Chapter 10 Financial Accounting

Multiple Choice Questions Treasury stock is recorded as: An increase in stockholders' equity. A decrease in stockholders' equity. A liability. An asset.

A decrease in stockholders' equity. Treasury stock has a "debit" balance and is shown as a reduction from the stockholders' equity in the financial statements.

Concept Overview Questions Lego, Inc., issued common stock in Year 1. It issued 10,000 shares of 8%, $100 par value cumulative preferred stock for $110 per share at the beginning of Year 4. It did not pay any dividends during Year 4. In December of Year 5, it declares total dividends of $200,000. How much will the preferred stockholders of Lego receive as dividends in Year 5? Multiple Choice $200,000 $160,000 $80,000 $40,000

$160,000

Multiple Choice Questions A company issues 100,000 shares of $1 par value common stock for $17 per share. To record this transaction, the company would credit Additional Paid-in Capital for: $100,000. $1,700,000. $1,800,000. $1,600,000.

$1,600,000.

Concept Overview Questions Cole Corporation was organized on January 1, Year 1. The company was authorized to issue 100,000 shares of $1 par value common stock. During the year, the company had the following transactions relating to stockholders' equity: Issued 40,000 shares of common stock at $8 per share. Reported a net income of $60,000. Paid dividends of $30,000. Purchased 5,000 shares of treasury stock at $10 per share. What is total stockholders' equity at the end of Year 1? Multiple Choice $300,000 $350,000 $400,000 $460,000

$300,000

Multiple Choice Questions A company issues 100,000 shares of $1 par value common stock for $17 per share. To record this transaction, the company would credit Common Stock for: $100,000. $1,600,000. $1,700,000. $1,800,000.

100,000

Concept Overview Questions Clary Corporation reports dividends per share of $1.20 and net income for the year of $120,000. The current stock price is $48.00. What is the company's dividend yield? Multiple Choice 1.0% 2.5% 4.8% 10.0%

2.5%

Concept Overview Questions The stockholders' equity section of the balance sheet includes which of the following accounts?Select all answers that apply to this question. Check All That Apply Additional Paid-in Capital Bonds Payable Common Stock Notes Payable Preferred Stock Retained Earnings Treasury Stock

Additional paid in capital Common stock Preferred stock Retained earnings Treasury stock

Multiple Choice Questions A company issues 10,000 shares of $0.05 par value common stock for $25 per share. Which of the following is recorded at issuance? Credit Additional Paid-In Capital for $250,000. Credit Common Stock for $500. Credit Additional Paid-In Capital for $500. Credit Common Stock for $250,000.

Credit Common Stock for $500.

Concept Overview Questions Which of the following dates associated with dividends does not require an entry to be recorded? Multiple Choice Payment date Record date Declaration date

Record date

Concept Overview Questions The market value of Kennedy Corporation's common stock is $100 per share when it declares a 20% stock dividend on its 10,000 shares outstanding of $1 par value common stock. The entry to record this small stock dividend involves a _____. Multiple Choice debit to Stock Dividends for $2,000 credit to Common Stock for $200,000 credit to Additional Paid-in Capital for $198,000 debit to Cash for $200,000

credit to Additional Paid-In Capital for $198,000 The entry involves a debit Stock Dividends for $200,000, a credit to Common Stock for $2,000, and a credit to Additional Paid-In Capital for the $198,000 difference.

Concept Overview Questions Drag the appropriate key term to the box given next to its associated description. -Authorized Stock -Issued Stock -Outstanding Stock Match each of the options above to the items below. -Shares actually sold, which includes treasury stock -Total number of shares available to sell -Shares held by investors

-Authorized Stock: Total number of shares available to sell -Issued Stock: Shares actually sold, which includes treasury stock -Outstanding Stock: Shares held by investors

Multiple Choice Questions Suppose a company purchases 2,000 shares of its own $1 par value common stock for $16 per share. Which of the following is recorded at the time of the purchase? Debit Treasury Stock for $32,000. Debit Common Stock for $30,000. Debit Common Stock for $32,000. Debit Treasury Stock for $2,000.

