Chapter 18

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A 2-for-1 stock split increases the marketability of the stock because

the market price per share decreases.

State laws regulate which of the following corporate activities?

issuance of stock repurchase of stock nature of share authorization

When stock splits or stock dividends result in fractional shares, the situation is handled by

issuing cash payments for the fractional shares.

Corporations raise equity capital by

issuing stock. operating at a profit.

A limitation of the return on shareholders' equity ratio is that

it uses the book value of equity

Distributions of stock to current shareholders of a corporation are called what type of distribution?

stock dividend

Which of the following dividends has no effect on total owners' equity?

stock dividend

Canton has 60,000 shares of $10 par issued and outstanding. Canton declares a 2-for-1 stock split. What is the par value and number of shares outstanding after the stock split?

$5 par; 120,000 shares

Which of the following transactions are classified as a stock dividend?

A distribution of additional shares of a corporation's stock to current shareholders of the corporation.

Which account is a stockholders' equity account?

Additional Paid In Capital

Right to exchange preferred stock for common stock

Conversion

If preferred shares must be redeemed by a certain date, they should be classified as

Debt

A distribution of 25% or more of the outstanding shares of stock is treated as which of the following?

Either a stock dividend or a stock split

True or false: A corporation is owned by debt and equity holders.

False

True or false: The balance sheet should disclose the sources of changes in the stockholders' equity accounts.

False

True or false: Treasury stock represents investments in treasury securities of the U.S. government.

False

True or false: When investors purchase shares of stock from a corporation, it is recorded by the corporation as investments in securities.

False

The most important advantage to the corporate form of business is

Limited Liability

the following accounts are classified as shareholders' equity

Net unrealized holding gains on investments Preferred stock Additional paid-in capital

Which of the following accurately describes shareholders' equity?

Ownership interests of the shareholders

Fantastic Gold Inc. declares and distributes to its shareholders 1 gram of gold in lieu of a cash dividend. Fantastic Gold is distributing a(n)

Property Dividend

Which type of dividend does not reduce the assets of the firm or create a liability?

Stock Dividend

Royce has 100,000 shares of $10 par issued and outstanding. Royce declares a 2-for-1 stock split in the form of a stock dividend. Which of the following are true?

The par value will not change. The number of shares outstanding increases.

Preferred stock is similar to a bond when it has which of the following features?

a dividend rate a mandatory redeemable feature

Mandatorily redeemable preferred stock is reported as

a liability on the balance sheet

When a business incorporates, it must file its ______ with the state in which it incorporates.

articles of incorporation

Retained earnings is typically reported on the balance sheet

as a single amount.

Formally retiring shares reduces these accounts to their pre-issuance condition:

common stock paid-in capital in excess of par

When a corporation issues shares of common stock for an amount above par, which of the following entries occur?

credit to common stock credit to additional paid-in capital

The journal entry to record a stock split effected in the form of dividends may include which of the following?

credit to common stock debit to retained earnings debit to paid-in-capital

If preferred shares must be redeemed by a certain date, they should be classified as

debt

When a company repurchases shares held as treasury stock, the number of shares outstanding

decreases

If more than one class of shares is authorized, what type of information must be specified?

designation to distinguish each class specific rights for each class

When a company issues different classes of shares, it must

distinguish the rights for each class of stock.

When a corporation repurchases its stock as treasury stock, the number of shares authorized

does not change

The earnings-price ratio is ______ divided by ______.

earnings per share; market price per share

What is the effect of the repurchase of treasury stock on the return on shareholders' equity ratio?

increase

A nonreciprocal transfer to owners is referred to as a

property dividend.

The purposes of a quasi reorganization are to

reduce the deficit in retained earnings. write down inflated assets.

When a corporation repurchases its stock as treasury stock, the number of shares issued

remains the same.

Which of the following are sources of shareholders' equity?

retained earnings paid-in capital

Miles Corp. declares and distributes a 3-for-1 stock split effected in the form of a 200% stock dividend. Miles had 10,000 shares of $1 par value common stock valued at $8 per share before the stock split. If Miles wishes to capitalize retained earnings, the journal entry required to record the stock split would include a debit to

retained earnings $20,000.

When a small stock dividend is declared and distributed,

retained earnings is reduced by the market value of the shares issued

A company that repurchases its own securities accounts for the shares of stock as

retired shares or treasury shares.

