CH 7 SB

Which types of firms frequently issue a significant amount of preferred stock? More than one answer may be correct.

Insurance companies Utility companies Banks

hat is the accounting entry to record the purchase of treasury stock

Dr. Treasury Stock Cr. Cash

Preferred stock issues that provide for (cumulative/participating) dividends may result in the preferred stockholders receiving additional dividends beyond the annual preferred dividend requirement.

Participating

What is the entry (on a per share basis) to record the issuance of $10 par value common stock at a market value (price) of $13 per share?

DR Cash 13 CR Common Stock 10 CR Additional Paid-in Capital 3

Which statements regarding additional paid-in capital are true? More than one answer may be correct.

It is sometimes referred to as capital in excess of par value. It is a component of stockholders' equity.

How does a stock dividend affect the financial statements of the company? More than one answer may be correct.

Its total paid-in capital is increased. Its common stock is increased. Its net income is not affected.

Which type of transaction would not be included on the income statement?

Prior period adjustments

Which of the following statements regarding net income (loss) and retained earnings are correct?

Retained earnings represent the cumulative earnings the corporation has retained for use in the business. Net income for the period increases retained earnings.

Which stockholders' equity captions are usually seen in a balance sheet?

Treasury stock Common stock Additional paid-in capital

Not-for-profit organizations prepare a statement of Blank______, which is similar to a statement of stockholders' equity prepared by corporations.

changes in fund balances

The entry to record the issuance of common stock for a price greater than the par value per share includes which of the following? More than one answer may be correct.

A credit to Additional Paid-in Capital account for the excess of the market value (price) over the par value per share A debit to Cash account for the market value (price) per share A credit to Common Stock account for the par value per share

How does a declaration of a cash dividend affect a firm's financial statements on the date of declaration? More than one answer may be correct.

A decrease in total stockholders' equity An increase in current liabilities

Which statements regarding prior period adjustments are true?

They are direct adjustments to retained earnings for the correction of errors. They may result in either an increase or decrease to retained earnings.

Paid-in capital includes which of these?

Preferred stock Additional paid-in capital Common stock

How does the purchase of treasury stock affect the financial statements? More than one answer may be correct.

A decrease to cash A decrease to total stockholders' equity

When a corporation distributes some of its earnings to its owners/stockholders, what is the distribution called?

A dividend

Where should the reasons for changes to any stockholders' equity account during a fiscal period be presented? More than one answer may be correct.

In a separate statement of changes in stockholders' equity In the notes to the financial statements In the balance sheet

Identify the requirements that must be met for a corporation to pay a cash dividend.

In most states, the dividend must not exceed the corporation's retained earnings. The corporation must have enough cash to be able to pay the dividend.

Which of these transactions are not included on the income statement? More than one answer may be correct.

Prior period adjustments for the correction of errors Transactions involving the corporation's own stock Dividends to stockholders

Why does the word income appear in the stockholders' equity section of the balance sheet (as accumulated other comprehensive income or loss)?

All items of income (or loss) ultimately affect stockholders' equity on the balance sheet.

Why do companies reacquire their own common stock and hold it as treasury stock? More than one answer may be correct.

For future use for employee stock purchase plans Because the market price for their common stock is low and the companies want to shrink the supply of their own stock in the market To later be resold for cash if additional capital is needed

Which statements regarding additional paid-in capital are true? More than one answer may be correct.

It reflects the excess of the amount received from the sale of preferred or common stock over par value. It is sometimes referred to as capital surplus. It is a stockholders' equity category.

For most preferred stock, how often are dividends typically issued? More than one answer may be correct.

Twice a year Every quarter

Not-for-profit and governmental organizations normally report to resource providers rather than investors because:

these types of organizations do not have owners who have direct financial interests in the entities.

A firm's own stock that has been acquired from its stockholders is called outstandingBlank 1Blank 1 outstanding , Incorrect Unavailable (authorized/issued/outstanding/treasury) stock.

treasury

Firm A has 8 percent, $50 par value cumulative preferred stock, 30,000 shares authorized, issued, and outstanding. Dividends are paid semiannually, and no dividends are in arrears. The semiannual dividend requirement is:

30,000 x $50 x 8% x 6/12 = $60,000

Common stock is an example of what is sometimes referred to as (contributed/earned) capital.

Contributed

Immediately after the issuance of a stock dividend, the market value per share of common stock for the company should normally:

decrease because more shares of stock are now outstanding, but the total market value of all shares remains the same.

Preferred stock is different from common stock in that preferred stock:

has several debt-like features. has a limited claim on the company's assets in the event of liquidation. does not generally have voting rights.

A stock dividend

is normally expressed as a percentage of previously issued shares. is the issuance of additional shares of stock in proportion to each stockholder's current ownership. does not affect the proportionate ownership interests held by each shareholder.

