Unit 6 (Lesson 26 & 27)

On January 1, 2017, Vancleave Corporation had 110,000 shares of its $.001 par value common stock outstanding. On November 27, when the market price of the stock was $8, the corporation declared a 10% stock dividend to be issued to stockholders of record on December 28, 2017. What was the impact of the 10% stock dividend on the balance of the retained earnings account?

$88,000 decrease D- Retained earnings ($8 x 10% x 110,000)-88,000 C-Common stock dividend distributable ($.001 x 10% x 110,000)- 11 C-Paid-in capital in excess of par- common stock- 87,989 Small stock dividends use the fair value of the stock to record issue of the stock dividend. While total Stockholder's Equity does not change, Retained Earnings is decreased by $88,000.

Financial Condition and Dividend Distributions

-Effective management of a company requires attention to more than the legality of dividend distributions. Management must also consider economic conditions, most importantly, liquidity. -the company may have a balance in retained earnings to declare a cash dividend but the balance sheet is showing a lack of liquidity so it would have to sell plant assets or borrow cash -the company may have a balance in retained earnings to declare a cash dividend but the company needs its cash for other purposes (current liabilities, payroll, and other expenditures) -before declaring a dividend, management must consider availability of funds to pay the dividend (both present and future financial positions should warrant the distribution) -the SEC encourages companies to disclose their dividend policy in their annual report and for companies that consistently pay dividends to indicate whether they intend to continue this practice in the future

Stock Split Effected in Form of a Stock Dividend

-the split cuts the par value in half as well -if treated as a stock split effected in the form of a stock dividend, additional paid-in capital-common is debited rather than retained earnings

Very few companies pay dividends in amounts equal to their legally available retained earnings. The major reasons are as follows.

1. To maintain agreements (bond covenants) with specific creditors, to retain all or a portion of the earnings, in the form of assets, to build up additional protection against possible loss. 2. To meet state corporation requirements, that earnings equivalent to the cost of treasury shares purchased be restricted against dividend declarations. 3. To retain assets that would otherwise be paid out as dividends, to finance growth or expansion. This is sometimes called internal financing, reinvesting earnings, or "plowing" the profits back into the business. 4. To smooth out dividend payments from year to year by accumulating earnings in good years and using such accumulated earnings as a basis for dividends in bad years. 5. To build up a cushion or buffer against possible losses or errors in the calculation of profits.

At the date of declaration of a large common stock dividend, what should the entry include?

A debit to Retained Earnings D-Retained Earnings (at par) C-Common Stock Dividend Distributable (at par) The corporation uses the par value instead of the fair value when calculating the transfer from Retained Earnings to Common Stock. On the declaration date, a large stock dividend is recorded using the following journal entry: Debit to Retained Earnings (at par), Credit to Common Stock Dividend Distributable (at par).

Dividend

A distribution of cash or other property to shareholders -a distribution of earnings, not an expense -a liability is recognized at declaration -retained earnings is usually the source of dividends-and owner's equity is reduced when those dividends are paid EXCEPT for stock dividends

Liquidating Dividends

A dividend NOT based on retained earnings. Any dividend not based on profits/earnings reduces paid-in capital. A dividend which is a return to stockholders of a portion of their original investments. -paid from contributed capital, not retained earnings -when the dividend is greater than the balance in retained earnings -a return of capital rather than a return on capital -in some cases, management simply decides to cease business and declares a liquidating dividends *At Declaration* D-Retained Earnings (Dividends declared) D- Additional paid-in capital C- Dividends Payable *Date of Payment:* D- Dividends Payable C-Cash

Dividend payouts can be important signals to the market.

A dividend check provides proof that at least some portion of a company's profits is genuine.

Where should the balance in Common Stock Dividend Distributable be reported on the Balance Sheet?

Addition to capital stock On the declaration date, a small stock dividend is recorded using the following journal entry: D- Retained Earnings (at fair value) C- Common Stock Dividend Distributable (at par) C-Paid-in Capital in Excess of Par - Common Stock Common Stock Dividends Payable have a credit balance and therefore are in increase (or addition to) capital stock. Stock dividends are not related to cash and therefore are not liability, nor are they a contra-asset.

