ch 11

The stockholders of a corporation have unlimited liability. A.True B.False

B.False The liability of a stockholder is normally limited to their investment in the corporation.

A corporation shows the following account balances: Retained earnings $300,000 Treasury stock 10,000 Dividends payable 20,000 Paid-in capital in excess of par value 55,000 Common stock 200,000 How much is total stockholders' equity? A.$565,000 B.$555,000 C.$545,000 D.$525,000

C.$545,000 Retained earnings - treasury stock + paid-in capital in excess of par value + common stock = total stockholders' equity: $300,000 - $10,000 + $55,000 + $200,000 = $545,000

Which of the following does not affect retained earnings? A.Net income B.Net loss C.Dividends D.Additional investment by stockholders

D.Additional investment by stockholders Retained earnings are decreased by a net loss.

On which date are entries for cash dividends required? A.Declaration date and the record date B.Record date and the payment date C.declaration date, record date, and payment date D.Declaration date and the payment date

D.Declaration date and the payment date Entries for cash dividends are not required on the record date.

Which one of the following is not true concerning a retained earnings restriction? A.It makes a portion of the balance of retained earnings unavailable for dividends. B.It may arise from legal, contractual, or voluntary causes. C.It generally is disclosed in the notes to the financial statements. D.It is reported as a loss on the income statement.

D.It is reported as a loss on the income statement.

The par value of corporate shares issued represents a corporation's legal capital. A.True B.False

A.True This statement is true. This value must be maintained to ensure creditor's claims against the corporation.

When treasury stock is purchased, the number of outstanding shares decreases. A.True B.False

A.True Treasury stock will reduce the number of shares outstanding. There is no effect on the number of shares issued.

Which of the following will increase the paid-in capital section of the balance sheet? A.Stock split B.Stock dividend C.Cash dividend D.Treasury stock acquisition

B.Stock dividend A stock dividend causes retained earnings to decrease and total paid-in capital to increase.

A corporation shows the following account balances: Retained earnings $400,000 Treasury stock—common 20,000 Paid-in capital in excess of par value—common 55,000 Treasury stock—preferred 30,000 Common stock 200,000 Preferred stock 180,000 Paid-in capital in excess of par value—preferred 60,000 How much is total stockholders' equity? A.$845,000 B.$885,00 C.$895,000 D.$945,000

A.$845,000 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: $400,000 - $20,000 + $55,000 - $30,000 + $200,000 + $180,000 + $60,000 = $845,000

No journal entry is required on the dividend record date. A.True B.False

A.True There is a memo entry documenting the action.

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? A.$5,000 B.$12,000 C.$0 D.$7,000

B.$12,000 Stockholders' equity is reduced by the cost of acquiring the treasury stock.

Which statement about stock dividends is true? A.Stock dividends reduce a company's cash balance. B.A stock dividend has no effect on total stockholders' equity. C.A stock dividend decreases total stockholders' equity. D.A stock dividend increases total stockholders' equity for the par value of the stock being distributed.

B.A stock dividend has no effect on total stockholders' equity. A stock dividend moves amounts from retained earnings to paid-in capital and does not affect the total stockholders' equity amount. Total stockholders' equity stays the same as a result of stock dividends.

Which one of the following is a major disadvantage of a corporation? A.Limited liability of stockholders B.Additional taxes C.Transferable ownership rights D.Limited life

B.Additional taxes Transferable ownership rights are a major advantage, not a disadvantage of corporations.

A cumulative dividend feature means that preferred stockholders must be paid only current-year dividends before common stockholders receive dividends. A.True B.False

B.False A cumulative dividend feature means that preferred stockholders must be paid current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends.

Dividends in arrears are reported as a current liability on the balance sheet. A.True B.False

B.False This statement is false. No liability is recorded for undeclared dividends in arrears because only declared dividends are a legal obligation.

When stock dividends are declared and issued, total stockholders' equity increases. A.True B.False

B.False This statement is false. When stock dividends are declared and issued, total stockholders' equity remains the same.

