chapter 8

Which of the following is not a date associated with the declaration and payment of dividends?

Date of purchase Whoever owns the stock on the date of record is entitled to the dividend regardless of when the associated stock was purchased.

Which of the following is a reason a company would acquire treasury stock?

Reduce the likelihood of a hostile takeover Outside investors may try to take control of a company by acquiring its shares in the open market. If the outside investors are able to acquire a sufficient number of shares, they could vote to replace members of the existing board of directors with members that support their agenda and thereby, gain control of the company. If the existing management has the corporation purchase its own shares (treasury stock), the number of shares available to outsiders is diminished. So, even though treasury stock has no voting rights, keeping the shares out of the hands of hostile forces protects the existing management team.

Based on normal market reaction, the market price of stock will

decrease if actual earnings are less than expected earnings. Investors normally buy stock in order to obtain the right to share in the earnings of a company. The higher the expected earnings the more desirable the stock. If stock were purchased with high earnings expectations but actual earnings were low, investors would be disappointed and would discount the price of the stock.

A two for one stock split will double the amount of total stockholder's equity shown on the balance sheet. This statement is

false A stock split affects the par value and the number of shares of stock outstanding. It has no impact on the total amount of assets, liabilities, or stockholders' equity.

Treasury stock is listed as the first account under the stockholders' equity section of the balance sheet. This statement is

false Normally, treasury stock is listed as the last account shown under the stockholders equity section of the balance sheet. The only item shown after the treasury stock account balance is the summary heading "Total Stockholders' Equity".

Which of the following is not a potential benefit from owning common stock?

Risk minimization

On October 1, Allison Corporation declared a $70,000 cash dividend to be paid on December 15 to shareholders of record on November 1. Which of the following shows how Allison's financial statements will be affected on December 15?

option A December 15 is the payment date. Paying off the liability is an asset use transaction. An asset account (cash) and a liability account (dividends payable) decrease. Settling a debt has no impact on the income statement. Since dividend transactions are transactions between a corporation and its owners they are financing activities.

On November 1, Year 1, Dixon Company paid $20 per share to buy back 1,000 shares of its $8 par value common stock. The stock had originally sold for $15. Which of the following shows how the purchase of the treasury stock will affect Dixon's financial statements on November 1, Year 1?

option a Purchasing treasury stock has the opposite effect on the financial statements as issuing stock. The purchase of treasury stock is an asset use transaction. Assets (cash) decrease and treasury stock increases. Note that treasury stock is a contra equity account. As a result, increasing the treasury stock account decreases total stockholders' equity. Purchasing treasury stock does not affect the income statement. Treasury stock transactions are transactions between a corporation and its investors and therefore, are financing activities.

Wallace Corporation issued a 6 percent stock dividend on 30,000 shares of its $10 par value common stock. At the time of the dividend, the market value of the stock was $40 per share. Which of the following shows how the stock dividend will affect Wallace's financial statements?

option b Number of shares issued: 30,000 shares × .06 dividend = 1,800 sharesAmount to transfer from retained earnings: 1,800 shares × $40 per share = $72,000Par value of stock issue: 1,800 shares × 10 par value = $18,000Additional paid-in capital in excess of par = 1,800 shares × ($40 market value − $10 par) = $54,000A stock dividend is a claims exchange event. The retained earning account decreases by $72,000, the common stock account increases by $18,000 (1,800 shares × $10 par value) and the additional paid-in capital in excess of par value increases by $54,000 ($72,000 − $18,000). Since dividends do not affect the determination of net income, the income statement is not affected. Since cash was not collected or spent, the statement of cash flows is not affected.

On October 1, Allison Corporation declared a $70,000 cash dividend to be paid on December 15 to shareholders of record on November 1. Which of the following shows how Allison's financial statements will be affected on October 1?

option d October 1 is the declaration date. The declaration of a cash dividend is a claims exchange event. A liability account (dividends payable) increases and a stockholders' equity account (retained earnings) decreases. Since dividends are not sacrifices incurred to generate revenue, there is no impact on the income statement. Since cash was not collected or paid, there is no impact on the statement of cash flows.