acg ch 11

What method is normally used to account for treasury stock?

Cost method

Which of these is a disadvantage of corporations?

Government regulations

Maker-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding since its inception. No dividends were declared in the first two years. If the company pays $375,000 of dividends in the third year, how much will common stockholders receive?

$135,000 Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the two years in arrears and the current year. Total dividend = 10,000 x 8% x $100 = $80,000 Preferred dividends in arrears for two years ($80,000 × 2) = $160,000 Preferred for current year = $80,000 Total dividends to preferred stockholders = $240,000 Total dividends available = $375,000 Dividends available to common stockholders = $135,000

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 be reduced?

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

Vernon Corporation reported income before taxes of $2,000. It paid $200 in corporate income taxes so its net income is $1,800. The corporation paid its shareholder, an individual named Ernest, a $300 dividend. The shareholder is in the 10% tax bracket. How much in personal income taxes will the shareholder need to pay?

$30 One of the disadvantages of a corporate structure is the corporation pays its own tax burden on net income and then the stockholders pay income tax on the dividends they receive. Ernest must pay an additional $30 (i.e., $300 x 10%).

A corporation shows the following account balances: Retained earnings, $315,000 Treasury stock, $10,000 Dividends payable, $30,000 Paid-in capital in excess of par value, $55,000 Common stock, $215,000 How much is total stockholders' equity?

$575,000 Total stockholders' equity = Retained earnings - treasury stock + paid-in capital in excess of par value + common stock Total stockholders' equity = $315,000 - $10,000 + $55,000 + $215,000 = $575,000 Note: Dividends Payable is a liability.

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; 2,700,000 shares issued, 2,460,000 shares outstanding, $2,700,000 Paid-in capital in excess of par value - preferred stock, $180,000 Paid-in capital in excess of par value - common stock, $51,500,000 Retained earnings, $23,000,000 Treasury stock (40,000 shares), $1,050,000 The company's total stockholders' equity is

$76,510,000. 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 + 2,700,000 + 180,000 + 51,500,000 + 23,000,000 - 1,050,000 = $76,510,000

A corporation shows the following account balances: Retained earnings, $375,000 Treasury stock—common, $20,000 Paid-in capital in excess of par value—common, $60,000 Treasury stock—preferred, $20,000 Common stock, $200,000 Preferred stock, $175,000 Paid-in capital in excess of par value—preferred, $60,000 How much is total stockholders' equity?

$830,000 Total stockholders' equity = Retained earnings - treasury stock--common + paid-in capital in excess of par value--common - treasury stock--preferred + common stock + preferred stock + paid-in capital in excess of par value--preferred Total stockholders' equity = $375,000 - $20,000 + $60,000 - $20,000 + $200,000 + $175,000 + $60,000 = $830,000

Consider the following data for a corporation: Net income, $800,000 Preferred stock dividends, $50,000 Market price per share of stock, $25 Average common stockholders' equity, $4,000,000 Cash dividends declared on common stock, $20,000 What is the return on common stockholders' equity?

18.75% Return on common stockholders' equity = Net income less preferred stock dividends divided by the average common stockholders' equity Return on common stockholders' equity = ($800,000 - $50,000)/$4,000,000 = 18.75%.

Vista, Inc. has 250,000 shares of common stock outstanding. A 40% stock dividend was declared and issued. How many shares are outstanding after the stock dividend?

350,000 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: 250,000 + (250,000 x 40%) = 350,000 shares.

A corporation is authorized to sell 1,000,000 shares of common stock. Today there are 400,000 shares outstanding, and the board of directors declares a 10% stock dividend. How many shares will be issued as a stock dividend?

40,000 This number of outstanding shares is multiplied by the percentage of the stock dividend to get the total new shares to be issued. 400,000 shares outstanding x 10% = 40,000 new shares to be issued

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 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

Which statement about stock dividends is true?

A stock dividend has no effect on total stockholders' equity.

Dynatech issues 1,000 shares of $7 par value common stock at par. When the transaction is recorded, which accounts are credited?

Common Stock $7,000 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 = 1,000 x $10 = $10,000 Credit to Common stock = 1,000 x $7 = $7,000 Credit to Paid-in capital in excess of par value = 1,000 x ($10 - $7) = $3,000

If a corporation has incurred a net loss, which of the following is true?