Analysis of Stockholders' Equity

Analysts use stockholders' equity ratios to evaluate a company's profitability and long-term solvency. 1. Return on common stockholders' equity. 2. Payout ratio. 3. Book value per share.

Determining the proper amount of dividends to pay is a difficult financial management decision. Companies paying dividends are extremely reluctant to reduce or eliminate their dividend. They fear that the securities market might negatively view this action.

As a consequence, dividend-paying companies will make every effort to continue to do so. In addition, the type of shareholder the company has (taxable or nontaxable, retail investor or institutional investor) plays a large role in determining dividend policy.

Book Value (Equity Value) per Share

Book value per share of stock is the amount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet. Book Value per Share = Common Stockholders' Equity/ Outstanding Common Shares Book value per share = (stockholders' equity - preferred stock) / average number of common shares outstanding -book value per share of common stock is the amount of net assets that each share of common stock represents

How is the payout ratio calculated?

Cash dividends/net income less preferred dividends

Types of Dividends

Companies generally base dividend distributions either on accumulated profits (that is, retained earnings) or on some other capital item such as additional paid-in capital. Dividends are of the following types. 1. Cash dividends. 2. Property dividends (dividends in kind). 3. Liquidating dividends. -All dividends, except for stock dividends, reduce the total stockholders' equity in the corporation -A company should disclose a liquidating dividend—that is, a dividend not based on retained earnings—to the stockholders so that they will not misunderstand its source.

31. A company declares a property dividend in the form of shares of stock held as an investment and accounted for by the fair value method. The shares were purchase earlier in the year for $400,000. At the date of declaration, the shares have a value of $430,000. What is the amount of dividends payable?

Declaration Date: D-Investments in stock- 30,000 C-Gain on investment- 30,000 D- Retained Earnings-430,000 C- Property Dividends Payable- 430,000 Payment Date: D- Property Dividends Payable- 430,000 C-Investments in stock- 430,000

Property Dividends (dividends in kind)

Dividends payable in assets of the corporation other than cash e.g., merchandise, real-estate, investments (securities of other companies). Most common is a transfer of securities in other entities. -The dividend is measured at fair value at date of declaration -A gain or loss is recorded on the asset distributed -The company records the declared dividend as a debit to retained earnings and a credit to property dividends payable, at an amount equal to the fair value of the distributed property. *At Declaration:* D- Investment in stock C- Gain on investment D-Retained Earnings (Property Dividends Declared) C-Property Dividends Payable *At Payment:* Upon distribution of the dividend, the company debits property dividends payable and credits the account containing the distributed asset (restated at fair value). D-Property Dividends Payable C-Investment in stock e.g., Company A owns 4,000,000 shares of stock in Company B. On December 31, 2020, Company A distributed Company B's shares of stock as a dividend to its stockholders.

On October 31, 2017, Lexington Corp. declared and issued a 12% common stock dividend. Prior to this dividend, Lexington had 302,000 shares of $.001 par value common stock issued and outstanding. The fair value of Lexington's common stock was $16.75 per share on October 31, 2017. As a result of this stock dividend, what happened to the company's total stockholders' equity?

It did not change. Stock dividends simply reflect a reclassification of stockholder's equity. The total of stockholder's equity does not change.

Stock Splits (not a dividend)

It results in an increase in the number of shares outstanding with a corresponding decrease in the par or stated value per share. It is not a dividend. -2-for-1 stock split: decreases the total par value of the stock and increase the number of shares outstanding; has no effect on retained earnings -no entry is recorded for a stock split as the total dollar amount of all stockholders' equity accounts remains unchanged -a memorandum note is entered to indicate the changed par value of the shares and the increased number of shares -has no effect on total stockholders' equity -reduces the market price of the stock as well -a lot of companies declare a stock split to decrease the market price of their stock because their target investors may not be able to afford their stock

Cash dividends are paid on the basis of which number of shares?

Outstanding Cash dividends are paid only on the shares that are currently owned - the outstanding shares.

