Accounting Chapter 8

Fontaine Incorporated issued a 10% stock dividend on its $20 par value common stock. On the distribution date, there were there were 12,000 shares of stock issued and 10,000 shares of stock outstanding. The market value of the stock was $25. As a result of the stock dividend, the amount of retained earnings decreased by ______.

$25,000. Reason: $25 market value × 10,000 shares outstanding × 10% stock dividend = $25,000 decrease in retained earnings.

Are these statements true or false regarding preferred stock?

- If a company skips a dividend on noncumulative preferred stock, the dividend is lost forever. - Preferred stock dividends in arrears must be paid before dividends can be distributed to common stockholders.

The term "Retained Earnings" is best explained by which of the following statements?

A measure of capital generated through earnings.

The book value of a share of stock may be

All of the answers are correct.

Which of the following is a reason why a corporation may choose not to pay dividends?

All of these are valid reasons to not pay dividends.

If a corporation has issued noncumulative preferred stock, common stockholders may receive greater dividends than if the corporation has issued cumulative preferred stock.

False

common; Reason: Preferred shareholders frequently are guaranteed a liquidation value in the case of bankruptcy before assets are distributed to common stockholders.

If a company is forced to liquidate, the highest risk of losing their investment rests with ______ stockholders.

Which of the following terms designates the maximum number of shares of stock that a corporation may issue?

Number of shares authorized

Which of the following is a disadvantage of a sole proprietorship?

Unlimited liability.

The greatest potential for rewards when a corporation prospers rests with ______ stockholders.

common

When a corporation issues a stock divided, Retained Earnings ______.

decreases and Paid-in Capital increases

Appropriating retained earnings is a(n) ______ event.

equity exchange

A corporation must record a liability for cash dividends on the date of record.

false

A two for one stock split will double the amount of total stockholder's equity shown on the balance sheet. This statement is

false

When a corporation records a stock dividend, it decreases the retained earnings account for the par value of the stock.

false

Appropriating retained earnings does not affect the ______.

income statement statement of cash flows

A chief advantage of the corporate form of business is ______.

limited liability

Normally companies sell stock for an amount that is

more than the par value.

Stock dividends are based on the number of shares ______.

outstanding

Appropriating retained earnings ______ the amount of retained earnings available to distribute as dividends.

restricts

Jake Corporation paid its stockholders a dividend by issuing them additional shares of its stock. This type of event is called a

stock dividend.

A corporation is a legal entity created by the authority of a state government, separate and distinct from its owners.

true

Liability is a significant disadvantage of the partnership form of business organization.

true

Preferred stockholders generally have a preference to dividends.

true

Preferred stockholders generally have no voting rights in a corporation.

true

Common stockholders have the right to ______.

vote on significant matters that affect the corporate charter share in the distribution of profits participate in the election of directors

The payment of a previously declared cash dividend will:

will not impact liability or equity

Fontaine Incorporated issued a 10% stock dividend on its $20 par value common stock. On the distribution date, there were there were 12,000 shares of stock issued and 10,000 shares of stock outstanding. The market value of the stock was $25. As a result of the stock dividend, the amount of additional paid-in capital in excess of par value increased by ______.

$5,000. Reason: $25 market value - $20 par value = $5 additional paid-in capital in excess of par value × 1,000 shares = $5,000.

Preferred stockholders generally have no preference to assets when the company is liquidated.

False

Base Line Incorporated is authorized to issue 50,000 shares of $15 stated value preferred stock. On January 1, Year 1, Base Line issued 10,000 shares of the stock for $24 per share. Immediately after the issue, Base Line's balance sheet showed ______ of paid-in-capital in excess of stated value.

$90,000 Reason: $24 issue price - $15 stated value = $9 in excess of stated x 10,000 shares = $90,000

Which of the following entities would report income tax expense on its income statement?

A corporation.

Which of the following statements are true? (1)

A proprietorship is the simplest form of business organization to organize and operate. The requirements for establishing a corporation vary from state to state.

Which of the following statements are true?

A proprietorship is the simplest form of business organization to organize and operate. The requirements for establishing a corporation vary from state to state.

Which of the following statements are true? (2)

Preferred stock dividends in arrears must be paid before dividends can be distributed to common stockholders. If a company skips a dividend on noncumulative preferred stock, the dividend is lost forever.

Which of the following is a reason a company would acquire treasury stock?

Reduce the likelihood of a hostile takeover

Which of the following is not normally a preference given to the holders of preferred stock?

The right to vote before the common stockholders at the corporation's annual meeting.

It is easier to acquire influential control in a company that has closely held stock ownership than in a company that has widely held stock ownership. This statement is

false

Preferred stock carries voting rights that give the preferred stockholders greater power in the corporation's decision-making process than common stockholders have.

false

The class or type of stock that every corporation must have is preferred stock.

false

The number of shares of stock outstanding generally is greater than the number of shares of stock issued.

false?

In general, common stockholders experience

greater risk and greater potential rewards than preferred stockholders.

Preferred stock ______.

has a liquidation value that, in case of bankruptcy, is paid before assets are distributed to common stockholders dividends are paid before dividends are distributed to common stockholders

Immediately after a two for one common stock split, the per share market price of the issuing corporation's common stock is expected to be

slightly higher than one half of what it was immediately before the split.

Preferred stockholders generally receive a set or fixed amount of dividends.

true

The market price of common stock is based on investors' expectations about future earnings. This statement is

true

True or false: The financial statement effects of issuing stated value stock are identical to the financial statement effects of issue par value stock.

true