If a company wishes to increase its stock price, it might declare a(n)_____________stock split.

reverse

Mueller Company issues one share in exchange for two outstanding shares of common shares. Mueller must have had a:

reverse stock split

When a company decreases its outstanding shares of stock by exchanging 1 share of stock for 10 shares, this is referred to as a(n)

reverse stock split.

Under IFRS, shareholders' equity typically is classified under two categories referred to as:

share capital reserves

The costs for legal, promotional, and accounting services to issue stock should be

subtracted from the proceeds of issuing stock.

A property dividend is recorded at

the fair value of the assets at the dividend declaration date.

In year 1, Clark purchased 1,000 shares of treasury stock for $10 per share. In year 2, Clark reissued 200 shares of treasury stock for $14 per share. The journal entry to record the transaction in year 2 will include a credit to

treasury stock for $2,000.

True or false: No journal entry is required on the date of record.

true

A frequent reason for a stock split is to

cause the market price per share to decline

f a corporation issues its shares of stock for a noncash asset, at what amount should the transaction be recorded?

The fair value of the stock

Who regulates the nature of shares that can be authorized, the issuance and repurchase of those shares, and the distributions to shareholders?

The state in which the corporation is incorporated

Formally retiring shares has what effect on total shareholders' equity?

decreases

Miles Corp. declares and distributes a 3-for-1 stock split effected in the form of a 200% stock dividend. Miles had 10,000 shares of $1 par value common stock valued at $8 per share before the stock split. If Miles does not capitalize retained earnings, the journal entry required to record the split would include a debit to

paid-in capital in excess of par $20,000.

Historically, par value indicated

the amount of net assets that were not available for distribution to shareholders. the real value of shares the issue price of all shares

Statement of stockholders' Equity

Reports sources of the changes in stockholders' equity accounts.

How should cash dividends be reported on the statement of shareholders' equity?

As a reduction of retained earnings.

A company has available-for-sale debt securities in its portfolio that have increased in value at year-end. How should the unrealized gain on the available-for-sale securities be reported on the statement of shareholders' equity? (Assume the fair value option is not elected.)

As an increase in comprehensive income.

The effect of share issue costs is to

reduce paid-in capital in excess of par. Share issue costs reduce the net cash proceeds from selling the shares thus paid in capital - excess of par

Reynolds Corp. has 100,000 shares of $1 par value common stock issued and outstanding. Reynolds declares a 20% stock dividend when the fair value of the stock is $8 per share. The debit to retained earnings for the stock dividend is

$160,000.

Which of the following may be a source of paid-in capital?

Company repurchases some of its outstanding common stock Company sells stock to investors Share-based compensation activities

_____________ include(s) all changes in equity during a period except those resulting from investments by owners and distributions to owners.

Comprehensive income

In year 1, Sofia Corp. issued 1,000 shares of $1 par value common stock for $10 per share. In year 4, Sofia repurchased and immediately retired 100 shares of the stock at $6 per share. Which of the following entries would be included in the journal entry to retire the shares? (Select all that apply.)

Credit paid-in capital—share repurchase $400. Debit paid-in capital in excess of par $900. Debit common stock $100.

In year 1, Pride Corp. issued 10,000 shares of $1 par value common stock for $8 per share. In year 3, Pride repurchased and immediately retired 1,000 shares of the stock at $6 per share. Which of the following entries would be required to retire the shares?

Debit paid-in capital in excess of par $7,000.

Which of the following are characteristics of treasury stock?

It has no voting rights. It does not receive a dividend. It is stock that is repurchased by the company.

When investors purchase shares of stock, it is classified as

Paid In Capital

The date on which a company determines the registered owners of the stock who will receive a dividend is referred to as the

Record Date

Balance Sheet

Reports amounts of shareholders' equity at end of reporting periods.

If a company has preferred stock outstanding, a variation of calculating return on shareholders' equity can be made by making which adjustments to the ratio?

Subtract preferred dividends from net income. Use average common shareholders' equity in the denominator.

When a corporation issues two securities for a single price, how is the issue price usually allocated?

The cash received is allocated based on the relative market value of each security.

When a company repurchases its own shares of stock, what are the two acceptable accounting choices for the transaction?

The shares can be called treasury shares. The shares can be formally retired.

When a company repurchases its own shares of stock, what are the two acceptable accounting choices for the transaction?

The shares can be formally retired. The shares can be called treasury shares.

A restriction of retained earnings signifies that

a portion of retained earnings is not available for dividends.

