Chapter 18 Smart Book
True or false: No journal entry is required on the date of record.
True
A nonreciprocal transfer to owners is referred to as a
property dividend.
What are the effects of a stock split? (Select all that apply.)
-The number of shares outstanding increases. -Par value decreases.
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
$16,000 Reason: 100,000 x 20% = 20,000 shares x $8 = $160,000
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 accounts are classified as shareholders' equity?
-Additional paid-in capital -Preferred stock -Net unrealized holding gains on investments
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.
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 May 15?
Debit dividends payable $12,000.
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. Paid in excess of par =($8-$1)*1000 shares =$7000
Which of the following accurately describes shareholders' equity?
Ownership interests of the shareholders
The ownership interests of the investors in a corporation are referred to as
Shareholders' equity
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 does a dividend become a liability to a corporation?
When it is declared by the board of directors
Mandatorily redeemable preferred stock is reported as
a liability on the balance sheet.
A restriction of retained earnings signifies that
a portion of retained earnings is not available for dividends.
A frequent reason for a stock split is to
cause the market price per share to decline
The journal entry to record a stock split effected in the form of dividends may include which of the following? (Select all that apply.)
debit to paid-in-capital debit to retained earnings credit to common stock
When a company issues different classes of shares, it must
distinguish the rights for each class of stock.
A distribution of assets to shareholders is referred to as a(n) _____.
dividend
In order to receive a dividend, investors must purchase shares of stock before the
ex-dividend date.
Property dividends are valued at
fair value
For IFRS reporting, the critical feature that distinguishes a liability from equity is if
if the issuer is required to deliver cash or another financial instrument to the holder
What is the effect of the repurchase of treasury stock on the return on shareholders' equity ratio?
increase
The most likely reason for a company to declare a reverse stock split is to
increase the market value of the shares.
A repurchase of treasury stock will Blank______ a company's return on equity because net income is divided by a Blank______ amount of equity.
increase; smaller
The most important advantage to the corporate form of business is
limited liability
In a corporation, shareholders' liability is
limited to the amount of the investment.
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.
The return on shareholders' equity ratio is computed by dividing
net income by average shareholders' equity.
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?
nonowner
What type of corporations include churches, hospitals, universities, and charities?
not-for-profit
When investors purchase shares of stock, it is classified as
paid-in capital
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
Which type of stock usually has a high par value and a percentage of par value dividend rate?
preferred stock
The two types of corporations are
profit and not-for-profit.
The effect of share issue costs is to
reduce paid-in capital in excess of par.
When a corporation repurchases its stock as treasury stock, the number of shares issued
remains the same
Shareholders' equity is classified under IFRS into two categories: share capital and _____.
reserves
A corporation's accumulated, undistributed net income or loss is referred as
retained earnings
A corporation's accumulated income that has not been distributed as dividends to shareholders is referred to as _____ earnings.
retained or reinvested
Distributions of stock to current shareholders of a corporation are called what type of distribution?
stock dividend
A distribution of 25% or more of the outstanding shares of stock may be treated as which of the following? (Select all that apply.)
stock split stock dividend
The term treasury stock refers to
stock that is repurchased and not retired.
Historically, par value was considered to be
the amount of net assets that were not available for distribution to shareholders.
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.
A 2-for-1 stock split increases the marketability of the stock because
the market price per share decreases.
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
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? (Select all that apply.)
-Reduce the paid-in capital in excess of par account. -Capitalize retained earnings.
Match each date with its corresponding activities.
Declaration date = Date that the corporate board of directors announces a dividend Record date = Date that a determination is made as to recipients of a dividend Ex-dividend date = Date before which investors must purchase stock in order to receive a dividend Payment Date = Date that corporate assets are transferred to shareholders
When a corporation distributes assets of the company to its investors, it is referred to as a(n)
dividend
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
A reverse stock split requires
no journal entry
Historically, par value indicated (select all that apply)
-the real value of shares -the amount of net assets that were not available for distribution to shareholders. -the issue price of all shares
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.
Shareholders' equity consists of which of the following items? (Select all that apply.)
-amounts invested by shareholders -amounts earned by the corporation
The purposes of a quasi reorganization are to (Select all that apply.)
-write down inflated assets. -reduce the deficit in retained earnings.
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 (Select all that apply.)
-credit treasury stock for $5,000. -credit to paid-in capital from treasury stock for $3,000.
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? (Select all that apply.)
