Chapter 18
A 2-for-1 stock split increases the marketability of the stock because
the market price per share decreases.
State laws regulate which of the following corporate activities?
issuance of stock repurchase of stock nature of share authorization
When stock splits or stock dividends result in fractional shares, the situation is handled by
issuing cash payments for the fractional shares.
Corporations raise equity capital by
issuing stock. operating at a profit.
A limitation of the return on shareholders' equity ratio is that
it uses the book value of equity
Distributions of stock to current shareholders of a corporation are called what type of distribution?
stock dividend
Which of the following dividends has no effect on total owners' equity?
stock dividend
Canton has 60,000 shares of $10 par issued and outstanding. Canton declares a 2-for-1 stock split. What is the par value and number of shares outstanding after the stock split?
$5 par; 120,000 shares
Which of the following transactions are classified as a stock dividend?
A distribution of additional shares of a corporation's stock to current shareholders of the corporation.
Which account is a stockholders' equity account?
Additional Paid In Capital
Right to exchange preferred stock for common stock
Conversion
If preferred shares must be redeemed by a certain date, they should be classified as
Debt
A distribution of 25% or more of the outstanding shares of stock is treated as which of the following?
Either a stock dividend or a stock split
True or false: A corporation is owned by debt and equity holders.
False
True or false: The balance sheet should disclose the sources of changes in the stockholders' equity accounts.
False
True or false: Treasury stock represents investments in treasury securities of the U.S. government.
False
True or false: When investors purchase shares of stock from a corporation, it is recorded by the corporation as investments in securities.
False
The most important advantage to the corporate form of business is
Limited Liability
the following accounts are classified as shareholders' equity
Net unrealized holding gains on investments Preferred stock Additional paid-in capital
Which of the following accurately describes shareholders' equity?
Ownership interests of the shareholders
Fantastic Gold Inc. declares and distributes to its shareholders 1 gram of gold in lieu of a cash dividend. Fantastic Gold is distributing a(n)
Property Dividend
Which type of dividend does not reduce the assets of the firm or create a liability?
Stock Dividend
Royce has 100,000 shares of $10 par issued and outstanding. Royce declares a 2-for-1 stock split in the form of a stock dividend. Which of the following are true?
The par value will not change. The number of shares outstanding increases.
Preferred stock is similar to a bond when it has which of the following features?
a dividend rate a mandatory redeemable feature
Mandatorily redeemable preferred stock is reported as
a liability on the balance sheet
When a business incorporates, it must file its ______ with the state in which it incorporates.
articles of incorporation
Retained earnings is typically reported on the balance sheet
as a single amount.
Formally retiring shares reduces these accounts to their pre-issuance condition:
common stock paid-in capital in excess of par
When a corporation issues shares of common stock for an amount above par, which of the following entries occur?
credit to common stock credit to additional paid-in capital
The journal entry to record a stock split effected in the form of dividends may include which of the following?
credit to common stock debit to retained earnings debit to paid-in-capital
If preferred shares must be redeemed by a certain date, they should be classified as
debt
When a company repurchases shares held as treasury stock, the number of shares outstanding
decreases
If more than one class of shares is authorized, what type of information must be specified?
designation to distinguish each class specific rights for each class
When a company issues different classes of shares, it must
distinguish the rights for each class of stock.
When a corporation repurchases its stock as treasury stock, the number of shares authorized
does not change
The earnings-price ratio is ______ divided by ______.
earnings per share; market price per share
What is the effect of the repurchase of treasury stock on the return on shareholders' equity ratio?
increase
A nonreciprocal transfer to owners is referred to as a
property dividend.
The purposes of a quasi reorganization are to
reduce the deficit in retained earnings. write down inflated assets.
When a corporation repurchases its stock as treasury stock, the number of shares issued
remains the same.
Which of the following are sources of shareholders' equity?
retained earnings paid-in capital
Miles Corp. declares and distributes a 3-for-1 stock split effected in the form of a 200% stock dividend. Miles had 10,000 shares of $1 par value common stock valued at $8 per share before the stock split. If Miles wishes to capitalize retained earnings, the journal entry required to record the stock split would include a debit to
retained earnings $20,000.
When a small stock dividend is declared and distributed,
retained earnings is reduced by the market value of the shares issued
A company that repurchases its own securities accounts for the shares of stock as
retired shares or treasury shares.