Debit Treasury Stock for $32,000. When a company purchases it's own common stock, the treasury stock account is debited and cash account is credited by the amount of repurchase. No calculations regarding additional paid in capital are made for this transaction. Treasury stock repurchase = Number of shares * Purchase price = 2,000 * $16= $32,000

Multiple Choice Questions Declaring a cash dividend has what effect on total stockholders' equity? An increase in total stockholders' equity. A decrease in total stockholders' equity. Cannot be determined from the given information. No effect on total stockholders' equity.

No effect on total stockholders' equity. Stock dividend does not any effect on total liabilities and total stockholder's equity because by the stock dividene retained earnings decrease and common stock increase. which both are parts of shareholder's equity.

Concept Overview Questions Total assets, total liabilities, and total stockholders' equity do not change as a result of a large stock dividend True False

True

Concept Overview Questions Marina, Inc., acquires 1 million shares of its own $1 par value common stock at $70 per share. It later resells the 1 million shares of treasury stock for $75. We record the $5 difference per share as a: Multiple Choice gain in the income statement revenue in the income statement credit to Additional Paid-in Capital credit to Common Stock

credit to Additional Paid-in Capital

Concept Overview Questions Identify the primary advantages of the corporate form of business compared to a sole proprietorship or partnership. Check All That Apply Limited liability Ability to raise capital Lower taxes Less paperwork Ease of incorporation

Limited liability Ability to raise capital

Multiple Choice Questions In its first three years of operations, a company has net income of $2,000; $5,000; and $8,000. It also pays dividends of $1,000 in the second year, and $3,000 in the third year. What is the balance of Retained Earnings at the end of the third year? $11,000. $4,000. $15,000. $5,000.

$11,000.

Concept Overview Questions Marine Corporation issued common stock in Year 1. It issued 10,000 shares of 10%, $100 par value noncumulative preferred stock for $110 per share at the beginning of Year 3. It did not pay any dividends in Year 3 or Year 4. In December of Year 5, it declares total dividends of $250,000. How much will the common stockholders of Marine Corporation receive as dividends in Year 5? Multiple Choice $150,000 $250,000 $50,000 $100,000

$150,000

Concept Overview Questions For the current year, Fitch Company generates net income of $140,000. The company has 40,000 shares of common stock outstanding, and the stock is currently trading at $56 per share. What is the company's price-earnings ratio? Multiple Choice $2.50 $3.50 $6.25 $16.00

$16.00

Multiple Choice Questions At the beginning of 20X1, a company issues 100,000 shares of 4%, $10 par value, cumulative preferred stock. All remaining shares outstanding are common stock. The company does not pay any dividends in 20X1, but pays dividends of $100,000 at the end of 20X2. How much of the dividend will be paid to common stockholders in 20X2? $20,000. $60,000. $80,000. $100,000.

$20,000.

Multiple Choice Questions Suppose a company declares a dividend of $0.50 per share. At the time of declaration, the company has 100,000 shares issued and 90,000 shares outstanding. On the declaration date, Dividends would be recorded for $45,000. $50,000. $95,000. $0.

$45,000.

Homework Questions Donnie Hilfiger has two classes of stock authorized: $1 par preferred and $0.01 par value common. As of the beginning of 2021, 440 shares of preferred stock and 5,400 shares of common stock have been issued. The following transactions affect stockholders' equity during 2021: ---March 1 Issue 2,500 shares of common stock for $56 per share. ---May 15 Purchase 540 shares of treasury stock for $49 per share. ---July 10 Resell 340 shares of treasury stock purchased on May 15 for $54 per share. ---October 15 Issue 340 shares of preferred stock for $59 per share. ---December 1 Declare a cash dividend on both common and preferred stock of $1.90 per share to all stockholders of record on December 15. (Hint: Dividends are not paid on treasury stock.) ---December 31 Pay the cash dividends declared on December 1. Donnie Hilfiger has the following beginning balances in its stockholders' equity accounts on January 1, 2021: Preferred Stock, $440; Common Stock, $54; Additional Paid-in Capital, $83,000; and Retained Earnings, $33,300. Net income for the year ended December 31, 2021, is $13,600. -Record the issuance of 2,500 shares of common stock for $56 per share. -Record the purchase of 540 shares of treasury stock for $49 per share. -Record the resell 340 shares of treasury stock purchased on May 15 for $54 per share. -Record the issuance of 340 shares of preferred stock for $59 per share. -Record the declaration of a cash dividend on both common and preferred stock of $1.90 per share to all stockholders. (Hint: Dividends are not paid on treasury stock.) -Record the entry on December 15. -Record the cash dividends declared on December 1.