Which of the following items are included in other comprehensive income?

adjustments from foreign currency translations net holding gains and losses on certain types of investments

A business that incorporates must file a document with the state, which includes a description of the business activities, the shares to be issued, and the composition of the board of directors. Which of the following terms are used to describe this document?

articles of incorporation corporate charter

Under IFRS, the critical feature that distinguishes a liability is if the issuer can be required to deliver ______ or another financial instrument to the holder.

cash

A restriction of retained earnings (select all that apply)

communicates the portion of retained earnings not available for dividends. indicates management's intention to withhold assets for a specified purpose.

The date on which the board of directors announces that a dividend will be paid is referred to as the

declaration date.

Preferred stockholders usually have preference over common stockholders with respect to which items?

distribution of assets in liquidation dividends

When a corporation distributes assets of the company to its investors, it is referred to as a(n)

dividend.

True or false: The return on shareholders' equity ratio is calculated as net income divided by common stock.

false

A stock split effected in the form of a large stock dividend

has no effect on the par value of the stock. reduces paid in capital - excess of par.

The most likely reason for a company to declare a reverse stock split is to

increase the market value of the shares.

In a corporation, shareholders' liability is

limited to the amount of the investment.

When the dividend exceeds the balance in retained earnings, the excess is referred to as a(n)

liquidating dividend

Return on shareholders' equity indicates the percent of corporate earnings for each dollar of total equity invested in the corporation, whereas the earnings-price ratio reflects the percentage earned for each dollar of

market value of common stock

A reverse stock split requires

no journal entry.

The return to common shareholders' equity is calculated by subtracting Blank______ from net income and dividing that amount by average Blank______.

preferred dividends; shareholders' equity attributed to common shareholders

The two types of corporations are

profit and not-for-profit.

Amounts earned by the corporation on behalf of its shareholders are referred to as

retained earnings.

When a company issues its shares of stock for a noncash asset, which of the following may provide evidence of fair value of the transaction?

the amount of cash that would be paid to purchase the asset an independent appraisal of the value of the asset the quoted market price for the shares

Historically, par value was considered to be

the amount of net assets that were not available for distribution to shareholders.

For IFRS reporting, the critical feature that distinguishes a liability from equity is if

the issuer is required to deliver cash or another financial instrument to the holder.

When a company believes the market price of its stock is__________it may attempt to support the price by________________the supply of stock through stock repurchases.

undervalued; decreasing

A quasi-reorganization allows a firm that is undergoing financial difficulties to

write-down inflated assets and reduce an accumulated deficit

Which of the following describe the ways in which companies may record stock splits effected in the form of dividends?

Capitalize retained earnings. Reduce the paid-in capital in excess of par account.

Which of the following is subject to double taxation?

Corporations

IFRS

International Financial Reporting Standards

Which of the following has limited liability for its owners, but passes income through to its investors and avoids double taxation?

S Corporation

The ownership interests of the investors in a corporation are referred to as

Stockholders' Equity

A liquidating dividend means that

dividends exceed retained earnings.

Because the return on shareholders' equity is based on the book value of equity, analysts often supplement their understanding of the return to shareholders with the

earnings-price ratio

A small stock dividend is usually less than Blank______% of the number of shares of stock outstanding.

25%

Farley Corp. has 50,000 shares of $1 par value common stock issued and outstanding. Farley declares a 10% stock dividend when the fair value of the stock is $9 per share. Which of the following entries will be included in the entries required to record the declaration and payment of the stock dividend

Debit retained earnings $45,000. Credit additional paid-in capital $40,000. Credit common stock $5,000.

A corporation's accumulated income that has not been distributed as dividends to shareholders is referred to as

Retained Earnings

When does a dividend become a liability to a corporation?

When it is declared by the board of directors

Shareholders' equity consists of

amounts invested by shareholders amounts earned by the corporation

A corporation's accumulated, undistributed net income or loss is referred as

retained earnings.

S corporations have the limited liability of a corporation, but income and expenses are passed through the owners as in a partnership, avoiding double taxation.

S

When the dividend exceeds the balance in retained earnings, the excess is referred to as a(n)

Blank 1: liquidating or liquidation dividend

When stock splits or stock dividends result in fractional shares, companies issue ________________payments along with the additional shares to compensate for the fractions.

CASH

When common stock has a designated par value, and common stock is issued at an amount above par, which entry is recorded?

Credit common stock for the par amount.