Durango Inc. had net income for 2017 of $2,120,000 and earnings per share on common stock of $5. Included in the net income was $300,000 of bond interest expense related to its long-term debt. The income tax rate for 2017 was 30%. Dividends on preferred stock were $400,000. The payout ratio on common stock was 25%. What were the dividends for common stock in 2017?

Payout ratio = cash dividends/ net income - preferred dividends 25% = x / (2,120,000-400,000) 25%= x/1,720,000 x= 25% x 1,720,000 = $430,000

Return on Common Stockholders' Equity (ROE)

ROE measures profitability from the common stockholders' viewpoint. This ratio shows how many dollars of net income the company earned for each dollar invested by the owners. ROE = (net income - preferred dividends)/ average common stockholders' equity -when preferred stock is present, income available to common stockholders equals net income less preferred dividends. -the amount of common stock equity used in this ratio equals total stockholders' equity less the par value of preferred stock

Long Co. issued 100,000 shares of $10 par common stock for $1,200,000. A year later Long acquired 16,000 shares of its own common stock at $15 per share. Three months later Long sold 8,000 of these shares at $19 per share. If the cost method is used to record treasury stock transactions, what is the credit side of the journal entry to record the sale of the 8,000 treasury shares?

Sale: D- Cash- 152,000 C-Treasury Stock-120,000 C- Paid-in capital in from Treasury Stock- 32,000 The journal entry to record the sale of 8,000 shares of treasury stock is: Debit Cash $152,000 (8,000 shares x $19/share); Credit Treasury Stock $120,000, Credit Paid-in Capital from Treasury Stock $32,000.

Stock Dividends

The issuance by a corporation of its own stock to its stockholders on a pro rata basis, without receiving any consideration. A distribution by a firm of its stock to its shareholders in proportion to their existing holdings. -dividends not paid in cash but in additional shares of stock -a capitalization of retained earnings that results in a reduction in retained earnings and a corresponding increase in certain contributed capital accounts -total stockholders' equity remains unchanged when a stock dividend is distributed -increases the number of shares outstanding -all stockholders retain their same proportionate share of ownership in the corporation -it does not affect total equity but transfers amounts between equity components -no affects on assets or liabilities -merely reflects a reclassification of stockholders' equity from retained earnings to other capital accounts (change in composition of equity accounts) *Small (ordinary) Stock Dividend* -when the stock dividend is less than 20-25 percent of the common shares outstanding at the time of the dividend declaration, the company is therefore required to transfer the fair value of the stock issued from retained earnings -has no effect on total assets or total stockholders' equity At Declaration: D-Retained earnings (fair market value) C-Common Stock dividend distributable (par value) C-Paid-in capital in excess of par- common stock Date of Issue: D-Common stock dividend distributable C-Common stock *Large Stock Dividend* If the dividend exceeds 25%, the par value method is used. At Declaration: D-Retained earnings (stock's par value) C-Common stock dividend distributable (stock's par value) At Distribution: D-Common Stock dividend distributable C- Common Stock -decreases retained earnings but does not change total stockholders' equity

Payout Ratio

The ratio of cash dividends to net income. -If preferred stock is outstanding, this ratio equals cash dividends paid to common stockholders, divided by net income available to common stockholders. Payout Ratio= Cash Dividends/Net Income Payout ratio= Cash Dividends/(Net Income-Preferred Dividends)

Common stockholders of a business enterprise are said to be the residual owners. What does the term residual owner mean?

The stockholder bears the ultimate risks and uncertainties and receive the benefits of enterprise ownership

Whenever corporations issue additional shares for the purpose of reducing the unit market price, then the distribution more closely resembles a stock split than a stock dividend.

This effect usually results only if the number of shares issued is more than 20-25 percent of the number of shares previously outstanding.

Cash Dividends

When a corporation distributes a dividend in cash to the stockholders. It is a distribution of profits/earnings from retained earnings (a return of stockholders' profits) -the board of directors vote on the declaration of a cash dividend before declaring it -there is usually a time lag between declaration and payment e.g., the board of directors might approve a resolution at the January 10 (date of declaration) meeting and declare it payable February 5 (date of payment) to all stockholders of record January 25 (date of record) -a declared cash dividend is usually a current liability -dividend per share is multiplied by the number of shares outstanding -declaration reduces owner's equity *At Declaration*: D-Retained earnings (cash dividends declared) C-Dividends Payable *At record*: No journal entry. *At Payment*: D-Dividends Payable C-Cash -Companies do not declare or pay cash dividends on treasury stock.