For most preferred stock, how often are dividends typically issued?

Twice a year Every quarter

Firm C has 10 percent, $80 par value cumulative preferred stock, 9,000 shares authorized, 7,000 issued, and 6,000 shares outstanding. Dividends are paid annually. Dividends were not paid in the prior three years. The total dividend requirement in the current year to pay dividends in arrears as well as the current year's preferred dividend is:

6,000 x $80 x 10% x 4 = $192,000

In most states, the (par/stated/slate) value per share represents the legal capital on the corporation.

Par

Additional paid-in capital is a stockholders' equity category that reflects the excess of the amount received from the sale of preferred or common stock over the (surplus/market/par) value per share.

Par

Which of these are the essential rights of common stockholders?

They have a claim to all assets that remain in the entity after all liabilities and preferred stock claims have been satisfied. All profits accrue to common stockholders; there is no upper limit to the value of their ownership interest. They do not have any personal liability for corporate debts and thus cannot be forced by creditors to invest additional amounts to make up for losses.

What is the accounting entry to record the purchase of treasury stock?

Dr. Treasury Stock Cr. Cash

Firm B has $3, $50 par value cumulative preferred stock, 50,000 shares authorized and issued, and 40,000 shares outstanding. Dividends are paid quarterly, and no dividends are in arrears. The quarterly dividend requirement is:

40,000 x $3 x 3/12 = $30,000

What is the accounting entry to record the sale of treasury stock for a price greater than the treasury shares were purchased for?

Dr. Cash Cr. Treasury Stock Cr. Additional Paid-in Capital

Which of these are included in the entry to record an issuance of a small stock dividend when the market price per share of stock is greater than the par value per share? More than one answer may be correct.

A credit to the Common Stock account for the par value per dividend share issued A debit to the Retained Earnings account for the market price per dividend share issued

How does a cash dividend affect a firm's financial statements on the date the dividend is paid out? More than one answer may be correct.

A decrease in cash A decrease in current liabilities

Under ______ voting, if three directors are to be elected, the owner of 50 shares of common stock is entitled to 150 votes.

Cumulative

Identify the differences between preferred stock and bonds payable.

Preferred dividends are not an expense and are not deductible for tax purposes; bond interest is an expense and is deductible for tax purposes. Preferred stock has no maturity date; bond principal must be paid at maturity. Preferred dividends may be legally skipped; bond interest must be paid, or the firm faces legal action, possibly leading to bankruptcy.

Which stockholders' equity captions are usually seen in a balance sheet?

Preferred stock Retained earnings Accumulated other comprehensive income (loss)

How is preferred stock different from common stock? More than one answer may be correct.

Preferred stock must be paid dividends before any dividends can be paid on common stock. Preferred stock has historically been viewed as having less risk than common stock.

Some firms assign a (slate/stated/legal) value per share, which is essentially par value by a different name.

Stated

How does a cash dividend affect the firm's financial statements on the date the dividend is paid out? More than one answer may be correct. Multiple select question.

A decrease in total liabilities A decrease in total assets

The number of issued shares will always be less than or equal to the number of (authorized/outstanding) shares. Likewise, the number of outstanding shares will always be less than or equal to the number of (issued/treasury) shares.

Authorized Issued

The cumulative foreign currency translation adjustment is reported as a component of:

Accumulated Other Comprehensive Income (Loss) within stockholders' equity on the balance sheet.

Which of these statements about common stockholders are true?

All profits accrue to common stockholders; there is no upper limit to the value of their ownership interests. They are the ultimate owners of the corporation; they have a residual ownership claim to the corporation's assets.

How does a declaration of a cash dividend affect a firm's financial statements on the date of declaration? More than one answer may be correct. Multiple select question.

An increase in total liabilities A decrease in retained earnings

When treasury stock is sold at a price greater than the treasury shares were purchased for, how does the transaction affect the financial statements? More than one answer may be correct.

An increase to total assets No effect on total liabilities

The maximum number of shares the corporation is legally approved to issue is the number of shares (authorized/issued/outstanding).

Authorized

The number of (authorized/issued/outstanding/treasury) shares is stated in the corporate charter that is filed with the state of incorporation.

Authorized

In accounting for the sale of common stock, the Additional Paid-in Capital account is (debited/credited) for the excess of the market value per share over the par value per share.

Credited

Preferred stock issues usually provide a (cumulative/participating) dividend, which means that any dividends that have been missed and are in (treasury/arrears) must be paid subsequently before any dividends can be paid to the common stockholders.

Cumulative Arrears

Which statements are true regarding the cumulative foreign currency translation adjustment? More than one answer may be correct.