Debited to Retained Earnings in a closing entry

Forming a corporation does not necessarily involve

Incurring debt

In the stockholders' equity section of the balance sheet, where and how is treasury stock reported?

It is reported as a deduction appearing after both total paid-in capital and retained earnings.

Which of the following represents the amount that must be retained in the business for the protection of corporate creditors?

Legal capital

For what reason might a company acquire treasury stock?

To reissue the shares to officers and employees under bonus and stock compensation plans

A corporation issued 1,000 shares of its $1.00 par value common stock for $8.00 per share and later repurchased 200 of those shares for $3.00 per share. Which of the following will be debited to record the repurchase of the shares?

Treasury Stock for $600 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: 200 shares x $3/share = $600.

Corporations have several officers who manage the corporation. One such officer is the treasurer. The treasurer

has custody of the corporation's funds and maintains the company's cash position.

Which event does not require a journal entry?

The record date of a cash dividend

Which of the following is a characteristic of sole proprietorships?

Low taxation

Which one of the following is not a right of preferred stockholders?

Priority voting rights

A corporation has the following equity account balances: Common stock, $2.50 par value, $75,000 Paid-In Capital In Excess of Par Value, $2,400,000 Based on this information, the corporation's

legal capital is $75,000. Solution: Issued shares are the total number of shares sold (i.e., issued) to stockholders. When stock is issued, the company records the par value of the shares issued in its stock account (e.g., Common Stock). This company has $75,000 recorded in its Common Stock account, and its common stock has a $2.50 par value per share so it has issued 30,000 shares (i.e., $75,000/$2.50 par per share = 30,000 shares). Even acquiring treasury stock does not affect the amount recorded in Common Stock because treasury stock affects the company's Treasury Stock account and not its Common Stock account. Par value is often used to determine a corporation's legal capital, and legal capital does not include Paid-In Capital in Excess of Par Value. This company's legal capital is $75,000. The average price per share issued is computed as the proceeds from issuing the stock divided by the number of shares issued [i.e., ($75,000 + $2,400,000)/30,000 shares = $82.50].

ABC Corporation has cumulative preferred stock on which it pays dividends of $25,000 per year. The dividends are in arrears for three years. If the corporation plans to distribute $120,000 as dividends in the current year, how much will the common stockholders receive?

$20,000 Stockholders who own cumulative preferred stock receive an allocation for each of the past three years (i.e., the preferred stock is in arrears for three 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 three years ($25,000 × 3) = $75,000 Preferred for current year = 25,000 Total dividends to preferred stockholders = $100,000 Total dividends available = $120,000 Dividends available to common stockholders = $20,000

Ramona, Inc. has 2,500 shares of 6%, $100 par, cumulative preferred stock and 80,000 shares of $4 par common stock outstanding. Last year the board of directors declared and paid a $5,000 dividend. This year the dividend declared and paid was $30,000. What amount of this dividend will be paid to the preferred stockholders?

$25,000 Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the prior year and the current year. Total dividend = 2,500 x 6% x $100 = $15,000 Preferred dividends in arrears for prior year ($15,000 - $5,000) = $10,000 Preferred dividends for current year = 15,000 Total dividends to preferred stockholders = $25,000

If a corporation issues 1,000 shares of $3 par common stock for $7 a share, how much is the legal capital?

$3,000 Legal capital is the amount that must be retained in the business for protection of the corporate creditors. Traditionally, corporations issued stock with a par value. Par value is an amount listed in the corporate charter assigned to each share of stock, and it can be used to determine the legal capital. More recently, states have allowed corporations to issue stock without a par value. In those cases, legal capital is determined through other means. The legal capital is the par value per share ($3 per share) times the number of shares issued (1,000) or $3,000. This will be equal to the total reported in the stock account.

Danielle Inc. has 10,000 shares of 6%, $50 par, non-cumulative preferred stock and 75,000 shares of $4 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 $75,000 dividend this year. What amount of the total dividend will be paid to common stockholders?

