Chapter 10- Stockholders' Equity

The balance sheet of California Clothing reports total equity of $600,000 and $700,000 at the beginning and end of the year, respectively. Net income and sales for the year are $65,000 and $1,300,000, respectively. What is California Clothing's return on equity?

$65,000/[($600,000 + $700,000)/2] = 10%.

Clothing Emporium was organized on January 1, 2015. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2015, Clothing Emporium had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is the total stockholders' equity at the end of 2015?

(30,000 x $7) + (20,000 x $8) + $100,000 − $50,000 = $420,000.

The disadvantages of the corporate form of business include:

Additional taxes.

Jade Jewelers issued 15,000 shares of $1 par value stock for $20 per share. What is true about the journal entry to record the issuance?

Credit Common Stock $15,000. Cash 300,000 Common Stock 15,000 Additional Paid in Capital 285,000

Retained Earnings:

Increases stockholders' equity.

When treasury stock is resold at a gain, the difference between its cost and the cash received when resold:

Increases stockholders' equity.

Which of the following stages of equity financing comes last in the traditional order of progression?

Initial Public Offering IPO

Outstanding common stock refers to the total number of shares:

Issued less treasury stock.

Why doesn't stockholders' equity equal the market value of equity?

It's related to the use of historical cost to report many long-term assets and the expensing of value generating costs such as research and development and advertising.

Retained Earnings represent a company's:

Net income less dividends since the company first started.

Which of the following statements about treasury stock transactions is true?

Stockholders' equity is reduced when treasury stock is purchased.

How does the stockholders' equity section in the balance sheet differ from the statement of stockholders' equity?

The stockholders' equity section shows balances at a point in time, whereas the statement of stockholders' equity shows activity over a period of time.

The balance of Retained Earning at the end of the year represents:

Total earnings less payments to owners over the life of the company.

The corporation's own stock that has been issued and then repurchased by the company is referred to as:

Treasury Stock

Both cash dividends and stock dividends:

reduce retained earnings

Treasury Stock:

Decreases stockholders' equity.

Which of the following accounts is not reported in the stockholders' equity section of the balance sheet?

Sales Revenue

On November 6, Coleman Corp. reacquired 1,000 shares of its $2 par value common stock for $27 each. On November 20, Coleman Corp. reissued 400 shares for $30 each. Which of the following is correct regarding the effect of the journal entry for the reissued shares?

Stockholders' Equity increases. Cash (400x$30) 12,000 Treasury stock(400x$27) 10,800 Additional Paid In Capital 1,200

Authorized common stock refers to the total number of shares:

That can be issued.

A feature common to both stock splits and stock dividends is

That there is no effect on total stockholders' equity.

The stockholders' equity section in the balance sheet shows:

The ending balance in each stockholders' equity account.

The par value of common stock represents:

The legal capital per share of stock assigned when the corporation was first established.

Financial information for Retro Designs includes the following selected data: Net income (in millions): $175 Preferred Stock Dividends (in millions): $25 common stock shares outstanding (in millions): 250 Stock Price: $10.00 What is the company's price-earnings ratio?

$10 ÷ $0.60* = 16.7. *Earnings per share = ($175 − $25) ÷ 250 = $0.60.

The balance sheet of Sand Sportswear reports total equity of $500,000 and $650,000 at the beginning and end of the year, respectively. The return on equity for the year is 20%. What is Sand Sportswear's net income for the year?

$115,000. Net income divided by average total assets equals 20%. Average total assets equal $575,000 [($500,000 + $650,000)/2]; therefore, net income must be $115,000 ($575,000 x 20%).

Financial information for Accessories Unlimited includes the following selected data: Net Income (in millions): $150 Shares outstanding (in millions): 300 Stock Price: $20.00 What is the company's return on the market value of equity?

$150 ÷ ($20.00 x 300) = 2.5%.

Financial information for Accessories Unlimited includes the following selected data: Net Income (In Millions): $150 Shares Outstanding (In Millions): 300 Stock Price: $20.00 What is the company's earnings per share?

$150 ÷ 300 = $0.50.

The ending Retained Earnings balance of Lambert Inc. increased by $1.5 million from the beginning of the year. The company's net income earned during the year is $3.5 million. What is the amount of dividends Lambert Inc. declared and paid?

$2.0 million. Net income minus dividends equals the change in retained earnings.

California Adventures issues 5,000 shares of 8%, $100 par value preferred stock at the beginning of 2014. All remaining shares are common stock. The company was not able to pay dividends in 2014, but plans to pay dividends of $100,000 in 2015. Assuming the preferred stock is noncumulative, how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2015?

$40,000 to preferred stockholders and $60,000 to common stockholders. Preferred Dividends in arrears from 2014 are lost: $0 Preferred dividends for 2015 (5000 shares x 8% x $100 par value): $40,000 Remaining dividends to common stockholders$60,000 =$100,000

Over the first four years of the company's life, it earned the following net income (loss): $6,000; $3,000; $6,000, and ($2,000). If the company's ending retained earnings is $10,000 after year 4, what is the average amount of dividends paid per year?

($6,000 + $3,000 + $6,000 − $2,000) = $13,000 − $10,000 = $3,000/4 = $750.

Clothing Emporium was organized on January 1, 2015. The firm was authorized to issue 100,000 shares of $5 par value common stock. During 2015, Clothing Emporium had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is the total amount recorded in the Common Stock account at the end of 2015?

(30,000 x $5) + (20,000 x $5) = $250,000.

Preferred stock:

Can have features of both liabilities and stockholders' equity.

When a company issues 25,000 shares of $1 par value common stock for $10 per share, the journal entry for this issuance would include:

A credit to Additional Paid-in Capital for $225,000. Cash 250,000 Common Stock 25,000 Addition Paid in capital 225,000

Treasury Stock is normally reported as:

A reduction of total stockholders' equity.

Which of the following statements is not true regarding earnings per share?

A.) Earnings per share is calculated as net income minus dividends on preferred stock all divided by the average number of common shares outstanding. ***B.) Earnings per share is useful in comparing earnings performance across companies at the same point in time. C.) Earnings per share is calculated as net income minus dividends on preferred stock all divided by the average number of common shares outstanding. D.) Earnings per share is forecasted by financial analysts.

Fashion, Inc. had a Retained Earnings balance of $12,000 at December 31, 2015. The company had an average income of $7,500 over the next 3 years, and an ending Retained Earnings balance of $15,000 at December 31, 2016. What was the total amount of dividends paid over the last three years?

Beginning RE + Net income − Dividends = Ending RE. $12,000 + 22,500 ($7,500 x 3) − Dividends = $15,000. Dividends = $19,500.

Which of the following has the highest expected return to the investor?

Common Stock

Which of the following is the most likely to have voting rights?

Common Stock

Which of the following is not a potential feature of preferred stock?

Convertible. Redeemable. Cumulative. They all potential features.

Hayes Corporation issues 100 shares of its $1 par value common stock for $15 per share. The entry to record the issuance will not include a:

Debit to Cash $1,500. Credit to Additional Paid-In Capital $1,400. Credit to Common Stock of $100. All these are right

When treasury stock is purchased, what is the effect on total stockholders' equity?

Decrease

What would be the impact on the accounting equation when a company purchases treasury stock?

Decrease assets and decrease stockholders' equity.

The declaration and issuance of a stock dividend:

Does not change total assets, liabilities, or total stockholders' equity.

The Retained Earnings balance reported on the balance sheet typically is not affected by:

stock splits