It can swing back and forth from a debit (net cumulative loss) balance to a credit (net cumulative gain) balance within stockholders' equity. It is reported as a component of Accumulated Other Comprehensive Income (Loss) within stockholders' equity. ' It is reported within stockholders' equity rather than on the income statement because these amounts are unrealized.

Identify the true statements regarding noncontrolling interest. More than one answer may be correct.

It is sometimes called a minority interest. It signifies that a portion of the net assets controlled by the reporting entity are attributable to the ownership interests of outside parties.

How does a stock dividend affect the financial statements of the company? More than one answer may be correct. Multiple select question.

Its retained earnings account is decreased. Its total assets are not affected. Its total stockholders' equity is not affected.

Identify the similarities between preferred stock and bonds payable. More than one answer may be correct.

Liquidating value (for preferred stock) and maturity value (for bonds) both represent a fixed claim to assets. Preferred stock and bonds payable are both usually callable and may be convertible. Dividends (for preferred stock) and interest (for bonds) both normally represent a fixed claim to income.

If the stock dividend percentage is less than 20 to 25 percent (i.e., a small stock dividend), the (par/market) value of additional common shares issued is transferred from retained earnings to common stock for the par value and to additional paid-in capital for the market value minus the par value.

Market

Why do investors frequently purchase preferred stock from firms such as banks and utility companies?

They prefer the relative security of preferred stock.

Which of the following statements are true regarding owners' equity and ownership rights held in noncorporate entities? More than one answer may be correct.

Neither proprietorships nor partnerships issue stock. Owners' equity for proprietorships and partnerships is usually referred to as capital. No distinction is made between invested capital and retained earnings for a proprietorship or a partnership.

Which statements regarding net income (loss) and retained earnings are correct?

Net loss for the period decreases retained earnings. Dividends declared during the period decrease retained earnings.

What happens after a stock split? More than one answer may be correct.

No accounting entry is required. The number of shares authorized, issued, and outstanding increase proportionately. Existing stockholders receive additional shares of stock in ratios such as 2:1 or 3:1 or 4:1 (as some common examples).

If the stock dividend percentage is more than 20 to 25 percent (i.e., a large stock dividend), the (par/market) value of additional common shares issued is transferred from retained earnings to common stock.

Par

Under (cumulative/slate) voting, if three directors are to be elected, the owner of 50 shares of common stock is entitled to 50 votes.

Slate

Which statements are true regarding common stock terminology?

Some firms assign a stated value per share, which is effectively treated the same as the par value per share. In most states, stockholders' equity cannot be reduced below the legal capital of the corporation by paying dividends or purchasing treasury stock.

What alternative titles are sometimes used for a statement of changes in stockholders' equity? More than one answer may be correct.

Statement of equity Statement of stockholders' equity

Identify the financial statement of a corporation that is similar to the statement of changes in fund balances prepared by not-for-profit organizations.

Statement of stockholders' equity

The issuance of additional shares of common stock to stockholders in proportion to the number of shares each currently owns is referred to as a (scrip/stock/bond) dividend.

Stock

What happens after a stock split? More than one answer may be correct.

The Common Stock caption of stockholders' equity indicates a drop in the par value per share (if appropriate). The total market value of the company's outstanding stock usually does not change

Identify the requirements that must be met for a corporation to pay a cash dividend.

The board of directors must declare the dividend. The declaration of a cash dividend must not result in a violation of any existing contractual agreements such as bond covenants.

Companies reacquire their own common stock and hold it as treasury stock:

because management wants to shrink the supply of its own stock in the market to drive up the price per share. for future use for the acquisition of other companies. as a defensive move to thwart a takeover by another company.

Stock dividends are _____. Multiple choice question.

issued in proportion to the number of shares that each shareholder owns

The income statement is not affected by stock dividends because the transaction is between the corporation and:

its stockholders; no gain or loss can result from a capital transaction.

The market value per share of common stock for a company decreases immediately after it issues a stock dividend because Blank______.

more number of shares of stock are now outstanding, and the total market value of the company's total shares do not change

The portion of equity in a subsidiary not attributable, directly or indirectly, to the parent company (reporting entity) is referred to as the (unusual/noncontrolling/extraordinary) interest.

noncontrolling

Dollar Inc. made a mistake in the year-end physical count of its inventory, and the error was discovered in the following year. Upon discovering the error, Dollar Inc. directly made the adjustment to the inventory and retained earnings in the current year. This scenario is an example of a

prior period adjustment

Financial statements prepared by not-for-profit organizations focus on Blank______ rather than owners.

resource providers

The term capitalizing retained earnings refers to the fact that stock dividends cause a permanent transfer of some:

retained earnings to paid-in capital.

Any salary paid to the proprietor of a firm is Blank______.

treated as reduction to the proprietor's capital