ACG 11

The 13th Street Grill issued 8,000 of $2 par value common stock for $5 per share. Which of the following will be part of the journal entry to record the issuance? a. A credit of $16,000 to Common Stock b. A credit of $40,000 to Common Stock c. A debit of $24,000 to Common Stock d. A debit of $40,000 to Common Stock e. A credit of $8,000 to Common Stock

a. A credit of $16,000 to Common Stock The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 8,000 x $5 = $40,000 Credit to Common stock = 8,000 x $2 = $16,000 Credit to Paid-in capital in excess of par value = 8,000 x ($5 - $2) = $24,000

The effect of the declaration of a cash dividend by the board of directors is to a. Increase total liabilities and decrease total stockholders' equity. b. Increase total stockholders' equity and decrease total assets. c. Increase total assets and increase total liabilities. d. Increase total liabilities and decrease total assets. e. Increase expenses and increase total liabilities.

a. Increase total liabilities and decrease total stockholders' equity. Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. The company journalizes the following on the date of declaration:It debits the Cash Dividend account for the amount of the dividend, and it credits Dividends Payable for the same amount. Nothing is journalized on the date of record. On the date of payment, the company journalizes the payment and reduction in the payable as follows: it debits Dividends Payable and credits Cash for the amount of the dividend paid.

A corporation issued 1,000 shares of its $3.00 par value common stock for $12.00 per share and later repurchased 50 of those shares for $9.00 per share. Which of the following will be debited when the repurchase of the shares is journalized? a. Treasury Stock for $450 b. Retained Earnings for $450 c. Treasury Stock for $150 d. Retained Earnings for $150 e. Common Stock for $450

a. Treasury Stock for $450 The journal entry to record the acquisition of a company's own stock (i.e., treasury stock) will increase the treasury stock account (i.e., a contra stockholders' equity account) and it will also decrease the cash account for the total cost to acquire. The cost of the treasury stock: 50 shares x $9/share = $450. Debit the Treasury Stock account to increase it.

Outstanding stock of the West Corporation included 40,000 shares of $5 par common stock and 10,000 shares of 6%, $10 par non-cumulative preferred stock. In 2019, West declared and paid dividends of $4,000. In 2020, West declared and paid dividends of $12,000. How much of the 2020 dividend was distributed to preferred shareholders? a. $14,000 b. $6,000 c. $2,400 d. $8,000 e. $10,000

b. $6,000 Dividend to preferred shareholders = 10,000 x $10 x 6% =$6,000

Consider the following data for a corporation: Net income, $715,000 Preferred stock dividends, $50,000 Market price per share of stock, $25 Average common stockholders' equity, $3,000,000 Cash dividends declared on common stock, $30,000 What is the payout ratio? a. 2.5% b. 4.2% c. 250% d. 10% e. 40%

b. 4.2% Payout ratio is cash dividends declared to common stockholders divided by net income.Payout ratio = $30,000/$715,000 = 4.2%

The following data is available for Red Carpet Corporation at December 31:Common stock, par $3 (authorized 250,000 shares) $300,000Treasury stock (at cost $12 per share) $1,200Based on the data, how many shares of common stock are outstanding? a. 99,990 b. 99,900 c. 250,000 d. 249,900 e. 100,000

b. 99,900 The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $300,000 and common stock has a $3 par value per share the company the company must have 100,000 shares of common stock issued (i.e., $300,000/$3 per share = 100,000 shares).This company has treasury stock. Treasury stock is a corporation's own stock that has been reacquired. With $1,200 of treasury stock recorded on the company's books and a $12 cost per share the company must have 100 shares of its own common stock being held as treasury stock.The number of outstanding shares equals the number of issued shares minus the number of shares reacquired (i.e., treasury shares). This company has 100,000 shares outstanding (i.e., 100,000 - 100 = 99,900).

Which type of stock can be in arrears? a. Class B common stock b. Cumulative preferred stock c. All of these d. Callable preferred stock e. Convertible common stock

b. Cumulative preferred stock Some corporations issue preferred stock. Preferred stock designates a dividend stated in dollars or as a percentage of par value. If the corporation declares a dividend in a given year then it must pay the preferred stockholders their designated dividend before it can pay any dividends to common stockholders. Preferred stock is either cumulative or noncumulative. If it is cumulative then dividends not paid to preferred stockholders in past years are in arrears and the corporation must pay all dividends in arrears in addition to paying preferred stockholders their current year dividend before the corporation can pay any dividends to common stockholders. Whether preferred stock is cumulative and in arrears should be disclosed in footnotes of the corporation's annual report.

A disadvantage of the corporate form of business is a. limited liability. b. taxation. c. its status as a separate legal entity. d. continuous existence. e. ease of transfer of ownership.

b. taxation Corporations must pay additional taxes relative to other forms of business and this is a disadvantage that is costly to corporations. Corporations pay income taxes on their incomes, and then when dividends are distributed to stockholders then the stockholders must pay income taxes on the amounts received as dividends. Corporations are described as being subject to "double taxation."