Which of the following increases when a corporation purchases treasury stock? A.Number of shares authorized B.Number of shares issued C.Number of treasury shares D.Number of outstanding shares

C.Number of treasury shares

Dehesa, Inc. has 8,000 shares of 5%, $50 par, cumulative preferred stock and 50,000 shares of $3 par common stock outstanding. No dividends were declared last year, However, the board of directors just declared a $50,000 dividend this year to be paid in 10 days. What amount of the total dividend will be paid to common stockholders? A.$10,000 B.$30,000 C.$15,000 D.$50,000

A.$10,000 Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the arrears and the current year.

Dehesa, Inc. has 8,000 shares of 5%, $15 par, cumulative preferred stock and 50,000 shares of $3 par common stock outstanding. No dividends were declared last year. However, the board of directors just declared a $34,000 dividend this year. What amount of the total dividend will be paid to common stockholders? A.$22,000 B.$12,000 C.$28,000 D.$34,000

A.$22,000 Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the year in arrears and the current year. Total dividend = 8,000 × 5% × $15 = $6,000 Preferred dividends in arrears for prior year $ 6,000 Preferred dividends for current year 6,000 Total dividends to preferred stockholders 12,000 Total dividends available (34,000) Dividends available to common stockholders $ 22,000 Feedback B: Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the year in arrears and the current year.

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 payout ratio? A.2.5% B.4.0% C.40% D.250%

A.2.5% The payout ratio is cash dividends divided by net income.

Vista, Inc. has 300,000 shares of common stock outstanding. A 30% stock dividend was declared and issued. How many shares are outstanding after the stock dividend? A.390,000 B.330,000 C.300,000 D.309,000

A.390,000 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.

Jaylo Inc. had net income of $500,000, net sales of $10,000,000 and paid cash dividends of $200,000 to the common stockholders. How much is Jaylo's payout ratio? A.40% B.20% C.2% D.4%

A.40% The payout ratio is computed by dividing total cash dividends declared to common stockholders by net income.

Harrison, Inc. issued 4,000 shares of common stock at $12 per share. If the stock has a par value of $0.50 per share, which of the following will be part of the journal entry to record the issuance? A.Credit to Common Stock for $2,000 B.Debit to Cash for $4,000 C.Credit to Paid-in Capital in Excess of Par Value for $48,000 D.Debit to Retained Earnings for $46,000

A.Credit to Common Stock for $2,000 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.

Wynola, 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? A.Credit to Common Stock for $4,000 B.Debit to Cash for $4,000 C.Credit to Paid-in Capital in Excess of Par Value for $10,000 D.Debit to Retained Earnings for $6,000

A.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.

If a corporation has incurred a net loss, which account will it affect? A.Debited to Retained Earnings in a closing entry B.Credited to Retained Earnings in a closing entry C.Debited to a paid-in capital account in a closing entry D.Credited to a paid-in capital account in a closing entry

A.Debited to Retained Earnings in a closing entry A net loss is never closed to a paid-in capital account.

Which of the following represents the amount per share of stock that must be retained in the business for the protection of corporate creditors? A.Legal capital B.Par value C.Market value D.Stated value

A.Legal capital Market value is the selling price of a share of stock on a given day.

Which one of the following is not part of 'capital stock' in the balance sheet? A.Paid-in capital in excess of par value-common stock B.Convertible Class A preferred stock, stated value C.Non-voting Class B preferred stock, stated value D.Common stock, stated value

A.Paid-in capital in excess of par value-common stock The capital stock section of the balance sheet consists of preferred and common stock. Any stock accounts that are in excess of the par or stated value are included in the additional paid-in capital section.

For what reason might a company acquire treasury stock? A.To reissue the shares to officers and employees under bonus and stock compensation plans B.To signal to the stock market that management believes the stock is overpriced C.To increase profit D.To increase the number of shares of stock outstanding

A.To reissue the shares to officers and employees under bonus and stock compensation plans A signal may be sent to the stock market that management believes the stock is underpriced, not overpriced.

In the stockholders' equity section of the balance sheet, from what is the cost of treasury stock deducted? A.Total paid-in capital and retained earnings B.Retained earnings C.Total common stock D.Common stock and paid-in capital

A.Total paid-in capital and retained earnings Treasury stock is deducted from total paid-in capital and retained earnings to arrive at total stockholders' equity.