In year 1, Rim Corporation purchases 1,000 shares of treasury stock for $10 per share. In year 2, Rim reissues 100 shares of the treasury stock for $12 per share. In year 3, Rim reissues 500 shares of its treasury stock for $9 per share. The journal entry to record the reissuance of treasury stock in year 3 will include which of the following entries?

Debit cash $4,500 Debit retained earnings $300. Credit treasury stock $5,000 Debit paid-in capital—share repurchase $200.

In year 1, Sofia Corp. issued 1,000 shares of $1 par value common stock for $10 per share. In year 4, Sofia repurchased and immediately retired 100 shares of the stock at $6 per share. Which of the following entries would be included in the journal entry to retire the shares?

Debit common stock $100. Debit paid-in capital in excess of par $900. Credit paid-in capital—share repurchase $400.

A repurchase of treasury stock will ______ a company's return on equity because net income is divided by a ______ amount of equity.

increase; smaller

In year 1, Goal Corp. purchases 1,000 shares of treasury stock for $10 per share. In year 2, Goal reissues 500 shares of the treasury stock for $13 per share. In year 3, Goal reissues 200 shares of its treasury stock for $8 per share. The journal entry to record the reissuance of treasury stock in year 3 will include which of the following entries?

Debit paid-in capital—treasury shares $400.

On April 1, Rawlings declares a dividend of $0.30 per share. Rawlings has 100,000 shares authorized, and 40,000 issued and outstanding. The date of record is April 28, and the payment date is May 15. Which of the following entries is included in the journal entry on April 1?

Debit retained earnings $12,000.

On March 1, Fresh Corp. declared a dividend of $3,000. The record date is March 20, and the payment date is April 1. What is the journal entry required on March 20?

No entry required

Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from what type of sources?

Non Owner

What type of corporations include churches, hospitals, universities, and charities?

Not-For-Profit

What are the effects of a stock split?

Par value decreases. The number of shares outstanding increases.

Which type of stock usually has a high par value and a percentage of par value dividend rate?

Preferred stock

Right to return preferred stock

Redemption

Shareholders' equity is classified under IFRS into two categories: share capital and

Reserve

When a corporation issues two securities for a single price and the market value of only one security is known, how is the cash received allocated?

The cash received is allocated first to the security for which the fair value is known, and the remainder is allocated to the other security.

When a company repurchases its stock and immediately retires the stock, which of the following occurs?

The equity accounts are reduced for the amount in which the shares were originally sold.

If a corporation issues its shares of stock for a noncash asset, at what amount should the transaction be recorded?

The fair value of the stock

Shares of stock previously sold by the corporation that are repurchased are called

Treasury Stock

When a company repurchases its own securities without formally retiring them, the stock is recorded in which account?

Treasury stock

The ex-dividend date is usually 1 day

before the date of record.

A corporation may repurchase its shares of stock because management

believes the market price of the stock is undervalued.

A company originally issues par value common stock at an amount above par. Subsequently, the company reacquires the shares for more than the issue price and immediately retires the shares. The company has no previous transactions for stock repurchases. Which of the following accounts would be reduced for the repurchase and retirement of the shares?

common stock retained earnings paid-in capital in excess of par

In year 1, Boise purchased 10,000 shares of treasury stock for $5 per share. In year 3, Boise reissued 1,000 shares of treasury stock for $8 per share. The journal entry to record the transaction in year 3 will include

credit to paid-in capital from treasury stock for $3,000. credit treasury stock for $5,000.

A company that is distributing liquidating dividends tends to be in the process of:

dissolving

When a small stock dividend is declared and distributed,

earned capital is reclassified as invested capital.

The earnings-price ratio is calculated as ______ divided by the market price per share.

earnings per share

In order to receive a dividend, investors must purchase shares of stock before the

ex-dividend date.

Property dividends are valued at

fair value

Disadvantages of the corporate form of business are

government regulation. double taxation.

Treasury shares are the same as shares that have never been issued; therefore, treasury shares

may not vote or receive cash dividends.

Which of the following items are included in other comprehensive income?

net holding gains and losses on certain types of investments deferred gains and losses on derivatives gains and losses from amendments to postretirement programs

The return on shareholders' equity ratio is computed by dividing

net income by average shareholders' equity.

Corporations raise capital by

operating at a profit. issuing debt. issuing stock.

A distribution of 25% or more of the outstanding shares of stock may be treated as which of the following?

stock split stock dividend

A corporation is owned by its

stockholders

When a property dividend is declared, a gain or loss is recognized for

the difference between the fair value and the book value of the assets distributed.


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