Large Stock Dividend (stock split-up effected in the form of a dividend)

a stock dividend of more than 20-25 percent of the number of shares previously outstanding

53. A company, which has 50,000 shares of $10 par value common stock outstanding, declares a 10% stock dividend on December 1. On the date of declaration, the stock has a fair market value of $25 per share. a. What is the journal entry to record the stock dividend when declared? b. What is the journal entry to record the stock issued?

a. D-Retained earnings (0.10 x 50,000 x $25)- 125,000 C-Common stock dividend distributable(0.10 x 50,000 x 10)- 50,000 C-Paid-in capital in excess of par-common stock- 75,000 b. D- Common stock dividend distributable- 50,000 C- Common Stock- 50,000

80. A company had the following information in its financial statements for the years ended 2019 and 2020 Cash dividends for the year 2020 $10,000 Net income for the year ended 2020 $93,000 Market price of stock, 12/31/19 $10 Market price of stock, 12/31/20 $12 Common stockholders' equity, 12/31/19 1,600,000 Common stockholders' equity, 12/31/20 1,980,000 Outstanding shares, 12/31/20 160,000 Preferred dividends for the year ended 2020 $15,000 What is the book value for the company for the year ended 2020? a. $12.38 b. $12.28 c. $12.22 d. $10.00

a. $12.38 Book value per share = Common stockholders' equity/ outstanding shares 1,980,000/160,000= $12.38 Accounting Rule: book value per share of common stock is the amount of net assets that each share of common stock represents.

83. On December 31, a company has the following data available Net Income $180,000 Interest expense $10,000 Total assets at the beginning of the year $810,000 Total assets at the end of the year $740,000 Total common stockholders' equity at the beginning of the year $520,000 Total common stockholders' equity at the end of the year $510,000 What is return on equity? (Round your final answer to two decimal places, X.XX%) a. 34.95% b. 36.89% c. 33.01% d. 21.94%

a. 34.95% Return on equity = net income - preferred dividends/ average common stockholders' equity 180,000/ ((520,000+510,000)/2)= .3495 or 34.95% Accounting Rule: ROE measures profitability from the common stockholders' viewpoint. This ratio shows how many dollars of net income the company earned for each dollar invested by the owners. Return on equity also helps investors judge the worthiness of a stock when the overall market is not doing well. Return on equity equals net income less preferred dividends, divided by average common stockholders' equity. The amount of common stock equity used in this ratio equals total stockholders' equity less the par value of preferred stock.

66. At the date of declaration of a small common stock dividend, the entry should not include a. a credit to common stock. b. a credit to paid-in capital in excess of par. c. a debit to retained earnings. d. a credit to common stock dividend distributable.

a. a credit to common stock Accounting Rule: the journal entry of a small stock dividend at the date of declaration is D- Retained earnings C-Common stock dividend distributable C-Paid-in capital in excess of par- common stock

34. The board of directors of a company declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. What is the journal entry for the dividend declaration? a. debit retained earnings 9,000 credit dividends payable 9,000 b. debit retained earnings 9,000 credit cash 9,000 c. debit retained earnings 10,000 credit dividends payable 10,000 d. debit retained earnings 10,000 credit cash 10,000

a. debit retained earnings 9,000 credit dividends payable 9,000 D- Retained Earnings-9,000 C- Dividends Payable-9,000 0.60 x (20,000-5,000)= 9,000

57. A company declares and distributes a 10% common stock dividend when it has 10,000 shares of $10 par value common stock outstanding. If the market value of the common stock is $20, the journal entry to record the stock dividend would include a a. debit to retained earnings $20,000. b. debit to retained earnings $,1000. c. credit to paid-in capital in excess of par - common stock $20,000. d) credit to paid-in capital in excess of par - common stock $,1000.