-paid-in capital in excess of par -retained earnings -common stock
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 is required.
Formally retiring shares has what effect on total shareholders' equity?
decrease
A liquidating dividend means that
dividends exceed retained earnings.
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.
Which account is a stockholders' equity account?
additional paid in capital
When stock splits or stock dividends result in fractional shares, companies issue _____ payments along with the additional shares to compensate for the fractions.
cash
______ include(s) all changes in equity during a period except those resulting from investments by owners and distributions to owners.
comprehensive income
The right of a shareholder to exchange his preferred stock for another class of stock is referred to as a right of _____ , whereas the right of the preferred shareholder to have her stock repurchased by the corporation for cash is referred to as a _____ privilege.
conversion ; redemption
When stock splits or stock dividends result in fractional shares, the situation is handled by
issuing cash payments for the fractional shares.
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 of the following dividends has no effect on total owners' equity?
stock dividend
Which of the following describe the ways in which companies may record stock splits effected in the form of dividends? (Select all that apply.)
-Capitalize retained earnings. -Reduce the paid-in capital in excess of par account.
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.)
-Debit common stock $100. -Credit paid-in capital—share repurchase $400. -Debit paid-in capital in excess of par $900.
On March 1, Fresh Corp. declared a dividend of $3,000. The record date is March 20, and the payment date is April 1. The journal entry required on April 1, will include which of the following entries? (Select all that apply.)
-Debit dividends payable $3,000. -Credit cash $3,000.
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 paid-in capital—share repurchase $200. -Credit treasury stock $5,000 -Debit retained earnings $300. -Debit cash $4,500 Reason: In year 2, the company will debit cash for $1,200 and credit treasury stock for $1,000 and paid-in capital-share repurchase for $200. In year 3, the company must debit the share repurchase account for $200 and the balance of $300 is debited to retained earnings.
On March 1, Fresh Corp. declared a dividend of $3,000. The record date is March 20, and the payment date is April 1. The journal entry required on March 1, will include which of the following entries? (Select all that apply.)
-Debit retained earnings $3,000. -Credit dividends payable $3,000.
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? (Select all that apply.)
-Debit retained earnings $45,000. -Credit additional paid-in capital $40,000. -Credit common stock $5,000.
Which of the following are characteristics of treasury stock? (Select all that apply.)
-It does not receive a dividend. -It has no voting rights. -It is stock that is repurchased by the company.
Which of the following accounts are classified as shareholders' equity?
-Preferred stock -Additional paid-in capital -Net unrealized holding gains on investments
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? (Select all that apply.)
-Subtract preferred dividends from net income. -Use average common shareholders' equity in the denominator.
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? (Select all that apply)
-The par value will not change. -The number of shares outstanding increases.
When a corporation issues shares of common stock for an amount above par, which of the following entries occur? (Select all that apply.)
-credit to additional paid-in capital -credit to common stock
Preferred stockholders usually have preference over common stockholders with respect to which items? (Select all that apply.)
-dividends -distribution of assets in liquidation
Disadvantages of the corporate form of business are (Select all that apply.)
-double taxation. -government regulation.
Which of the following items are included in other comprehensive income? (Select all that apply.)
-gains and losses from amendments to postretirement programs -net holding gains and losses on certain types of investments -deferred gains and losses on derivatives
A restriction of retained earnings (select all that apply)
-indicates management's intention to withhold assets for a specified purpose. -communicates the portion of retained earnings not available for dividends.
Corporations raise capital by
-issuing stock -issuing debt -operating at a profit
State laws regulate which of the following corporate activities? (Select all that apply.)
-nature of share authorization -repurchase of stock -issuance of stock
Which of the following items are included in other comprehensive income? (Select all that apply.)
-net holding gains and losses on certain types of investments -adjustments from foreign currency translations
Corporations raise equity capital by
-operating at a profit. -issuing stock
Formally retiring shares reduces these accounts to their pre-issuance condition:
-paid-in capital in excess of par -common stock
A stock split effected in the form of a large stock dividend (select all that apply)
-reduces paid in capital - excess of par. -has no effect on the par value of the stock.
Which of the following are sources of shareholders' equity? (Select all that apply.)
-retained earnings -paid-in capital
Under IFRS, shareholders' equity typically is classified under two categories referred to as:
-share capital -reserves
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? (Select all that apply.)