If a company wishes to increase its stock price, it might declare a(n)_____________stock split.
reverse
Mueller Company issues one share in exchange for two outstanding shares of common shares. Mueller must have had a:
reverse stock split
When a company decreases its outstanding shares of stock by exchanging 1 share of stock for 10 shares, this is referred to as a(n)
reverse stock split.
Under IFRS, shareholders' equity typically is classified under two categories referred to as:
share capital reserves
The costs for legal, promotional, and accounting services to issue stock should be
subtracted from the proceeds of issuing stock.
A property dividend is recorded at
the fair value of the assets at the dividend declaration date.
In year 1, Clark purchased 1,000 shares of treasury stock for $10 per share. In year 2, Clark reissued 200 shares of treasury stock for $14 per share. The journal entry to record the transaction in year 2 will include a credit to
treasury stock for $2,000.
True or false: No journal entry is required on the date of record.
true
A frequent reason for a stock split is to
cause the market price per share to decline
f a corporation issues its shares of stock for a noncash asset, at what amount should the transaction be recorded?
The fair value of the stock
Who regulates the nature of shares that can be authorized, the issuance and repurchase of those shares, and the distributions to shareholders?
The state in which the corporation is incorporated
Formally retiring shares has what effect on total shareholders' equity?
decreases
Miles Corp. declares and distributes a 3-for-1 stock split effected in the form of a 200% stock dividend. Miles had 10,000 shares of $1 par value common stock valued at $8 per share before the stock split. If Miles does not capitalize retained earnings, the journal entry required to record the split would include a debit to
paid-in capital in excess of par $20,000.
Historically, par value indicated
the amount of net assets that were not available for distribution to shareholders. the real value of shares the issue price of all shares
Statement of stockholders' Equity
Reports sources of the changes in stockholders' equity accounts.
How should cash dividends be reported on the statement of shareholders' equity?
As a reduction of retained earnings.
A company has available-for-sale debt securities in its portfolio that have increased in value at year-end. How should the unrealized gain on the available-for-sale securities be reported on the statement of shareholders' equity? (Assume the fair value option is not elected.)
As an increase in comprehensive income.
The effect of share issue costs is to
reduce paid-in capital in excess of par. Share issue costs reduce the net cash proceeds from selling the shares thus paid in capital - excess of par
Reynolds Corp. has 100,000 shares of $1 par value common stock issued and outstanding. Reynolds declares a 20% stock dividend when the fair value of the stock is $8 per share. The debit to retained earnings for the stock dividend is
$160,000.
Which of the following may be a source of paid-in capital?
Company repurchases some of its outstanding common stock Company sells stock to investors Share-based compensation activities
_____________ include(s) all changes in equity during a period except those resulting from investments by owners and distributions to owners.
Comprehensive income
In year 1, Sofia Corp. issued 1,000 shares of $1 par value common stock for $10 per share. In year 4, Sofia repurchased and immediately retired 100 shares of the stock at $6 per share. Which of the following entries would be included in the journal entry to retire the shares? (Select all that apply.)
Credit paid-in capital—share repurchase $400. Debit paid-in capital in excess of par $900. Debit common stock $100.
In year 1, Pride Corp. issued 10,000 shares of $1 par value common stock for $8 per share. In year 3, Pride repurchased and immediately retired 1,000 shares of the stock at $6 per share. Which of the following entries would be required to retire the shares?
Debit paid-in capital in excess of par $7,000.
Which of the following are characteristics of treasury stock?
It has no voting rights. It does not receive a dividend. It is stock that is repurchased by the company.
When investors purchase shares of stock, it is classified as
Paid In Capital
The date on which a company determines the registered owners of the stock who will receive a dividend is referred to as the
Record Date
Balance Sheet
Reports amounts of shareholders' equity at end of reporting periods.
If a company has preferred stock outstanding, a variation of calculating return on shareholders' equity can be made by making which adjustments to the ratio?
Subtract preferred dividends from net income. Use average common shareholders' equity in the denominator.
When a corporation issues two securities for a single price, how is the issue price usually allocated?
The cash received is allocated based on the relative market value of each security.
When a company repurchases its own shares of stock, what are the two acceptable accounting choices for the transaction?
The shares can be called treasury shares. The shares can be formally retired.
When a company repurchases its own shares of stock, what are the two acceptable accounting choices for the transaction?
The shares can be formally retired. The shares can be called treasury shares.
A restriction of retained earnings signifies that
a portion of retained earnings is not available for dividends.