a. debit to retained earnings $20,000. D-Retained earnings (0.10 x 10,000 x 20)- 20,000 C- Common Stock dividend distributable (0.10 x 10,000 x 10)-10,000 C-Paid-in capita in excess of par-common stock- 10,000

32. A company declares a cash dividend on May 1, the date of record is May 15, and the date of payment is June 11. The dividend is $3.00 per share. The company only has common stock, and there are 10,000 shares authorized, 8,000 shares issued, and 5,000 shares outstanding. Which account should be debited on June 11? a. dividends payable for $15,000. b. retained earnings for $15,000. c. retained earnings for $24,000. d. dividends payable for $24,000.

a. dividends payable for $15,000 $3 x 5,000 = 15,000 May 1: D-Retained earnings- 15,000 C-Dividends payable- 15,000 May 15: No journal entry June 11: D- Dividends payable- 15,000 C- Cash- 15,000 Accounting Rule: Dividends Payable is debited when the dividend is paid. The dividend per share is multiplied by the number of shares outstanding

65. A company declares a 5% common stock dividend to common stockholders and should transfer from retained earnings to paid-in capital an amount equal to the a. fair value of the shares issued. b. book value of the shares issued. c. minimum legal requirements. d. par or stated value of the shares issued

a. fair value of the shares issued Date of Declaration: D-Retained earnings (fair market value) C-Common Stock dividend distributable C-Paid-in capital in excess of par- common stock Date of Issuance: D- Common Stock dividend distributable C-Common Stock Accounting Rule: the fair value method is used for a small stock dividend, i.e. less than or equal to 25%.

38. A dividend which is a return to stockholders of a portion of their original investments is a a. liquidating dividend. b. property dividend. c. liability dividend. d. participating dividend.

a. liquidating dividend

85. The rate of return on common stock equity is calculated by dividing a. net income less preferred dividends by average common stockholders' equity. b. net income by average common stockholders' equity. c. net income less preferred dividends by ending common stockholders' equity. d. net income by ending common stockholders' equity.

a. net income less preferred dividends by average common stockholders' equity

41. For cash dividends, the journal entry on the date of record is a. non-existent. No journal entry is required on the date of record. b. debit retained earnings and credit dividends payable. c. debit dividends payable and credit cash. d. debit dividends payable and credit retained earnings.

a. non-existent. No journal entry is required on the date of record.

37. Company A owns 4,000,000 shares of stock in Company B. On December 31, 2020, Company A distributed Company B's shares of stock as a dividend to its stockholders. This is an example of a a. property dividend. b. stock dividend. c. liquidating dividend. d. cash dividend.

a. property dividend

69. The stockholders' equity of a company at July 31, 2020 is presented below Common stock, par value $20, authorized 400,000 shares; issued and outstanding 160,000 shares: $3,200,000 Paid-in capital in excess of par: $160,000 Retained earnings: $650,000 $4,010,000 On August 1, 2020, the board of directors of the company declared a 15% stock dividend on common stock, to be distributed on September 15th. The market price of Howell's common stock was $70 on August 1, 2020, and $76 on September 15, 2020. What is the amount of the debit to retained earnings as a result of the declaration and distribution of this stock dividend? a. $960,000 b. $1,680,000 c. $1,824,000 d. $1,200,000

b. $1,680,000 Declaration: D- Retained earnings (70 x 15% x 160,000) -1,680,000 C-Common stock dividend distributable ($20 x 15% x 160,000)- 480,000 C-Paid-in capital in excess of par- common stock- 1,200,000 Distribution: D-Common stock dividend distributable- 480,000 C-Common Stock- 480,000

36. Company A declared a property dividend for Company B's 20,000 shares $1 par common stock. Company B's stock was purchased for $5 per share. The fair value of that stock was $10 per share on the declaration date and $11 per share on the distribution date. What is the amount of the dividend? a. $100,000 b. $200,000 c. $220,000 d. $300,000

b. $200,000 D- Investment in Company B-100,000 C- Gain- 100,000 D-Retained Earnings- 200,000 C- Property Dividends Payable- 200,000 20,000 x 10= 200,000