- March 01- Record the issuance of 2,500 shares of common stock for $56 per share. Debit: ----Cash (2,500 sharesx $56 per share) : $140,000 Credit: ----Common Stock (2,500 shares x $0.01 per share) : $25 ----Additional Paid-In Capital: $139,975 ------------------------------------------------------- - May 15 - Record the purchase of 540 shares of treasury stock for $49 per share. Debit: ----Treasury Stock (540 shares x $49 per share) : $26,460 Credit: ----Cash: 26,460 ------------------------------------------------------- -July 10- Record the resell 340 shares of treasury stock purchased on May 15 for $54 per share. Debit: ----Cash (340 sharesx $54 per share) : $18,360 Credit: ----Treasury Stock (340 shares x $49 per share) : $16,660 ----Additional Paid-In Capital: $1,700 ------------------------------------------------------- -October 15- Record the issuance of 340 shares of preferred stock for $59 per share. Debit: ----Cash (340 sharesx $59 per share) : $20,060 Credit: ----Preferred Stock (340 shares x $1 per share) : $340 ----Additional Paid-In Capital: $19,720 ------------------------------------------------------- -December 01- Record the declaration of a cash dividend on both common and preferred stock of $1.90 per share to all stockholders. (Hint: Dividends are not paid on treasury stock.) Debit: ----Dividends : $16,112 Credit: ----Dividends Payable [(780 shares +7700) x 1.90) : $16,112 ------------------------------------------------------------- -December 15- Record the entry on December 15. No journal Entry Required ------------------------------------------------------------- -December 31- Record the cash dividends declared on December 1. Debit: ----Dividends Payable: $16,112 Credit: ----Cash : $16,112 --------------------------------------- Preferred Stock: 440 Shares + 340 shares = Common Stock: 5400 shares + 2500 Shares - 540 shares + 340 Shares

Homework Questions On September 1, the board of directors of Colorado Outfitters, Inc., declares a stock dividend on its 27,000, $18 par, common shares. The market price of the common stock is $47 on this date.Required:1. 2. & 3. Record the necessary journal entries assuming a small (10%) stock dividend, a large (100%) stock dividend, and a 2-for-1 stock split. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.) Record the stock dividend assuming a small (10%) stock dividend. Record the stock dividend assuming a large (100%) stock dividend. Record the stock dividend assuming a 2-for-1 stock split.

----Record the stock dividend assuming a small (10%) stock dividend. Debit: -Stock dividends $126,900 Credit: -Common stock $48,600 - additional paid-in capital $78,300 -------------------------------------------------------------- amount of stock dividend 27,000 x 10% = 2700 2700 x $47 = 126,900 value of common stock 27,000 x 10% = 2700 2700 X 18= 48600 additional paid-in capital of common stock 126,900 - 48600 = 78300 ----Record the stock dividend assuming a large (100%) stock dividend. Debit: -Stock dividends $486,000 Credit: -Common stock $486,000 -------------------------------------------------------------- value of common stock 27,000 x 100% = 27000 27000 X 18= 486,000 ----Record the stock dividend assuming a 2-for-1 stock split. The 2-for-1 stock split is done for increasing the number of shares. It is done by issuing more shares to outstanding shares. Thus, no journal entry is required as the value is the same. Therefore, no journal entry is required to record the stock dividend.

Concept Overview Questions Summers, Inc., has net income of $50 million in the current year. Stockholders' equity at the beginning and the end of the current year totaled $140 million and $160 million respectively. Total assets at the beginning and the end of the current year totaled $190 million and $210 million respectively. What is the company's return on equity for the current year? Multiple Choice 25.00% 33.33% 31.25% 23.80%

33.33%

Multiple Choice Questions A stock dividend occurs when: A company distributes to shareholders additional shares of its own stock. A company makes cash payments to shareholders. A company purchases shares of its own stock. A company resells its own stock that was previously purchased from shareholders.

