Chapter 18 - Shareholder's Equity

Cash and property dividends ______ total equity, and stock dividends _______ total equity.

decrease; do not effect

Gosling Corp. has 100,000 shares of common stock authorized, 80,000 shares issued, and 20,000 shares of treasury stock. Gosling declares a dividend of $0.10 share. Which of the following entries is required at the date of declaration?

Debit retained earnings $6,000. Reason: 80,000 shares issued - 20,000 treasury = 60,000 outstanding x $.10 per share

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

False Reason: Treasury stock represents shares of stock previously issued by the corporation that are repurchased by the corporation.

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

articles of incorporation

The change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources is called

comprehensive income.

A business that has equity accounts labeled "common stock" and "retained earnings" is a

corporation.

The date on which a cash dividend becomes a liability to a corporation is the

declaration date.

A liquidating dividend means that

dividends exceed retained earnings.

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

it uses book value of equity.

The number of shares a specific corporation is authorized to issue is set forth in

its articles of incorporation.

The feature that shares of preferred stock may be exchanged for cash at the option of the corporation or the shareholders is referred to as what?

redeemable

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

retained earnings.

Which of the following items are included in other comprehensive income? (Select all that apply.)

- net holding gains and losses on investments that are available for sale - adjustments from foreign currency translations

Corporations raise equity capital by

- operating at a profit. - issuing stock

The purposes of a quasi reorganization are to (Select all that apply.)

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

On March 1, 2018, Fresh Corp. declared a dividend of $3,000. The record date is March 20, 2018, and the payment date is April 1, 2018. What is the journal entry required on March 20, 2018?

No entry is required.

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

Nonowner

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

Not-for-profit

Which of the following accurately describes shareholders' equity?

Ownership interests of the shareholders

Large stock dividend

Reduce retained earnings by par; increase common stock by par.

Cash dividend

Reduce retained earnings; reduce a current asset.

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 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.

A restriction of retained earnings signifies that

a portion of retained earnings is not available for dividends.

A frequent reason for a stock split is to

cause the market price per share to decline.

Property dividends are valued at

fair value.

The most important advantage to the corporate form of business is

limited liability.

In a corporation, shareholders' liability is

limited to the amount of the investment.

Preferred stock that has contractual rights in which the company is obligated to repurchase the stock at a specified future date is called

mandatorily redeemable preferred stock.

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.

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

preferred dividends; shareholders' equity attributed to common shareholders

The two types of corporations are

profit and not-for-profit.

The purpose of the statement of shareholders' equity is to

report the changes and the sources of the changes in shareholder equity accounts.

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

stock dividend

The term treasury stock refers to

stock that is repurchased and not retired.

Historically, par value was considered to be

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

The statement of shareholders' equity reports

the changes in each shareholder equity account for the period.

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

the market price per share decreases.

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

write-down inflated assets and reduce an accumulated deficit

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. Reason: 100,000 x 20% = 20,000 shares x $8 = $160,000

Which of the following may be a source of paid-in capital? (Select all that apply.)

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

What are the effects of a stock split? (Select all that apply.)

- The number of shares outstanding increases. - Par value decreases.

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? (Select all that apply)

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

A restriction of retained earnings (select all that apply)

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

A property dividend: (Select all that apply.)

- is a noncash distribution to owners. - reduces retained earnings.

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? (Select all that apply.)

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

A stock split effected in the form of a large stock dividend (select all that apply)

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

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

25

A corporation is owned by its _____.

Blank 1: stockholders, shareholders, or investors

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

declaration date.

When a corporation issues a stock dividend, the fair value of the shares should normally

decrease.

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.

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

ex-dividend date.

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

Ex-dividend date

Date before which investors must purchase stock in order to receive a dividend

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

Decrease

When investors purchase shares of stock, it is classified as

paid-in capital.

Net assets equals

shareholders' equity.

A property dividend is recorded at

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

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. Reason: In year 2, the company will debit cash for $1,200 and credit treasury stock for $1,000 and paid-in capital-share repurchase for $200. In year 3, the company must debit the share repurchase account for $200 and the balance of $300 is debited to retained earnings.

On March 1, 2018, Fresh Corp. declared a dividend of $3,000. The record date is March 20, 2018, and the payment date is April 1, 2018. The journal entry required on March 1, 2018, will include which of the following entries? (Select all that apply.)

- Debit retained earnings $3,000. - Credit dividends payable $3,000.

Historically, par value indicated (select all that apply)

- the amount of net assets that were not available for distribution to shareholders. - the real value of shares - the issue price of all 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 of the following is subject to double taxation?

Corporations

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

False Reason: A corporation is owned by its shareholders, who are equity holders.