ABC Corporation has cumulative preferred stock on which it pays dividends of $10,000 per year. The dividends are in arrears for two years. If the corporation plans to distribute $55,000 as dividends in the current year, how much will the common stockholders receive? a. $30,000 b. $50,000 c. $25,000 d. $45,000 e. $40,000

c. $25,000 Stockholders who own cumulative preferred stock receive an allocation for each of the past two years (i.e., the preferred stock is in arrears for two years meaning dividends were not paid in those years) and an allocation for the current year. The remaining balance, if there is any, is allocated to the common stockholders.Preferred dividends in arrears for two years ($10,000 × 2) = $20,000 Preferred for current year = 10,000Total dividends to preferred stockholders = $30,000 Total dividends available = $55,000Dividends available to common stockholders = $25,000

Danielle Inc. has 8,000 shares of 5%, $50 par, non-cumulative preferred stock and 50,000 shares of $3 par common stock outstanding. Both the common stock and the preferred stock have been outstanding since the company began last year. No dividends were paid last year. The board of directors declared a $50,000 dividend this year. What amount of the total dividend will be paid to common stockholders? a. $15,000 b. $45,000 c. $30,000 d. $50,000 e. $10,000

c. $30,000 Before the common stockholders receive any dividends, preferred stockholders must be paid their dividends before anything can be paid to common stockholders. Also, this preferred stock is non-cumulative so dividends are never in arrears. Preferred stockholder dividend = 8,000 x 5% x $50 = $20,000Total dividends available = $50,000Dividends available to common stockholders = $30,000

Red Corporation's December 31, 2020 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 40,000 shares authorized; 20,000 shares issued $ 400,000 Common stock, $10 par value, 4,000,000 shares authorized; 2,600,000 shares issued, 2,560,000 shares outstanding 26,000,000 Paid-in capital in excess of par value - preferred stock 80,000 Paid-in capital in excess of par value - common stock 36,000,000 Retained earnings 10,200,000 Treasury stock (30,000 shares) 840,000 Red Corporation declared and paid a $100,000 cash dividend on December 15, 2020. If the company's dividends in arrears prior to that date were $24,000, Red Corporation's common stockholders received a. 40,000. b. $36,000. c. $44,000. d. $76,000. e. no dividend.

c. $44,000. Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $24,000. Current year dividend to preferred stockholders = $400,000 x 8% = $32,000 Total paid to preferred stockholders = $24,000 + 32,000 = $56,000 Total paid to common stockholders = $100,000 - 56,000 = $44,000

Spiral Corporation's December 31, balance sheet shows the following: 8% preferred stock, $10 par value, cumulative, 40,000 shares authorized; 18,000 shares issued, $180,000 Common stock, $1 par value, 4,000,000 shares authorized; 2,500,000 shares issued, 2,460,000 shares outstanding, $2,500,000 Paid-in capital in excess of par value - preferred stock, $180,000 Paid-in capital in excess of par value - common stock, $52,000,000 Retained earnings, $24,000,000 Treasury stock (40,000 shares), $1,250,000 The company's total stockholders' equity is a. $78,860,000. b. $78,480,000. c. $77,610,000. d. $53,960,000. e. $77,490,000.

c. $77,610,000. Total stockholders' equity = Preferred stock + Common stock + Paid-in capital in excess of par (for preferred stock & common stock) + Retained earnings - Treasury stock Total stockholders' equity = $180,000 + 2,500,000 + 180,000 + 52,000,000 + 24,000,000 - 1,250,000 = $77,610,000

Which one of the following is false concerning a retained earnings restriction? a. It generally is disclosed in the notes to the financial statements. b. It may arise from legal, contractual, or voluntary causes. c. It is reported on the income statement. d. All of these are true e. It makes a portion of the balance of retained earnings unavailable for dividends.

c. It is reported on the income statement. Retained earnings restrictions makes a portion of the balance of retained earnings unavailable for dividends. Retained earnings restrictions may arise from legal, contractual, or voluntary causes. Retained earnings restrictions are generally is disclosed in the notes to the financial statements. Retained earnings restrictions are not reported on the financial statements.

Franklin Corporation issues 25,000 shares of $50 par value preferred stock for cash at $125 per share. The entry to record the transaction will include a a. credit to Preferred Stock for $3,125,000. b. credit to Preferred Stock for $2,000,000 and a credit to Paid-in Capital in Excess of Par Value for $1,125,000. c. credit to Preferred Stock for $1,250,000 and a credit to Paid-in Capital in Excess of Par Value for $1,875,000. d. credit to Retained Earnings for $3,125,000. e. credit to Preferred Stock for $1,875,000 and a credit to Retained Earnings for $1,250,000.

c. credit to Preferred Stock for $1,250,000 and a credit to Paid-in Capital in Excess of Par Value for $1,875,000. When a company issues preferred stock, it debits the cash it receives from the stockholder, it credits preferred stock for the par value of the stock issued. and it credits paid-in capital in excess of par value--preferred stock for any amount received in excess of par value. Debit cash for $3,125,000 (i.e., 25,000 shares x $125 per share). Credit preferred stock for $1,250,000 (i.e., 25,000 shares x $50 per share). Credit paid-in capital in excess of par--preferred stock for $1,875,000 (i.e., 25,000 shares x $75 per share).