A company distributes to shareholders additional shares of its own stock.

Concept Overview Questions Innovative Media issues 1,000 shares of 8%, $50 par value preferred stock for $60 per share. Which of the following will be recorded at the time of the issue? Multiple Choice A credit to Additional Paid-in Capital for $10,000 A debit to Cash for $50,000 A credit to Preferred Stock for $10,000 A credit to Preferred Stock for $60,000

A credit to Additional Paid-In Capital for $10,000

Concept Overview Questions Preferred stock is "preferred" to common stock two ways: (1) preferred stockholders have first rights to dividends, and (2) in the event the company is dissolved, preferred stockholders receive preference over common stockholders in the distribution of assets. True False

True

Multiple Choice Questions Retained earnings represent: Total assets minus total liabilities. Amount of cash available for paying dividends. All net income, less all dividends, since the company began operations. Net income minus dividends for the current year.

All net income, less all dividends, since the company began operations.

Multiple Choice Questions The correct order from the largest number of shares to the smallest number of shares is: Issued, outstanding, and authorized. Authorized, issued, and outstanding. Issued, authorized, and outstanding. Outstanding, issued and authorized.

Authorised , Issued and Outstanding Authorised Shares : Authorized shares are the number of shares that a corporation is legally allowed to issue. Issued Shares : Issued shares are those which are which have been allocated and are subsequently held by shareholders. Outstanding Shares : Shares outstanding are all the shares of a corporation that have been authorized, issued and purchased by investors and are held by them.

Concept Overview Questions On January 1, Year 1, Davidson Corporation issues 1,000 shares of $1 par value common stock for $20 per share. Complete the necessary journal entry for the issuance of common stock by indicating the relevant account names and dollar amounts below. If more than one account title is debited or credited, enter the account titles in their alphabetical order. Record the issue of additional common stock.

Debit Cash for 20,000 Credit Common Stock for 1,000 Credit Additional Paid-in Capital for 19,000

Homework Questions Power Drive Corporation designs and produces a line of golf equipment and golf apparel. Power Drive has 100,000 shares of common stock outstanding as of the beginning of 2021. Power Drive has the following transactions affecting stockholders' equity in 2021. March 1 Issues 63,000 additional shares of $1 par value common stock for $60 per share. May 10 Purchases 5,800 shares of treasury stock for $63 per share. June 1 Declares a cash dividend of $1.90 per share to all stockholders of record on June 15. (Hint: Dividends are not paid on treasury stock.) July 1 Pays the cash dividend declared on June 1. October 21 Resells 2,900 shares of treasury stock purchased on May 10 for $68 per share. Power Drive Corporation has the following beginning balances in its stockholders' equity accounts on January 1, 2021: Common Stock, $100,000; Additional Paid-in Capital, $5,300,000; and Retained Earnings, $2,800,000. Net income for the year ended December 31, 2021, is $680,000. Prepare the statement of stockholders' equity for Power Drive Corporation for the year ended December 31, 2021.

Common Stock --Balance, Jan 1: $100,000 --Issue Common Stock: $63,000 (given for March 1) --Balance, December 31: $163,000 Additional Paid in Capital --Balance, Jan 1: $5,300,000 --Issue Common Stock (63,000 x ($60 per share-$1 par value)): $3,717,000 --Resell Treasury Stock (2,900 shares x ($68 per share- $63 per share)): $14,500 --Balance, December 31: $9,031,500 Retained Earnings --Balance, Jan 1: $2,800,000 --Declare Dividends (NEGATIVE)((100,000+63000-5800) X 1.90: $-298,680 --Net Income: $680,000 --Balance, December 31: $3,181,320 Treasury Stock --Purchase Treasury Stock (NEGATIVE) ($5800 X $63): $-365,400 --Resell Treasury Stock (2900 X $63): $182,700 --Balance, December 31: $-182,700 Total Stockholders Equity --Balance, Jan 1: $8,200,000 --Issue Common Stock: $3,780,000 --Purchase Treasury Stock: $-365,400 --Declare Dividends: $-298,680 --Resell Treasury Stock: $197,200 --Net Income: $680,000 --Balance, December 31: $12,193,120

Concept Overview Questions Identify the primary disadvantages of the corporate form of business compared to a sole proprietorship or partnership. Check All That Apply Ownership limitations Double taxation Personal liability More paperwork

Double taxation More paperwork

Multiple Choice Questions The disadvantages of a corporation compared to a sole proprietorship or partnership include: Limited liability. Double taxation. The ability to transfer ownership. The ability to raise capital.