Carnival issues 10,000 shares of $1 par value common stock for $10 per share. Stock issue costs are $3,000. The journal entry to record the issuance of stock will include a credit to

additional paid-in capital for $87,000.

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

shareholders' equity.

Preferred stockholders usually have preference over common stockholders with respect to which items? (Select all that apply.)

- distribution of assets in liquidation - dividends

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

Declaration date

Date that the corporate board of directors announces a dividend

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.

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? (Select all that apply.)

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

Brandon issues 1,000 shares of $5 par value common stock for $20 per share. Stock issue costs are $500. The journal entry to record the issuance of stock will include which of the following entries? (Select all that apply.)

- Debit cash $19,500. - Credit common stock $5,000. - Credit additional paid-in capital $14,500.

When a corporation issues shares of common stock for an amount above par, which of the following entries occur? (Select all that apply.)

- credit to common stock - credit to additional paid-in capital

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

dividend.

A ______ stock dividend is less than 25% of the outstanding shares of stock.

small

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. Reason: The shares were originally purchased for $10 per share. They were sold for $8 per share. Therefore the debit to paid-in capital is $400 (($10-$8) x 200 shares)

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

False Reason: Return on shareholders' equity is net income divided by average total shareholders' equity.

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

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

reverse stock split

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.

The ex-dividend date is usually 1 day

before the date of record.

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

dissolving

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.

Which of the following describe the ways in which companies may record stock splits effected in the form of dividends? (Select all that apply.)

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

The journal entry to record a stock split effected in the form of dividends may include which of the following? (Select all that apply.)

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

Disadvantages of the corporate form of business are (Select all that apply.)

- double taxation. - government regulation.

Corporations can raise capital by:

- issuing stock. - borrowing. - operating at a profit.

State laws regulate which of the following corporate activities? (Select all that apply.)

- nature of share authorization - issuance of stock - repurchase of stock

Which of the following accounts are classified as shareholders' equity?

- retained earnings - common stock - additional paid-in capital

The right of a shareholder to exchange their preferred stock for another class of stock is referred to as a right of _____, whereas the right of the preferred shareholder to have their stock repurchased by the corporation for cash is referred to as a _____ privilege.

Blank 1: conversion Blank 2: redemption or redeemable

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.

On April 1, 2018, 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 May 15?

Debit dividends payable $12,000.

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

Preferred stock

Property dividend

Reduce retained earnings, recognize gain on appreciation on income statement.

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.

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

True Reason: No entry is necessary, but a list of registered owners of the stock is made.

Retained earnings is typically reported on the balance sheet

as a single amount.

For U.S. GAAP reporting purposes, mandatorily redeemable preferred stock is classified as

debt.

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

debt.

The return on shareholders' equity ratio is computed by dividing

net income by average shareholders' equity.

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.

Amounts earned by the corporation on behalf of its shareholders and recorded as a single amount are referred to as:

retained earnings.

A company that repurchases its own securities accounts for the buyback as:

retired shares or treasury shares.

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

stock dividend

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

stock dividend

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

subtracted from the proceeds of issuing stock.

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.

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

treasury stock.

Which of the following are characteristics of treasury stock? (Select all that apply.)

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

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 (Select all that apply.)

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

Which of the following items are included in other comprehensive income? (Select all that apply.)

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

If more than one class of shares is authorized, what type of information must be specified? (Select all that apply)

- specific rights for each class - designation to distinguish each class

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? (Select all that apply.)

- the amount of cash that would be paid to purchase the asset - the quoted market price for the shares

Which account is a stockholders' equity account?

Additional paid-in capital

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

As a reduction of retained earnings.

A distribution of assets to shareholders is referred to as a _____.

Blank 1: dividend or dividends

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

Blank 1: reserves or reserve

Record date

Date that a determination is made as to recipients of a dividend

Payment Date

Date that corporate assets are transferred to shareholders

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

S corporation

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

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

decreases

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

decreases.

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

The effect of share issue costs is to

reduce paid-in capital in excess of par.

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

Blank 1: retained or reinvested

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.

On March 1, 2018, Fresh Corp. declared a dividend of $3,000. The record date is March 20, 2018, and the payment date is April 1, 2018. The journal entry required on April 1, 2018, will include which of the following entries? (Select all that apply.)

- Credit cash $3,000. - Debit dividends payable $3,000.

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.)

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

Which of the following is true regarding the issuance of a stock dividend? (Select all that apply.)

- The fair value per share decreases in proportion to the additional shares issued - Shareholders will still own the same percentage of the company as before the distribution

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? (Select all that apply.)

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

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

- a mandatory redeemable feature - a dividend rate

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

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

Small stock dividend

Reduce retained earnings for fair value; increase common stock by par value; increase additional paid-in capital.

When does a dividend become a liability to a corporation?

When it is declared by the board of directors

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.