49. On February 1, a corporation has 40,000 shares of $1 par value common stock issued and outstanding. The corporation also has Additional Paid-in Capital of $200,000 and Retained Earnings of $200,000. On February 1, the corporation declared a 2-for-1 stock split. After the split, what is the total par value of the common stock and the total stockholders' equity, respectively? a. $80,000; $440,000 b. $40,000; $440,000 c. $20,000; $440,000 d. $40,000; $240,000

b. $40,000; $440,000 Total par value of common stock: $0.50 x 80,000 = 40,000 Total stockholders' equity: APIC of 200,000 + Retained earnings of 200,000 + Common Stock of ($1 x 40,000) = 440,000 Remember a 2-for-1 stock split will decrease the total par value of the stock and increase the number of shares outstanding. The total dollar amount of all stockholders' equity accounts remains unchanged.

84. A company reported the following information in its financial statements • Net income $70,000 • Preferred dividends $10,000 • Beginning common stockholders' equity $100,000 • Ending common stockholders' equity $200,000 • Common shares outstanding 50,000 What is the return on common stockholders' equity? a. 30% b. 40% c. 60% d. 120%

b. 40% ROE = net income - preferred dividends/ average common stockholders' equity 70,000-10,000/ ((100,000 + 200,000)/2)= 40%

39. A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to a. retained earnings. b. a paid-in capital account. c. accumulated depletion. d. accumulated depreciation.

b. a paid-in capital account

67. The balance in common stock dividend distributable should be reported as a(n) a. deduction from common stock issued. b. addition to capital stock. c. current liability. d. contra current asset.

b. addition to capital stock

74. The payout ratio can be calculated by dividing a. dividends per share by earnings per share. b. cash dividends by net income less preferred dividends. c. cash dividends by market price per share. d. dividends per share by earnings per share and dividing cash dividends by net income less preferred dividends.

b. cash dividends by net income less preferred dividends

78. Book value per share of common stock is derived by which of the following a. common stockholders' equity divided by the number of common shares authorized. b. common stockholders' equity divided by the number of common shares outstanding. c. net income divided by the number of common shares outstanding. d. net income divided by the number of common shares authorized.

b. common stockholders' equity divided by the number of common shares outstanding.

30. A company announces a $500,000 dividend payable to common stockholders. The cash dividend announcements noted that stockholders should consider $400,000 of the dividend as income and the remainder as a return of capital. Which journal entry should be used to record this dividend? a. debit retained earnings for $500,000; credit paid-in capital in excess of par - common stock for $100,000; credit dividends payable for $400,000. b. debit retained earnings for $400,000; debit paid-in capital in excess of par - common stock for $100,000; credit dividends payable for $500,000. c. debit retained earnings for $500,000; credit dividends payable for $500,000. d. debit retained earnings for $400,000; credit dividends payable for $400,000

b. debit retained earnings for $400,000; debit paid-in capital in excess of par - common stock for $100,000; credit dividends payable for $500,000. D-Retained Earnings- 400,000 D-Paid-In Capital in excess of par-common stock- 100,000 C- Dividends Payable- 500,000 Accounting Rule: this question is a combination of a cash dividend and liquidating dividend

47. A 2-for-1 stock split will a. increase the total par value of the stock and increase the number of shares outstanding. b. decrease the total par value of the stock and increase the number of shares outstanding. c. not change the total par value of the stock and increase the number of shares outstanding. d. increase total stockholders' equity.

b. decrease the total par value of the stock and increase the number of shares outstanding.

63. The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding a. increases common stock outstanding and increases total stockholders' equity. b. decreases retained earnings but does not change total stockholders' equity. c. may increase or decrease paid-in capital in excess of par but does not change total stockholders' equity. d. increases retained earnings and increases total stockholders' equity.

b. decreases retained earnings but does not change total stockholders' equity.

