Intermediate Accounting II - Chapter 15 - True or False

False (The shareholder who owns convertible preferred stock not only enjoys the preferred claim on dividends, but also has the option of converting into a common shareholder. Because of the attractiveness of this feature, convertible preferred stock will normally sell for a higher price than the same issue would without the conversion feature.)

True or false? A convertible preferred stock issue normally will sell for a lower price than the same issue would without the conversion feature.

False (Cash dividends are not declared and paid on treasury stock.)

True or false? A corporation must pay cash dividends on treasury stock.

False (A declared cash dividend is a liability.)

True or false? A declared cash dividend is not a liability because the board of directors can simply undeclare the dividend.

True

True or false? A property dividend is a nonreciprocal transfer of nonmonetary assets between an enterprise and its owners.

True

True or false? A stock dividend results in a capitalization of retained earnings with no corresponding decrease in total stockholders' equity.

True

True or false? A company might purchase its outstanding stock to provide tax efficient distributions of excess cash to shareholders.

False (This statement is generally false. Growth companies need all the capital they can generate either through operations (net income) or outside financing (investors or creditors). People investing in such companies generally recognize this fact and hope they generate a positive increase in the value of their stock holdings.)

True or false? All things being equal, growth companies tend to pay larger dividends than well established companies, because growth companies have to provide an extra incentive for potential investors.

True

True or false? Any dividend not based on profits must be a reduction of corporate capital, and to that extent, it is a liquidating dividend.

True

True or false? Any dividend other than a stock dividend reduces the stockholders' equity in the corporation.

False (Contributed capital (paid-in capital) is the term used to describe the total amount paid in on capital stock at any given time. Earned capital is the capital that develops if the business operates profitably.)

True or false? Contributed capital is the capital that develops if the business operates profitably.

True

True or false? Contribution by shareholders (paid-in capital) and income retained by the corporation represent the two primary sources from which corporate equity is derived.

False (No liability exists for preferred dividends in arrears. The only time a liability exists for dividends is after they are declared by the board of directors. Any dividends in arrears on preferred stock should be disclosed in a footnote to the financial statements.)

True or false? Dividends in arrears on preferred stock should be classified on the balance sheet as a liability.

True

True or false? From an accounting standpoint, no entry is recorded for a stock split.

True

True or false? If a stock dividend is large (more than 20-25%), the distribution should be referred to as a stock split.

True

True or false? Management salaries and other indirect costs related to a stock issue should be expensed as incurred.

False (Anyone who wishes to establish a corporation must submit articles of incorporation to the proper department of the government of the state in which incorporation is desired. The federal government does not grant corporate charters.)

True or false? Most corporations are granted their charters directly by the federal government.

True

True or false? One of the major distinctions between a stock split and a stock dividend is the fact that a stock split alters the par or stated value of the stock issue involved, while a stock dividend does not affect par or stated value.

False (The participating feature of preferred stock refers to the right of preferred shareholders to share ratably with the common stockholders in any profit distribution beyond the prescribed rate. Preferred stock is normally nonvoting stock.)

True or false? Preferred stock does not have the voting right unless it possesses the participating feature.

True

True or false? The current cash position of a corporation is a prime consideration in deciding whether a cash dividend should be declared.

False (A property dividend is a nonreciprocal transfer of nonmonetary assets between an enterprise and its owners. A transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset.)

True or false? The distribution of a nonmonetary asset as an ordinary dividend may be regarded as equivalent to an exchange with owners and, therefore, recorded at the book value of the nonmonetary asset distributed.

True

True or false? The dividend preference related to preferred stock is merely an assurance that the stated dividend rate or amount must be paid before any dividends can be paid on the common stock.

False (If treasury stock is reissued at a price in excess of the acquisition cost, the excess is credited to an account titled Paid-in Capital from Treasury Stock. This account is shown in the equity section of the balance sheet. A corporation cannot report a "gain" or a "loss" from dealing in its own stock.)

True or false? The gain on the sale of treasury stock should be included in income before extraordinary items on the income statement.

False (The par value of a stock issued has no relationship to the fair market value of the stock. Par value has but one real significance; it establishes the maximum responsibility of a stockholder in the event of corporate insolvency or other involuntary dissolution.)

True or false? The par value of a share of common stock usually is a good indication of what the stock is worth on the market.

True

True or false? The preemptive right protects an existing stockholder from involuntary dilution of ownership interest.

False (The rate of return on common stock equity is computed by dividing net income less preferred dividends by average common stockholders' equity.)

True or false? The rate of return on common stock equity is computed by dividing sales by average common stockholders' equity.

True

True or false? Treasury shares are issued shares of the company's own stock that have been reacquired but not retired.

True

True or false? Treasury shares represent a reduction in the number of outstanding shares but not in the number of issued shares.

True

True or false? Treasury stock should be shown as a deduction from total stockholders' equity.

True

True or false? Under the incremental method, the market value of the securities is used as a basis for those classes that are known and the remainder of the lump sum is allocated to the class for which the market value is NOT known.

True

True or false? Very few companies pay dividends in amounts equal to their retained earnings legally available for dividends.

False (When a stock dividend is less than 20-25% of the common shares outstanding at the time of the dividend declaration, the fair market value of the stock issued should be transferred from retained earnings.)

True or false? When a stock dividend is less than 20-25% of the common shares outstanding at the time of the dividend declaration, the par value of the stock issued should be transferred from retained earnings.

False (The general rule to be applied when stock is issued for assets other than cash is that the noncash assets be recorded at either their fair market value or the fair market value of the stock issued, whichever is more clearly determinable.)

True or false? When capital stock is issued for noncash assets, the assets received should be recorded at the par value of the stock issued.