Weeds Inc. has a balance of $10,000,000 in retained earnings and declares a 5% stock dividend on its 1,000,000 shares of $5 par value common stock. The current market value of the stock is $25 per share. What is the entry to record this transaction at the declaration date? A. Stock Div. 1,250,000 Common St. 1,250,000 B. Stock Div. 1,250,000 Com. St. Div. Distr. 250,000 PIC in Excess of Par Value 1,000,000 C. Stock Div. 250,000 Com. St. Div. Distribu. 250,000 D. Com. St. Div. Distri. 250,000 Common St. 250,000

B. Stock Div. 1,250,000 Com. St. Div. Distr. 250,000 PIC in Excess of Par Value 1,000,000 The number of shares to be issued is the stock dividend percentage times the number of shares outstanding. The number of shares to be issued is multiplied by the market price of the stock and debited to Stock Dividends. Common Stock Dividends Distributable is credited for the number of shares times the par value of the stock. Paid-in Capital in Excess of Par Value is credited for the balance. Number of shares to be issued = 5% × 1,000,000 = 50,000 shares Debit to Stock Dividends = 50,000 × $25 = $1,250,000 Credit to Common Stock Dividends Distributable = 50,000 × $5 = $250,000 Credit to Paid-in Capital in Excess of Par Value = 50,000 × ($25 - $5) = $1,000,000

How are dividends in arrears reported in the financial statements? A.As a liability B.As an expense C.In a footnote D.As an equity item

C.In a footnote Dividends in arrears are not a liability until the board of directors declares the dividends, nor are they an expense. They are disclosed in a footnote.

Ernest, an individual, receives $100 from Vernon Corp. in dividends and is in the 28% tax bracket. Vernon Corp. already paid corporate taxes on the $100 at a 20% tax rate. How much in personal taxes will Ernest need to pay? A.$0 B.$28 C.$8 D.$20

B.$28 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.

If a corporation issues 1,000 shares of $3 par common stock for $7 a share, how much is the legal capital? A.$7,000 B.$3,000 C.$4,000 D.$0

B.$3,000 The legal capital is the par value per share ($3) times the number of shares issued (1,000) or $3,000. This will be equal to the total reported in the stock account.

A corporation has cumulative preferred stock on which it pays dividends of $20,000 per year. The dividends are in arrears for two years. If the corporation plans to distribute $90,000 as dividends in the current year, how much will the common stockholders receive? A.$20,000 B.$30,000 C.$40,000 D.$60,000

B.$30,000 Preferred stockholders receive an allocation for each of the past two years and an allocation for the current year. The balance remaining goes to the common stockholders. Preferred dividends in arrears for two years ($20,000 × 2) $40,000 Preferred for current year 20,000 Total dividends to preferred stockholders $60,000 Total dividends available (90,000) Dividends available to common stockholders $30,000

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? A.100,000 B.40,000 C.60,000 D.None of the answer choices are correct.

B.40,000 The number of outstanding shares is multiplied by the percentage of the stock dividend to get the total new shares to be issued.

Rynadune Inc. reported net income of $186,000 during 2014 and paid dividends of $26,000 on common stock. It also paid dividends on its 10,000 shares of 6%, $100 par value, noncumulative preferred stock. Common stockholders' equity was $1,200,000 on January 1, 2014, and $1,600,000 on December 31, 2014. How much is the company's return on common stockholders' equity for 2014? A.10.0% B.9.0% C.7.1% D.13.3%

B.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.

Which of the following is a disadvantage of the corporate business form? A.No income taxes B.Government regulation C.Continuous life D.Easy acquisition of capital

B.Government regulation Corporate income is taxed twice. Each corporation must pay taxes on corporate income and individual stockholders are required to pay income tax on dividends received from the corporation.

Roger is nearing retirement and would like to invest in a stock that will provide a good steady income flow. Which of the following is an important feature that Roger should require for the stock he selects? A.High current ratio B.High dividend payout C.High earnings per share D.High price-earnings ratio

B.High dividend payout A stock with a high current ratio may or may not pay dividends on a consistent basis.