Which of the following items are included in other comprehensive income?
adjustments from foreign currency translations net holding gains and losses on certain types of investments
A business that incorporates must file a document with the state, which includes a description of the business activities, the shares to be issued, and the composition of the board of directors. Which of the following terms are used to describe this document?
articles of incorporation corporate charter
Under IFRS, the critical feature that distinguishes a liability is if the issuer can be required to deliver ______ or another financial instrument to the holder.
cash
A restriction of retained earnings (select all that apply)
communicates the portion of retained earnings not available for dividends. indicates management's intention to withhold assets for a specified purpose.
The date on which the board of directors announces that a dividend will be paid is referred to as the
declaration date.
Preferred stockholders usually have preference over common stockholders with respect to which items?
distribution of assets in liquidation dividends
When a corporation distributes assets of the company to its investors, it is referred to as a(n)
dividend.
True or false: The return on shareholders' equity ratio is calculated as net income divided by common stock.
false
A stock split effected in the form of a large stock dividend
has no effect on the par value of the stock. reduces paid in capital - excess of par.
The most likely reason for a company to declare a reverse stock split is to
increase the market value of the shares.
In a corporation, shareholders' liability is
limited to the amount of the investment.
When the dividend exceeds the balance in retained earnings, the excess is referred to as a(n)
liquidating dividend
Return on shareholders' equity indicates the percent of corporate earnings for each dollar of total equity invested in the corporation, whereas the earnings-price ratio reflects the percentage earned for each dollar of
market value of common stock
A reverse stock split requires
no journal entry.
The return to common shareholders' equity is calculated by subtracting Blank______ from net income and dividing that amount by average Blank______.
preferred dividends; shareholders' equity attributed to common shareholders
The two types of corporations are
profit and not-for-profit.
Amounts earned by the corporation on behalf of its shareholders are referred to as
retained earnings.
When a company issues its shares of stock for a noncash asset, which of the following may provide evidence of fair value of the transaction?
the amount of cash that would be paid to purchase the asset an independent appraisal of the value of the asset the quoted market price for the shares
Historically, par value was considered to be
the amount of net assets that were not available for distribution to shareholders.
For IFRS reporting, the critical feature that distinguishes a liability from equity is if
the issuer is required to deliver cash or another financial instrument to the holder.
When a company believes the market price of its stock is__________it may attempt to support the price by________________the supply of stock through stock repurchases.
undervalued; decreasing
A quasi-reorganization allows a firm that is undergoing financial difficulties to
write-down inflated assets and reduce an accumulated deficit
Which of the following describe the ways in which companies may record stock splits effected in the form of dividends?
Capitalize retained earnings. Reduce the paid-in capital in excess of par account.
Which of the following is subject to double taxation?
Corporations
IFRS
International Financial Reporting Standards
Which of the following has limited liability for its owners, but passes income through to its investors and avoids double taxation?
S Corporation
The ownership interests of the investors in a corporation are referred to as
Stockholders' Equity
A liquidating dividend means that
dividends exceed retained earnings.
Because the return on shareholders' equity is based on the book value of equity, analysts often supplement their understanding of the return to shareholders with the
earnings-price ratio
A small stock dividend is usually less than Blank______% of the number of shares of stock outstanding.
25%
Farley Corp. has 50,000 shares of $1 par value common stock issued and outstanding. Farley declares a 10% stock dividend when the fair value of the stock is $9 per share. Which of the following entries will be included in the entries required to record the declaration and payment of the stock dividend
Debit retained earnings $45,000. Credit additional paid-in capital $40,000. Credit common stock $5,000.
A corporation's accumulated income that has not been distributed as dividends to shareholders is referred to as
Retained Earnings
When does a dividend become a liability to a corporation?
When it is declared by the board of directors
Shareholders' equity consists of
amounts invested by shareholders amounts earned by the corporation
A corporation's accumulated, undistributed net income or loss is referred as
retained earnings.
S corporations have the limited liability of a corporation, but income and expenses are passed through the owners as in a partnership, avoiding double taxation.
S
When the dividend exceeds the balance in retained earnings, the excess is referred to as a(n)
Blank 1: liquidating or liquidation dividend
When stock splits or stock dividends result in fractional shares, companies issue ________________payments along with the additional shares to compensate for the fractions.
CASH
When common stock has a designated par value, and common stock is issued at an amount above par, which entry is recorded?
Credit common stock for the par amount.
