Chapter 15 - Stockholder's Equity

Norton Company issues 4,000 shares of its $5 par value common stock having a fair value of $25 per share and 6,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $205,000. What amount of the proceeds should be allocated to the preferred stock? a) $128,125 b) $93,181 c) $111,818 d) $167,727

c) $111,818 FV of common = 100,000 = (4,000 x 25) FV of preferred = 120,000 = (6,000 x 20) % preferred stock = 120,000 / 220,000 = 0.5454 205,000 x 0.54 = $111,818

Anders, Inc., has 15,000 shares of 4%, $100 par value, cumulative preferred stock and 60,000 shares of $1 par value common stock outstanding at December 31, 2018. There were no dividends declared in 2016. The board of directors declares and pays a $110,000 dividend in 2017 and 2018. What is the amount of dividends received by the common stockholders in 2018? a) $0 b) $110,000 c) $40,000 d) $60,000

c) $40,000 Annual pref. div = 15,000 x .04 x 100 = 60,000 Amt due = 60,000 (2016) + 60,000 (2017) = 120,000 Div paid = 110,000 Amt owed = 120,000 - 110,000 = 10,000 (2017) 2018 div paid to pref. = 60,000 + 10,000 = 70,000 2018 div paid to common = 110,000 - 70,000 = 40,000

The preemptive right of a common stockholder is the right to a) exclude preferred stockholders from voting rights b) share proportionately in corporate assets upon liquidation c) share proportionately in any new issues of stock of the same class d) receive cash dividends before they are distributed to preferred stockholders

c) share proportionately in any new issues of stock of the same class

Farmer Corp. owned 20,000 shares of Eaton Corp. purchased in 2014 for $550,000. On December 15, 2017, Farmer declared a property dividend of all of its Eaton Corp. shares on the basis of one share of Eaton for every 10 shares of Farmer common stock held by its stockholders. The property dividend was distributed on January 15, 2018. On the declaration date, the aggregate market price of the Eaton shares held by Farmer was $900,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings of a) $350,000 b) $550,000 c) $0 d) $900,000

d) $900,000 RE = aggregate market price of declaration date RE 900,000 debit CS div. distribution XXX credit PIC excess of par - CS XXX credit

Common stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders a) are entitled to a dividend every year in which the business earns a profit b) have the rights to specific assets of the business c) can negotiate individual contracts on behalf of the enterprise d) bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership

d) bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership Residual ownership: assumes common shareholders to be the real owners of the business

Stockholder's equity is generally classified into two major categories: a) appropriated capital and retained earnings b) retained earnings and unappropriated capital c) contributed capital and appropriated capital d) earned capital and contributed capital

d) earned capital and contributed capital earned capital = the capital that develops from profitable operations, all undistributed income that remains invested in the company contributed capital = (paid-in capital) total amount paid in on capital stock; par value of all outstanding stock and premiums less discounts on issuance

Cash dividends are paid on the basis of the number of shares a) authorized b) outstanding less the number of treasury shares c) issued d) outstanding

d) outstanding

On December 1, 2018, Abel Corporation exchanged 50,000 shares of its $10 par value common stock held in treasury for a used machine. The treasury shares were acquired by Abel at a cost of $40 per share, and are accounted for under the cost method. On the date of the exchange, the common stock had a fair value of $55 per share (the shares were originally issued at $30 per share). As a result of this exchange, Abel's total stockholders' equity will increase by a) $2,750,000 b) $2,250,000 c) $500,000 d) $2,000,000

a) $2,750,000 Increase in SE = # of shares x FV per share 2,750,000 = 50,000 x 55

Total stockholders' equity represents a) a claim against a portion of the total assets of a company b) only the amount of earnings that have been retained in the business c) claim to specific assets contributed by the owners d) the maximum amount that can be borrowed by a company

a) a claim against a portion of the total assets of a company

Porter Corp. purchased its own par value stock on January 1, 2017 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from a) additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise from retained earnings b) additional paid-in capital without regard as to whether or not there have been previous net "gains" from sales of the same class of stock included therein c) net income d) retained earnings

a) additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise from retained earnings

When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the a) par value of the shares issued b) the market value of the services received or the market value of the share issues c) market value of the shares issued d) market value of the services received

a) par value of the shares issued the par value has no relationship to its fair value General rule: companies record stock issued for services or property other than cash at either FV of stock issued or the FV of noncash consideration received, whichever more clearly determined

Which dividends do not reduce stockholders' equity? a) stock dividends b) property dividends c) cash dividends d) liquidating dividends

a) stock dividends Stock dividends do not affect assets or liabilities, merely reflect a reclassification of SE

In January 2017, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2017, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares a) increased total stockholders' equity b) decreased total stockholders' equity c) did not change total stockholders' equity d) decreased the number of issued shares

b) decreased total stockholders' equity When a company purchases treasury stock, a reduction occurs in both assets and stockholders' equity

According to the FASB, redeemable preferred stock should be a) included in stockholders' equity b) included as a liability c) included with common stock d) included as a contra item in stockholders equity

b) included as a liability Redeemable preferred stock: has mandatory redemption period or a redemption feature that the issuer cannot control