Intermediate Accounting 2 - Chapter 18 - Shareholders Equity

A liquidating dividend means that

dividends exceed retained earnings.

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 may be a source of paid-in capital?

- Company sells stock to investors - Company repurchases some of its outstanding common stock - Share-based compensation activities

Which of the following accounts might a corporation use to record changes in its ownership interest during a reporting period?

- accumulated other comprehensive income - common stock - retained earnings

Corporations can raise capital by

- operating at a profit - issuing stock - borrowing

Which of the following accounts are classified as shareholders equity?

- retained earnings - common stock - additional paid-in capital - preferred stock - net unrealized holding gains on investments

Historically, par value indicated

- the real value of shares -the amount of net assets that were not available for distribution to shareholders. -the issue price of all 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.

Preferred stock is similar to a bond when it has which of the following features?

A mandatory redeemable feature A dividend rate

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, 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 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)

T/F A corporation is owned by debt and equity holders

False It's owned by shareholders, who are equity holders only

T/F Treasury stock represents investments in treasury securities of the US government

False Reason: Treasury stock represents shares of stock previously issued by the corporation that are repurchased by the corporation

T/F The return on shareholders' equity ratio is calculated as net income divided by common stock

False net income/average shareholders' equity

What type of corporations include churches, hospitals, universities, and churches?

Not-for-profit

Which of the following accurately describes shareholders' equity?

Ownership interests of the shareholders

Which type of stock usually has a high par value and a percentage of par value dividend rate?

Preferred stock

large stock dividend

Reduce retained earnings by par; increase common stock by par.

small stock dividend

Reduce retained earnings for fair value; increase common stock by par value; increase additional paid-in capital.

Cash dividend

Reduce retained earnings; reduce a current asset.

Amounts earned by the corporation on behalf of its shareholders and recorded as a single amount are referred to as:

Retained earnings

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

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

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 securities without formally retiring them, the stock is recorded in which account?

Treasury stock

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.

Carnival issues 10,000 shares of $1 par value common stock for $10 per share. Stock issue costs are $3,000. The journal entry to record the issuance of stock will include a credit to

additional paid-in capital for $87,000 10000 x 10 = 100000 10000 x 1 = 10000 100,000 - 10,000 = 90,000 - 3,000 = 87,000

Retained earnings is typically reported on the balance sheet

as a single amount

Net assets are calculated as

assets less liabilities

A frequent reason for a stock to split is to

cause the market price per share to decline

A restriction of retained earnings

communicates the portion of retained earnings not available for dividends indicates management's intention to withhold assets for a specified purpose

A business that has equity accounts labeled "common stock" and "retained earnings" is a

corporation

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 date on which a cash dividend becomes a liability to a corporation is the

declaration date

Cash and property dividends ______ total equity, and stock dividends _______ total equity.

decrease; do not effect

When a corporation repurchases its stock as treasury stock, the number of shares outstanding

decreases

When a company issues different classes of shares, it must

distinguish the rights for each class of stock

Preferred stockholders usually have preference over common stockholders with respect to which items?

distribution of assets in liquidation dividends

A distribution of assets to shareholders is referred to as a

dividend

When a corporation distributes assets of the company to its investors, it is referred to as a(n)

dividend

Disadvantages of a corporation

double taxation, government regulation

A property dividend

is a noncash distribution to owners. reduces retained earnings.

The most important advantage to the corporate form of business is

limited liability disadvantages are: double taxation and regulation

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 _____ dividend.

liquidating

A reverse stock split requires

no journal entry

When investors purchase shares of stock, it is classified as

paid-in capital

Two types of corporations are

profit and not-for-profit

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 (often called a dividend in kind or a nonreciprocal transfer to owners)

The purposes of a quasi reorganization are to

reduce the deficit in retained earnings write down inflated assets

A company that repurchases its own securities accounts for the buyback as:

retired shares or treasury shares

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 corporation is owned by its _______

shareholders (also stockholders or investors)

Net assets equals

shareholders' equity

The ownership interests of the investors in a corporation are referred to as

shareholders' equity

If more than one class of shares is authorized, what type of information must be specified?

specific rights for each class designation to distinguish each class

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.

A 2-for1 stock split increases the marketability of the stock because

the market price per share decreases

Shares of stock previously sold by the corporation that are repurchased are called

treasury stock

Which of the following is subject to double taxation?

Corporations

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

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 company repurchases shares held 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

Corporations raise capital by

issuing stock operating at a profit

The return on shareholders' equity ratio is computed by dividing

net income by average shareholders' equity net income/average shareholders' equity

The effect of share issue costs is to

reduce paid-in capital in excess of par.

A corporation's accumulated income that has not been distributed as dividends to shareholders is referred to as ______ earnings.

retained

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 (500 x 9) Debit paid-in capital - share repurchase $200 (100 x 2) Debit retained earnings $300 ((10 - 9) x 500) - 200 Credit treasury stock $5,000 (500 x 10) 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

Property dividend

Reduce retained earnings, recognize gain on appreciation on income statement.

Which of the following has limited liability for its owners, but passes income through to its investors and avoids double taxation?

S corporation

Which of the following items are included in other comprehensive income?

- Gains and losses from amendments to postretirement programs - Deferred gains and losses on derivatives - Net holding gains and losses on certain types of investments (also Adjustment from Foreign currency translation)

Brandon issues 1,000 shares of $5 par value common stock for $20 per share. Stock issue costs are $500. The journal entry to record the issuance of stock will include which of the following entries?

Credit additional paid-in capital $14,500 Credit common stock $5,000 Debit cash $19,500

Distributions of stock to current shareholders of a corporation are called what type of distribution?

Stock dividend

The costs for legal, promotional, and accounting services to issue stock should be

Subtracted from the proceeds of issuing stock

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

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?

paid-in capital in excess of par retained earnings common stock

The purpose of the statement of shareholders' equity is to

report the changes and the sources of the changes in the shareholder equity accounts

State laws regulate which of the following corporate activities?

repurchase of stock nature of share authorization issuance of stock

A corporation's accumulated, undistributed net income or loss is referred 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 the quoted market price of the shares (also an independent appraisal of the value of the asset)

The statement of shareholders' equity reports

the changes in each shareholder equity account for the period.