In year 1, Rim Corporation purchases 1,000 shares of treasury stock for $10 per share. In year 2, Rim reissues 100 shares of the treasury stock for $12 per share. In year 3, Rim reissues 500 shares of its treasury stock for $9 per share. The journal entry to record the reissuance of treasury stock in year 3 will include which of the following entries?
Debit cash $4,500 Debit retained earnings $300. Credit treasury stock $5,000 Debit paid-in capital—share repurchase $200.
In year 1, Sofia Corp. issued 1,000 shares of $1 par value common stock for $10 per share. In year 4, Sofia repurchased and immediately retired 100 shares of the stock at $6 per share. Which of the following entries would be included in the journal entry to retire the shares?
Debit common stock $100. Debit paid-in capital in excess of par $900. Credit paid-in capital—share repurchase $400.
A repurchase of treasury stock will ______ a company's return on equity because net income is divided by a ______ amount of equity.
increase; smaller
In year 1, Goal Corp. purchases 1,000 shares of treasury stock for $10 per share. In year 2, Goal reissues 500 shares of the treasury stock for $13 per share. In year 3, Goal reissues 200 shares of its treasury stock for $8 per share. The journal entry to record the reissuance of treasury stock in year 3 will include which of the following entries?
Debit paid-in capital—treasury shares $400.
On April 1, Rawlings declares a dividend of $0.30 per share. Rawlings has 100,000 shares authorized, and 40,000 issued and outstanding. The date of record is April 28, and the payment date is May 15. Which of the following entries is included in the journal entry on April 1?
Debit retained earnings $12,000.
On March 1, Fresh Corp. declared a dividend of $3,000. The record date is March 20, and the payment date is April 1. What is the journal entry required on March 20?
No entry required
Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from what type of sources?
Non Owner
What type of corporations include churches, hospitals, universities, and charities?
Not-For-Profit
What are the effects of a stock split?
Par value decreases. The number of shares outstanding increases.
Which type of stock usually has a high par value and a percentage of par value dividend rate?
Preferred stock
Right to return preferred stock
Redemption
Shareholders' equity is classified under IFRS into two categories: share capital and
Reserve
When a corporation issues two securities for a single price and the market value of only one security is known, how is the cash received allocated?
The cash received is allocated first to the security for which the fair value is known, and the remainder is allocated to the other security.
When a company repurchases its stock and immediately retires the stock, which of the following occurs?
The equity accounts are reduced for the amount in which the shares were originally sold.
If a corporation issues its shares of stock for a noncash asset, at what amount should the transaction be recorded?
The fair value of the stock
Shares of stock previously sold by the corporation that are repurchased are called
Treasury Stock
When a company repurchases its own securities without formally retiring them, the stock is recorded in which account?
Treasury stock
The ex-dividend date is usually 1 day
before the date of record.
A corporation may repurchase its shares of stock because management
believes the market price of the stock is undervalued.
A company originally issues par value common stock at an amount above par. Subsequently, the company reacquires the shares for more than the issue price and immediately retires the shares. The company has no previous transactions for stock repurchases. Which of the following accounts would be reduced for the repurchase and retirement of the shares?
common stock retained earnings paid-in capital in excess of par
In year 1, Boise purchased 10,000 shares of treasury stock for $5 per share. In year 3, Boise reissued 1,000 shares of treasury stock for $8 per share. The journal entry to record the transaction in year 3 will include
credit to paid-in capital from treasury stock for $3,000. credit treasury stock for $5,000.
A company that is distributing liquidating dividends tends to be in the process of:
dissolving
When a small stock dividend is declared and distributed,
earned capital is reclassified as invested capital.
The earnings-price ratio is calculated as ______ divided by the market price per share.
earnings per share
In order to receive a dividend, investors must purchase shares of stock before the
ex-dividend date.
Property dividends are valued at
fair value
Disadvantages of the corporate form of business are
government regulation. double taxation.
Treasury shares are the same as shares that have never been issued; therefore, treasury shares
may not vote or receive cash dividends.
Which of the following items are included in other comprehensive income?
net holding gains and losses on certain types of investments deferred gains and losses on derivatives gains and losses from amendments to postretirement programs
The return on shareholders' equity ratio is computed by dividing
net income by average shareholders' equity.
Corporations raise capital by
operating at a profit. issuing debt. issuing stock.
A distribution of 25% or more of the outstanding shares of stock may be treated as which of the following?
stock split stock dividend
A corporation is owned by its
stockholders
When a property dividend is declared, a gain or loss is recognized for
the difference between the fair value and the book value of the assets distributed.