$45,000 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 = 10,000 x 6% x $50 = $30,000 Total dividends available = $75,000 Dividends available to common stockholders = $45,000

The following data is available for Red Carpet Corporation at December 31: Common stock, par $5 (authorized 250,000 shares) $400,000 Treasury stock (at cost $15 per share) $ 3,000 Based on the data, how many shares of common stock are outstanding?

79,800 Solution: The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $400,000 and common stock has a $5 par value per share the company the company must have 80,000 shares of common stock outstanding (i.e., $400,000/$5 per share = 80,000 shares). This company has treasury stock. Treasury stock is a corporation's own stock that has been reacquired. Treasury stock reduced the number of shares outstanding. With $3,000 of treasury stock recorded on the company's books and a $15 cost per share the company must have 200 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 79,800 shares outstanding (i.e., 80,000 - 200 = 79,800).

In its first year, Raydine Inc. reported sales revenue of $1,100,000, net income of $186,000 and paid dividends of $26,000 to common stockholders. It also paid dividends on its 10,000 shares of 6%, $100 par value, noncumulative preferred stock. Common stockholders' equity was $1,200,000 at the start of the year and $1,600,000 at the end of the year. How much is the company's return on common stockholders' equity in its first year?

9.0% The return on common stockholders' equity is calculated by dividing the net income less the preferred stockholders' dividends by the average common stockholders' equity: [$186,000 - (10,000 shares x $100/share x 6%)] ÷ [($1,200,000 + $1,600,000) ÷ 2] = 9%.

Desert Towers Inc. issued 3,000 shares of $6 par value common stock for $7 per share. Which of the following is included in the journal entry to record the issuance?

Credit to Common Stock for $18,000 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 = 3,000 x $7 = $21,000 Credit to Common stock = 3,000 x $6 = $18,000 Credit to Paid-in capital in excess of par value = 3,000 x ($7 - $6) = $3,000

Windham, Inc. issued 1,000 shares of common stock at $10 per share. If the stock has a par value of $4 per share, which of the following will be part of the journal entry to record the issuance?

Credit to Common Stock for $4,000 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 = 1,000 x $10 = $10,000 Credit to Common stock = 1,000 x $4 = $4,000 Credit to Paid-in capital in excess of par value = 1,000 x ($10 - $4) = $6,000

Harrison, Inc. issued 5,000 shares of $15 par value preferred stock at $18 per share. Which of the following will be part of the journal entry to record the issuance?

Credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $15,000 The journal entry will increase the cash account for the total issue price, increase the preferred 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 preferred stock in the amount of the excess received above par value. Debit to Cash = 5,000 x $18 = $90,000 Credit to Preferred Stock = 5,000 x $15 = $75,000 Credit to Paid-in capital in excess of par value = 5,000 x ($18 - $15) = $15,000

Adler Company declared a cash dividend of $1.00 per share on 20,000 shares of common stock on January 15. The dividend is to be paid one month later on February 15 to stockholders of record on January 31. Which of the following summarizes the effects of the journal entry recorded on the date of record on January 31?

No journal entry is recorded on the date of record.

Which of the following is false with regards to corporations?

Privately held corporations tend to have more shareholders than publicly traded corporations.

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?

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.

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

debit to the Cash Dividends account and a credit to the Dividends Payable account. Solution: 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.

A corporation has the following equity account balances: Common stock, $2 par value, $80,000 Paid-In Capital In Excess of Par Value, $2,700,000 Based on this information, the corporation's

legal capital is $80,000. Solution: Issued shares are the total number of shares sold (i.e., issued) to stockholders. When stock is issued, the company records the par value of the shares issued in its stock account (e.g., Common Stock). This company has $80,000 recorded in its Common Stock account, and its common stock has a $2 par value per share so it has issued 40,000 shares (i.e., $80,000/$2 par per share = 40,000 shares). Even acquiring treasury stock does not affect the amount recorded in Common Stock because treasury stock affects the company's Treasury Stock account and not its Common Stock account. Par value is often used to determine a corporation's legal capital, and legal capital does not include Paid-In Capital in Excess of Par Value. This company's legal capital is $80,000. The average price per share issued is computed as the proceeds from issuing the stock divided by the number of shares issued [i.e., ($80,000 + $2,700,000)/40,000 shares = $69.50].