If 1,000 shares of $5 par common stock are reacquired by a corporation for $12 a share, by how much will total stockholders' equity change? a. $5,000 decrease b. $12,000 increase c. $5,000 increase d. $12,000 decrease e. $0

d. $12,000 decrease Stockholders' equity is reduced by the cost of acquiring the treasury stock: 1,000 shares x $12 per share = $12,000.

Vista, Inc. has 225,000 shares of common stock outstanding. A 40% stock dividend was declared and issued. How many shares are outstanding after the stock dividend? a. 309,000 b. 350,000 c. 325,000 d. 315,000 e. 390,000

d. 315,000 The number of outstanding shares is multiplied by the percentage of the stock dividend to get the total new shares to be issued. The new shares plus the original shares outstanding are then added together: 225,000 + (225,000 x 40%) = 315,000 shares.

The following information pertains to Marsh Company for the current year: Average total assets, $400,000Average common stockholders' equity, $200,000Sales, $120,000Net income, $24,000Dividends on common stock, $9,000Dividends on preferred stock, $6,000 What is the company's return on common stockholders' equity for the current year? a. 4.5%. b. 12%. c. 7.5%. d. 9%.

d. 9%. Return on common stockholders' equity = net income less preferred dividends divided by average common stockholders' equity. Return on common stockholders' equity = (24,000 - 6,000)/200,000 = 9%

Black Raptor Inc. has retained earnings of $500,000 and total stockholders' equity of $2,000,000. It has 80,000 shares of $10 par value common stock outstanding, which is currently selling for $25 per share. What will occur if Black Raptor declares a 10% stock dividend on its common stock? a, Retained earnings will decrease by $100,000 and total stockholders' equity will increase by $100,000. b. Retained earnings will decrease by $80,000 and total stockholders' equity will increase by $80,000. c. Retained earnings will decrease by $300,000 and total stockholders' equity will increase by $300,000. d. Retained earnings will decrease by $200,000 and total paid-in capital will increase by $200,000. e. Net income will decrease by $80,000.

d. Retained earnings will decrease by $200,000 and total paid-in capital will increase by $200,000. A 10% stock dividend will increase the number of shares issued by 8,000 shares (80,000 shares x 10%). At a market price of $25 per share, total paid-in capital will increase by $200,000 (8,000 shares x $25/share) and retained earnings will decrease by that same amount.Learning objective 5: Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

Corporations have several officers who manage the corporation. The chief accounting officer is also known as the a. None of these b. treasurer. c. All of these d. controller. e. chief executive officer.

d. controller. The chief executive officer (CEO) has overall responsibility for managing the business. Other officers help the chief executive officer operate the corporation. One such officer is the controller. The controller is the chief accounting officer. The controller maintains the corporation's accounting records, systems of internal controls, and prepares its financial statements, tax returns, and internal reports. In contrast, the treasurer has custody of the corporation's funds and maintains the company's cash position.

Which of the following accounts is listed first in the stockholders' equity section of the balance sheet? a. Common stock because all corporations have outstanding common stock. b. Treasury stock. c. Retained earnings. d. Common stock if common stock had been issued. Otherwise, preferred stock is listed first. e. Preferred stock if preferred stock had been issued. Otherwise, common stock is listed first.

e. Preferred stock if preferred stock had been issued. Otherwise, common stock is listed first. The stockholders' equity section of the balance sheet shows paid-in capital accounts before retained earnings and treasury stock. Within the paid-in capital portion of the equity section, companies report the preferred stock account balance, if the company has outstanding preferred stock. Next, is common stock followed by the paid-in capital in excess of par value accounts.

Which one of the following is not an ownership right of a stockholder in a corporation? a. All these are shareholder ownership rights b. To share in assets upon liquidation. c. To vote in the election of directors. d. To share in corporate earnings paid as dividends. e. To declare dividends on the common stock.

e. To declare dividends on the common stock. Stockholders of corporations have certain rights. Stockholders vote for the company's board of directors. When the company is profitable and dividends are paid, they are paid to the stockholders. When the company eventually closes and liquidates, the company pays its obligations to its creditors and any residual amounts in excess oof amounts owed to creditors are paid to the stockholders.

Nichols Corporation declared a cash dividend of $1.20 per share on 40,000 shares of common stock on April 15. The dividend is to be paid one month later on May 15 to stockholders of record on April 30. The correct entry to be recorded on the date of declaration of April 15 will include a a. debit to the Dividends account and a credit to the Cash Dividends Payable account. b. none of these. c. debit to the Dividends Payable account and a credit to the Cash account. d. debit to the Cash Dividends account and a credit to the Cash account. e. debit to the Cash Dividends account and a credit to the Dividends Payable account.

e. debit to the Cash Dividends account and a credit to the Dividends Payable account. Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. The company journalizes the following on the date of declaration:It debits the Cash Dividends account for the amount of the dividend, and it credits Dividends Payable for the same amount. Nothing is journalized on the date of record. On the date of payment, the company journalizes the payment and reduction in the payable as follows: it debits Dividends Payable and credits Cash for the amount of the dividend paid.