a liability on the balance sheet.

True; FASB requires redeemable preferred stock to be listed as a liability on the balance sheet.

All of the following statements are true regarding preferred stock:

a company often issues preferred stock instead of debt, because of a high debt-to-equity ratio; the dividend preference for preferred stock is expressed as a percentage of the par value; companies usually issue preferred stock with a par value

Before declaring a cash dividend, management must consider the

availability of funds; The availability of funds must be considered before declaring a cash dividend.

Characteristics of the corporate form of organization include all of the following except:

unlimited liability of stockholders; Limited liability (not unlimited liability) is a characteristic of the corporate form.

Characteristics of the corporate form of organization include all of the following:

variety of ownership interests; capital stock or share system; facility for attracting and accumulating large amounts of capital.


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