-the amount of cash that would be paid to purchase the asset -the quoted market price for the shares -an independent appraisal of the value of the asset
Shares of stock previously sold by the corporation that are repurchased are called
treasury stock
When a company believes the market price of its stock is Blank______, it may attempt to support the price by Blank______ the supply of stock through stock repurchases.
undervalued; decreasing
A small stock dividend is usually less than Blank______% of the number of shares of stock outstanding.
25
Owners of _____ 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
Which of the following has limited liability for its owners, but passes income through to its investors and avoids double taxation?
S corporation
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
When a business incorporates, it must file its Blank______ with the state in which it incorporates.
articles of incorporation
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
A corporation may repurchase its shares of stock because management
believes the market price of the stock is undervalued.
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
Which of the following is subject to double taxation?
corporations
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
The journal entry to record a stock split effected in the form of dividends may include which of the following? (Select all that apply.)
debit to retained earnings credit to common stock debit to paid-in-capital
The date on which a cash dividend becomes a liability to a corporation is the
declaration date.
The date on which the board of directors announces that a dividend will be paid is referred to as the
declaration date.
When a corporation repurchases its stock as treasury stock, the number of shares outstanding
decreases
When a corporation repurchases its stock as treasury stock, the number of shares authorized
does not change.
The earnings-price ratio is Blank______ divided by Blank______.
earnings per share; market price per share
A limitation of the return on shareholders' equity ratio is that
it uses book value of equity.
A limitation of the return on shareholders' equity ratio is that
it uses the book value of equity
The number of shares a specific corporation is authorized to issue is set forth in
its articles of incorporation
When the dividend exceeds the balance in retained earnings, the excess is referred to as a(n) _____ dividend.
liquidating or liquidation
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.
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.
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
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.
A Blank______ stock dividend is less than 25% of the outstanding shares of stock.
small
Which type of dividend does not reduce the assets of the firm or create a liability?
stock dividend
A corporation is owned by its _____ .
stockholders, shareholders, or investors
The costs for legal, promotional, and accounting services to issue stock should be
subtracted from the proceeds of issuing stock.
True or false: The balance sheet should disclose the sources of changes in the stockholders' equity accounts.
False
How should cash dividends be reported on the statement of shareholders' equity?
as a reduction of retained earnings
Retained earnings is typically reported on the balance sheet
as a single amount
The ex-dividend date is usually 1 day
before the date of record.
True or false: The return on shareholders' equity ratio is calculated as net income divided by common stock.
False Reason: Return on shareholders' equity is net income divided by average total shareholders' equity.
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.
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
When a small stock dividend is declared and distributed,
earned capital is reclassified as invested capital.
When a small stock dividend is declared and distributed,
earned capital is reclassified as invested capital. Reason: Dividends paid to investors are never recorded on the income statement.
The earnings-price ratio is calculated as Blank______ divided by the market price per share.
earnings per share
The feature that shares of preferred stock may be exchanged for cash at the option of the corporation or the shareholders is referred to as what?
redeemable
When a small stock dividend is declared and distributed,
retained earnings is reduced by the market value of the shares issued
If more than one class of shares is authorized, what type of information must be specified? (Select all that apply)
-designation to distinguish each class -specific rights for each class
If preferred shares must be redeemed by a certain date, they should be classified as
debt
Amounts earned by the corporation on behalf of its shareholders are referred to as
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 Blank______.
earnings-price ratio
Match the financial statement with respect to the reporting of stockholders' equity.
Balance Sheet- Reports amounts of shareholders' equity at end of reporting periods. Statement of stockholders' Equity- Reports sources of the changes in stockholders' equity accounts.
Match the preferred shareholder right with the correct description.
Conversion- Right to exchange preferred stock for common stock Redemption- Right to return preferred stock
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 Reason:The shares were originally purchased for $10 per share. They were sold for $8 per share. Therefore the debit to paid-in capital is $400 (($10-$8) x 200 shares)
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 Reason: 40,000 shares issued and outstanding x $.30 per share
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 Reason: A corporation is owned by its shareholders, who are equity holders.
True or false: Treasury stock represents investments in treasury securities of the U.S. government.
False Reason: Treasury stock represents shares of stock previously issued by the corporation that are repurchased by the corporation.
True or false: When investors purchase shares of stock from a corporation, it is recorded by the corporation as investments in securities.
False Reason: When investors purchase shares of stock in a corporation, the corporation records the transaction as paid-in capital.