Adaptive CHP 11

Design Corporation has 400,000 shares of $10 par-value common stock issued and outstanding when the market price is $25 per share. By what amount will total equity increase when the company declares a 2:1 stock split?

A stock split does not affect any component of equity. The original par value of the stock was $4,000,000. The 2:1 stock split decreases the par value of each share of stock from $10 to $5 and increases the number of shares from 400,000 to 800,000, maintaining a total par value of $4,000,000.

Joe Jones is a 30% stockholder in ABC Corporation. Although he owns more stock than any other stockholder owns, he may purchase and sell inventory only if he is designated as ________ for ABC.

Although Joe owns more stock than any other stockholder, he may only purchase and sell inventory if he is designated as an agent for ABC Corporation. Agents are appointed by the corporation, and the corporation is held responsible for the agent's actions.

If the paid-in capital in excess of par value increases in the accounting records, it means that

If the paid-in capital in excess of par value increases in the accounting records, it means that capital stock is issued at an amount greater than the par value.

The board of directors of Testa Incorporated has decided that they would like to declare a $400,000 cash dividend at some point in the near future. The company currently has Retained Earnings of $2,419,000 and a Cash balance of $827,000. They also have current liabilities totaling $436,000. What is missing in order for Testa to be able to pay a cash dividend?

A healthy cash reserve is what's missing for Testa Incorporated to be able to pay a cash dividend. For a company to pay dividends, it must have sufficient retained earnings, an adequate balance in cash, and the board of directors must declare the dividend.

When companies set their dividend payout, they generally aim for a rate that is

Companies setting their dividend payout generally aim for a sustainable rate. Investors typically evaluate the company's standings as well as the dividend record; maintaining a sustainable rate is attractive to investors.

Claire and David hold stock in two different companies, but both recently received additional shares of common stock rather than a cash dividend. After receiving the additional stock, the par value of Claire's stock decreased by 67%, but the par value of David's stock remained the same. What is the difference between Claire and David?

Claire received a stock split, and David received a stock dividend. In a stock split, the par value of the stock is decreased based on the type of split. For example, the par value of the stock in a 3-for-1 stock split would decrease by 67 percent. However, in a stock dividend, the par value of the stock does not decrease.

Edge Corporation issues 20,000 shares of $5 stated value no par stock in exchange for land with an advertised price of $125,000 when the stock is actively trading for $6 per share. Journalize the entry to recognize the exchange.

In this scenario, it is reasonably easy to determine the fair value of the stock since it is currently trading at $6 per share. Multiplying this figure by the 20,000 shares will result in a value of $120,000 for the land. Common Stock is credited for the stated value of $100,000, and Paid-in Captial in Excess of Stated Value - Common Stock is credited $20,000.

Trainor Sports recently issued 25,000 shares of its $12 par value common stock for $450,000. Which amounts represent legal capital and total paid-in capital, respectively?

Legal capital is based on the par value of the stock issued (25,000 X $12 = $300,000), and total paid-in capital refers to the proceeds from the sale of stock ($450,000).

Dellinger Incorporated issued 100,000 shares of no-par common stock with a stated value of $7 per share. How would the accounting for these shares differ if they had instead issued no-par common stock without a stated value?

No-par common stock with a stated value is that the stated value is credited to the Common Stock account and the amount over the stated value is credited to the Paid-in Capital in Excess of Par Value account. However, if there is no stated value, the full amount received for the no-par stock with no stated value is credited to the Common Stock account.

Accountants at Cerulean Corporation are busy preparing their quarterly report for the SEC, while accountants at Chartreuse Company are able to work on other projects. How do the two compare?

Privately held companies are not required to issue reports to the SEC because their shares of stock are not publicly traded.

The initial market price of a stock is affected by which of the following?

The company's anticipated future earnings, the current state of the economy, and the expected dividend rate per share all affect the initial market prices of stock. Potential investors want to know their investment is protected by the decisions the company makes along with their plans.

On their books, Boston Enterprises has $3.4 billion in paid-in capital and $1.8 billion in retained earnings. What is the maximum amount that Boston Enterprises could consider paying in dividends to stockholders, assuming they have the cash on hand?

The maximum amount that Boston Enterprises could consider paying in dividends to stockholders is $1.8 billion, assuming they have that much cash. While the payment of dividends from retained earnings is legal in all states, many states prohibit dividend payments from legal capital.

At what point are preferred dividends considered a liability?

When the board of directors declares a dividend, it becomes a liability. Dividends in arrears are not considered liabilities, but they should be disclosed in the notes to the financial statements.