Which one of the following is not a right of preferred stockholders? A.Priority in relation to dividends B.Priority voting rights C.Priority to the assets in the event of liquidation D.Priority to dividends, assets and voting rights.

B.Priority voting rights Preferred stockholders only have priority to dividends and to assets in the event of liquidation.

A corporation sold 1,000 shares of its $2.00 par value common stock for $10.00 per share and later repurchased 100 of those shares for $12.00 per share. Which of the following will be debited to record the repurchase of the 100 shares? A.Common Stock for $1,200 B.Treasury Stock for $1,200 C.Treasury Stock for $200 D.Cash for $1,200

B.Treasury Stock for $1,200 The journal entry will increase the treasury stock account (a contra stockholders' equity account) and will decrease the cash account for the total cost to acquire.

Which of the following is not a characteristic of a corporation? A.Separate legal existence B.Unlimited liability for stockholders C.Easy transfer of ownership interests D.Ability to acquire capital easily

B.Unlimited liability for stockholders Corporations are often able to acquire capital more easily than sole proprietorships and partnerships.

The 13th Street Grill issued 10,000 of $1 par value common stock for $5 per share. Which of the following will be part of the journal entry to record the issuance? A.A debit of $10,000 to Common Stock B.A debit of $50,000 to Common Stock C.A credit of $10,000 to Common Stock D.A credit of $50,000 to Common Stock

C.A credit of $10,000 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.

Which of the following does not increase the return on common stockholders' equity? A.An increase in the return on assets ratio B.An increase in the use of debt financing C.An increase in the company's stock price D.An increase in the company's net income

C.An increase in the company's stock price An increase in a firm's net income will cause return on common stockholders' equity to increase.

How is common stock listed in the stockholders' equity section of the balance sheet? A.Before preferred stock B.After retained earnings C.As part of paid-in capital D.Subtracted from treasury stock

C.As part of paid-in capital Common stock is listed after preferred stock, if there is any preferred stock.

Which of the following represents the maximum number of shares a corporation can issue? A.Outstanding shares B.Issued shares C.Authorized shares D.Treasury shares

C.Authorized shares Treasury shares are shares that have been issued and then purchased back by the corporation.

Dynatech issues 1,000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, which accounts are credited? A.Common Stock $10,000 and Gain on Stock Sale $2,000 B.Common Stock $12,000 C.Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000 D.Common Stock $10,000 and Retained Earnings $2,000

C.Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000 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.

DT Inc. issued 3,000 shares of $5 par value common stock for $6 per share. Which of the following is one part of the journal entry to record the issuance? A.Debit to Paid-in Capital in Excess of Par Value for $3,000 B.Debit to Cash for $15,000 C.Credit to Common Stock for $15,000 D.Credit to Common Stock for $18,000

C.Credit to Common Stock for $15,000 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.

Harrison, Inc. issued 600 shares of common stock at $10 per share. If the stock was no-par value stock, which of the following will be part of the journal entry to record the issuance? A.Debit to Cash for $600 B.Credit to Paid-in Capital in Excess of Par for $600 C.Credit to Common Stock for $6,000 D.Debit to Paid-in Capital $6,000

C.Credit to Common Stock for $6,000 The journal entry will increase the cash account for the total issue price and increase the common stock account for the same amount.

Which one of the following statements is incorrect? A.Dividends cannot be paid on common stock while any dividend on preferred stock is in arrears. B.Dividends in arrears on preferred are not considered a liability. C.Dividends may be paid on common stock while dividends are in arrears on preferred stock. D.When preferred stock is noncumulative, any dividend passed in a year is lost forever.

C.Dividends may be paid on common stock while dividends are in arrears on preferred stock. Dividends may not be paid on common stock if preferred dividends are in arrears.

Which of these is not a major advantage of a corporation? A.Separate legal existence B.Continuous life C.Government regulations D.Transferable ownership rights

C.Government regulations A continuous life is a major advantage of a corporation.

When a stock dividend is declared, which of the following accounts is debited? A.Common Stock Dividends Distributable B.Paid-in Capital in Excess of Par Valu C.Stock Dividends D.Common Stock

C.Stock Dividends When a stock dividend is declared, there will be a debit to Stock Dividends and a credit to both Common Stock Dividends Distributable and Paid-in Capital in Excess of Par Value.