64. A company issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued? a. there should be no capitalization of retained earnings. b. par value. c. fair value on the declaration date. d. fair value on the payment date.

b. par value Accounting Rule: the par value method is used for a large stock dividend, i.e. greater than 25%. D-Retained earnings C-Common stock

46. A company has 10,000 shares of $6 par value common stock outstanding. The market value of the stock is $10. What is the impact of a 2-for-1 stock split? a. retained earnings is reduced by $100,000. b. par value of the stock is reduced to $3 per share. c. the number of shares of stock outstanding is reduced to 5,000. d. paid-in capital in excess of par value - common stock is reduced by $30,000.

b. par value of the stock is reduced to $3 per share

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

b. stock dividends Accounting Rule: a stock dividend merely reflects a reclassification of stockholders' equity from retained earnings to other capital accounts.

68. A feature common to both stock splits and stock dividends is a. a transfer to earned capital of a corporation. b. that there is no effect on total stockholders' equity. c. an increase in total liabilities of a corporation. d. a reduction in the contributed capital of a corporation.

b. that there is no effect on total stockholders' equity

82. A company had the following information in its financial statements for the year ended 2019 and 2020 Common cash dividends for the year 2019 $20,000 Net income for the year ended 2020 $130,000 Market price of stock, 12/31/20 $24 Common stockholders' equity, 12/31/19 $2,200,000 Common stockholders' equity, 12/31/20 $2,700,000 Outstanding shares, 12/31/20 150,000 Preferred dividends for the year ended 2020 $30,000 What is the book value per share for the year ended 2020? a. $17.80 b. $18.00 c. $14.67 d. $17.67

b.$18.00 2,700,000/150,000= $18.00 Accounting Rule: the book value per share formula is used to calculate the per share value of a company based on its equity available to common shareholders. The term "book value" is a company's assets minus its liabilities and is sometimes referred to as stockholder's equity, owner's equity, shareholder's equity, or simply equity.

79. A company has total stockholders' equity of $7,400,000. The company's outstanding capital stock includes 100,000 shares of $10 par value common stock and 20,000 shares of 6%, $100 par value preferred stock. (No dividends are in arrears.) What is the book value per share of common stock? a. $39 b. $49 c. $54 d. $74

c. $54 Book value per share = 7,400,000 - (20,000 x 100)/ 100,000= $54

76. A company had the following information in its financial statements for the years ended 2019 and 2020 Cash dividends for the year 2020 $10,000 Net income for the year ended 2020 $97,000 Market price of stock, 12/31/19 $10 Market price of stock, 12/31/20 $12 Common stockholders' equity, 12/31/19 $1,000,000 Common stockholders' equity, 12/31/20 $1,200,000 Outstanding shares, 12/31/208 100,000 Preferred dividends for the year ended 2020 $15,000 What is the payout ratio for Sealy Corporation for the year ended 2020? a. 18.3% b. 10.3% c. 12.2% d. 25.8%

c. 12.2% Payout ratio = cash dividends/ (net income- preferred dividends) 10,000/(97,000-15,000)=0.122 or 12.2%

75. A company had the following information in its financial statements for the years ended 2019 and 2020 Cash dividends for the year 2020: $10,000 Net income for the year ended 2020: $93,000 Market price of stock, 12/31/19: $10 Market price of stock, 12/31/20: $12 Common stockholders' equity, 12/31/19: 1,600,000 Common stockholders' equity, 12/31/20: 1,980,000 Outstanding shares, 12/31/20: 160,000 Preferred dividends for the year ended 2020: $15,000 What is the payout ratio for the company for the year ended 2020? a. 18.1% b. 16.1% c. 12.8% d. 10.8%

c. 12.8% Payout ratio = cash dividends/ (net income - preferred dividends) 10,000/ (93,000-15,000) = 0.128 or 12.8%

60. A shareholder in a company owns 2,000 shares of the company's common stock, which represents 24% of the outstanding common stock of the company. The shareholder receives a 5% stock dividend. After the stock dividend, what is the shareholders ownership in the company's common stock? a. 5% ownership. b. 19% ownership. c. 24% ownership. d. 29% ownership.

c. 24% ownership total stockholder's equity is unchanged but the balances of different accounts in stockholders' equity will change Accounting Rule: the shareholder maintains the same proportionate interest in the company after the issue of the stock dividend.