Double taxation. The main disadvantage of a Corporation Compared to a Sole proprietorship is the Effect of Double taxation. Sole proprietorship is solely owned by one person and effect of tax is at its own, where as Corporation is owned by Shared holders Which includes that effect of tax at the individual level and Corporation Level.

Concept Overview Questions There is a direct relationship between the par value and market value of the common stock: stocks with a low par value have a low market value, while stocks with a high par value have a high market value. True False

False

Multiple Choice Questions When treasury stock is resold, total stockholders' equity: Does not change. Increases. Decreases. The effect depends on the relationship between the purchase price and resale price.

Increases when the share are repurchased the value of the purchase will be deducted from the stockholders equity , and will be transferred to treasury stock account when the shares are resold then the treasury stock account will be deduced and then the stockholders equity will increase

Homework Questions A company has 1,400 shares of 6%, $100 par value preferred stock the company issued at the beginning of Year 1. All remaining shares are common stock. The company was not able to pay dividends in Year 1, but plans to pay dividends of $19,000 in Year 2. Required:1. & 2. How much of the $19,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in Year 2, assuming the preferred stock is cumulative? What if the preferred stock were noncumulative?

Line/Cumulative/ Non-Cumulative --Preferred dividend in arrears for year 1 /$8400/$0 --Preferred dividend for year 2/$8400/$8400 --Remaining dividends to common stockholders/$2200/$10600 --Total dividends/$19000/$19000 --------------------------------------------------- Working Note: (1400 x 100 x 6%)=8400 8400+8400= 16800 19,000-16800=2200 8400+2200= 10600

Multiple Choice Questions What is the primary reason for declaring a stock split? Increase the share price. Increase stockholders' equity. Decrease stockholders' equity. Lower the trading price of a stock into a more acceptable trading range.

Lower the trading price of a stock into a more acceptable trading range. Stocks are split so that the market price per share can get reduced and more number of investors can afford to buy a share. Stock split doesn't alter the stockholders equity in total.

Multiple Chice Questions Return on equity is calculated as: Net income divided by ending market value of equity. Net income divided by average market value of equity. Net income divided by average stockholders' equity. Net income divided by ending stockholders' equity.

Net income divided by average stockholders' equity.

Multiple Choice Questions Earnings per share measures: Net income earned per share of common stock. Net income earned per share of common and preferred stock. Cash earned per share of common and preferred stock. Cash earned per share of common stock.

Net income earned per share of common stock. -Earnings per share measures the net income earned per each share of common stocks outstanding -The Earnings per share is calculated by using the following formula Earnings per share = [Net Income - Preferred dividends] / Weighted average number of common stocks outstanding

Concept Overview Questions Which of the following is the complete description of the numerator in the equation used to calculate earnings per share? Multiple Choice Net income minus dividends on preferred stock Net income minus dividends on common stock Net income Net income minus total dividends

Net income minus dividends on preferred stock

Multiple Choice Questions Cash dividends are based on the number of shares: Issued. Authorized. Authorized and issued. Outstanding.

Outstanding The Dividends are always based on the number of shares outstanding. In Some Cases, Issued Shares and Outstanding Shares can be same if the Shares are not repurchased.

Concept Overview Questions The Stock Dividends account is a temporary stockholders' equity account that is closed into ______. Multiple Choice Retained Earnings Common Stock Dividends Net Income

Retained Earnings

Homework Questions Khaki Republic sells clothing and accessories through premium outlet locations and online. Selected financial data for Khaki Republic is provided as follows: ($ in millions except share data) Sales $2,740 Net income $154 Stockholders' equity, beginning $1,620 Stockholders' equity, ending $2,230 Average shares outstanding (in millions) 100 Dividends per share $0.60 Stock price, ending $35.10 Required: Calculate the following ratios for Khaki Republic. (Enter your net income and average stockholders' equity answers in millions (i.e., 5,000,000 should be entered as 5). Round your answers to 2 decimal places.)