Weeds Inc. has a balance of $10,000,000 in retained earnings and declares a 4% stock dividend on its 1,000,000 shares of $3 par value common stock. The current market value of the stock is $20 per share. What is the entry to record the transaction when the dividend shares are issued? A. St Div. 800,000 Com. St. 800,000 B. St. Div. 800,000 Com. St. Div. Distri. 120,000 PIC in Excess of Par Value 680,000 C. Stock Div. 120,000 Com. St. Div. Distri. 120,000 D. Com. St. Div. Distri. 120,000 Common St. 120,000

D. Com. St. Div. Distri. 120,000 Common St. 120,000 The number of shares to be issued is the stock dividend percentage times the number of shares outstanding. When distributed, the Common Stock Dividends Distributable is decreased and the Common Stock account is increased for the number of shares times the par value of the stock.

Ramona, Inc. has 2,000 shares of 5%, $100 par, cumulative preferred stock and 80,000 shares of $4 par common stock outstanding. Last year the board of directors declared and paid an $8,000 dividend. This year the dividend declared and paid was $15,000. What amount of this dividend will be paid to the preferred stockholders? A.$15,000 B.$10,000 C.$0 D.$12,000

D.$12,000 The preferred stockholders are entitled to $10,000 per year (2,000 shares × $100 par × 5%). Since they only received a portion last year, they must be paid the balance to bring them current as well as the current year dividends.

M-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2014. No dividends were declared in 2012 or 2013. If M-Bot wants to pay $375,000 of dividends in 2014, how much will common stockholders receive? A.$0 B.$295,000 C.$215,000 D.$135,000

D.$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.

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? A.21.25% B.20.00% C.19.50% D.18.75%

D.18.75% Net income less preferred stock dividends divided by the average common stockholders' equity equals return on common stockholders' equity.

Which of the following is a feature associated only with preferred stock? A.Dividend preference B.Preference to assets in the event of liquidation C.Cumulative dividends D.All of the answer choices are correct

D.All of the answer choices are correct Preferred stockholders have priority over common stockholders in receiving dividends.

What method is normally used to account for treasury stock? A.Stated value method B.Legal value method C.Par value method D.Cost method

D.Cost method Treasury stock is normally accounted for using the cost method.

Which of these statements is false? A.Ownership of common stock gives the owner a voting right. B.The stockholders' equity section begins with paid-in capital amounts. C.The authorization of capital stock does not result in a formal accounting entry. D.Legal capital is intended to protect stockholders.

D.Legal capital is intended to protect stockholders. Ownership of common stock does give the owner a voting right.

Which one of the following decreases when a corporation purchases treasury stock? A.Authorized shares B.Issued shares C.Treasury shares D.Outstanding shares

D.Outstanding shares Treasury shares increase when treasury stock is purchased.

Raptor Inc. has retained earnings of $500,000 and total stockholders' equity of $2,000,000. It has 100,000 shares of $8 par value common stock outstanding, which is currently selling for $30 per share. What will occur is Raptor declares a 10% stock dividend on its common stock? A.Net income will decrease by $80,000. B.Retained earnings will decrease by $80,000 and total stockholders' equity will increase by $80,000. C.Retained earnings will decrease by $300,000 and total stockholders' equity will increase by $300,000. D.Retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000.

D.Retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000. A 10% stock dividend will increase the number of shares issued by 10,000 (100,000 × 10%). At a market price of $30 per share, total paid-in capital will increase by $300,000 (10,000 shares × $30/share) and retained earnings will decrease by that same amount.

If everything else is held constant, what will cause earnings per share to increase? A.The payment of a cash dividend to common stockholders B.The payment of a cash dividend to preferred stockholders C.The issuance of new shares common stock D.The purchase of treasury stock

D.The purchase of treasury stock The issuance of new shares of common stock would not affect earnings, but will increase the number of outstanding shares which will then reduce earnings per share.

Which of the following is not a stockholder's right? A.The preemptive right B.The right to share in dividends C.The right to vote in the election for the board of directors D.The right to participate in management decisions

D.The right to participate in management decisions The stockholder has the right to a proportional share of dividends.