Return On Equity Line 1: ---> Net Income + Average Stockholders Equity ((stock eq begin + stock eg end) divided by 2) = Return on Equity Line 2: ---> 154 / 1925 = 8% --------------------------------------------------------- Dividend yield Line 1: ---> = dividend per share/stock price Line 2: ---> $0.60 / $35.10 = 1.7% --------------------------------------------------------- Price-Earnings Ratio Line 1: ---> = stock price/earning per share (net income/ average shares oustanding) Line 2: ---> $35.10 / 1.54 = 22.8

Multiple Choice Questions Which of the following shows activity over a period of time? Neither the stockholders' equity section in the balance sheet or the statement of stockholders' equity. Stockholders' equity section in the balance sheet. Statement of stockholders' equity. Both the stockholders' equity section in the balance sheet and the statement of stockholders' equity.

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.

Multiple Choice Questions A company resells 10,000 shares of treasury stock for $22 per share. The stock was purchased in a previous year for $18 per share. By how much would net income be affected by the sale of this treasury stock? $220,000. $40,000. $180,000. There would be no effect on net income from the sale of treasury stock.

There would be no effect on net income from the sale of treasury stock. Net income is NOT affected at all by purchase or sale of treasury stock.

Homework Questions Donnie Hilfiger has two classes of stock authorized: $1 par preferred and $0.01 par value common. As of the beginning of 2021, 440 shares of preferred stock and 5,400 shares of common stock have been issued. The following transactions affect stockholders' equity during 2021: ---March 1 Issue 2,500 shares of common stock for $56 per share. ---May 15 Purchase 540 shares of treasury stock for $49 per share. ---July 10 Resell 340 shares of treasury stock purchased on May 15 for $54 per share. ---October 15 Issue 340 shares of preferred stock for $59 per share. ---December 1 Declare a cash dividend on both common and preferred stock of $1.90 per share to all stockholders of record on December 15. (Hint: Dividends are not paid on treasury stock.) ---December 31 Pay the cash dividends declared on December 1. Donnie Hilfiger has the following beginning balances in its stockholders' equity accounts on January 1, 2021: Preferred Stock, $440; Common Stock, $54; Additional Paid-in Capital, $83,000; and Retained Earnings, $33,300. Net income for the year ended December 31, 2021, is $13,600. Select whether each of the following transactions increases ( + ) or decreases ( − ) total assets, total liabilities, and total stockholders' equity.

Total Assets --Issue Common Stock: plus --Purchase Treasury Stock: minus --Resell treasury stock: plus --issue preferred stock: plus --Declare cash dividends: blank --Pay cash dividends: minus Total Liabilities --Issue Common Stock: blank --Purchase Treasury Stock: blank --Resell treasury stock: blank --issue preferred stock: blank --Declare cash dividends: plus --Pay cash dividends: minus Total Stockholders Equity --Issue Common Stock: plus --Purchase Treasury Stock: minus --Resell treasury stock: plus --issue preferred stock: plus --Declare cash dividends: minus --Pay cash dividends: blank

Concept Overview Questions The balance in retained earnings equals all net income, less all dividends, since the company began operations. True False

True

Concept Overview Questions When a company uses a portion of the company's earnings to buy back treasury shares, the action decreases stockholders' equity. True False

True

Concept Overview Questions Dividends paid are allocated according to the percentage of shares owned by each stockholder. True False

True

Concept Overview Questions When a corporation acquires shares of its own common stock, it records a: Multiple Choice debit to Common Stock for par value debit to Common Stock for cost debit to Treasury Stock for par value debit to Treasury Stock for cost

debit to Treasury Stock for cost

Concept Overview Questions What is the net effect of a dividend declaration and payment? Multiple Choice reduction in both liabilities and assets reduction in both stockholders' equity and assets increase in both liabilities and stockholders' equity increase in liabilities and decrease in stockholders' equity

reduction in both stockholders' equity and assets