86. A company had the following information in its financial statements for the years ended 2019 and 2020 Cash dividends for the year 2020 $5,000 Net income for the year ended 2020 $97,000 Market price of stock, 12/31/19 $10 Market price of stock, 12/31/20 $12 Common stockholders' equity, 12/31/19 $1,000,000 Common stockholders' equity, 12/31/20 $1,200,000 Outstanding shares, 12/31/20 100,000 Preferred dividends for the year ended 2020 $15,000 What is the rate of return on common stock equity for Sealy Corporation for the year ended 2020? a. 8.8% b. 6.8% c. 7.5% d. 6.5%

c. 7.5% 97,000-15,000/((1,000,000 + 1,200,000)/2)= 0.0745 Accounting Rule: the numerator consists of net income available for common stockholders which is equal to net income less dividend on preferred stock. The denominator consists of average common stockholders' equity which is equal to average total stockholders' equity less average preferred stockholders' equity.

51. What effect does the issuance of a 2-for-1 stock split have on each of the following? Par Value per Share; Retained Earnings a. No effect; No effect b. Increase; No effect c. Decrease; No effect d. Decrease; Decrease

c. Decrease; No effect

58. A company declares and distributes a 10% common stock dividend when it has 20,000 shares of $10 par value common stock outstanding. If the market value of the common stock is $30, the journal entry to record the stock dividend would include a a. credit to common stock $40,000. b. credit to common stock $60,000. c. credit to paid-in capital in excess of par - common stock $40,000. d. credit to paid-in capital in excess of par - common stock $20,000.

c. credit to paid-in capital in excess of par - common stock $40,000. D-Retained earnings (10% x 20,000 x 30)- 60,000 C- Common Stock dividend distributable- 20,000 C- Paid-in capita in excess of par-common stock- 40,000

45. When a property dividend is declared, the property to be distributed should be revalued to fair value as of the a. record date. b. date of distribution. c. date of declaration. d. announcement date.

c. date of declaration

35. A company's board of directors declares a $0.75 per share cash dividend. The company has 375,000 shares of common stock issued and 50,000 shares of treasury stock on the date of record. What is the journal entry to record this event? a. debit dividend expense for $281,250; credit dividends payable for $281,250. b. debit common stock for $243,750; credit dividends payable for $243,750. c. debit retained earnings for $243,750; credit dividends payable for $243,750. d. debit retained earnings for $281,250; credit dividends payable for $281,250.

c. debit retained earnings for $243,750; credit dividends payable for $243,750. D- Retained earnings- 243,650 C- Dividends Payable- 243,750 375,000-50,000=325,000 325,000 x 0.75 = 243,750

87. A company is preparing for an expansion and wants to improve its return on equity to be more attractive to investors. How could this be accomplished? a. increase preferred dividends. b. issue a stock split. c. increase net income. d. issue additional shares of stock.

c. increase net income Accounting Rule: to improve return on equity, the numerator would have to increase or the denominator would have to decrease. Increasing net income, increases the numerator of the ROE ratio. ROE = net income - preferred dividends/average common stockholders' equity Financing more with debt than equity, decreases the denominator of the ROE ratio. Remember the accounting equation: A = L +E. Increasing liabilities would decrease equity.

52. Which of the following is true of a stock dividend? a. it is a liability. b. the decision to issue a stock dividend resides with shareholders. c. it does not affect total equity but transfers amounts between equity components. d. it creates a cash reserve for shareholders.

c. it does not affect total equity but transfers amounts between equity components

40. If a company declares a $100,000 cash dividend, the account to be debited on the date of declaration is a. common stock. b. dividends payable. c. retained earnings. d. paid-in capital in excess of par.

c. retained earnings Date of Declaration: D-Retained Earnings C- Dividends Payable Date of Payment: D-Dividends Payable C-Cash

59. How does the declaration and distribution of a 15% stock dividend affect stockholders' equity? a. the total amount of stockholders' equity will increase. b. the total amount of stockholders' equity will decrease. c. the balances of different accounts in stockholders' equity will change, but total stockholders' equity is unchanged. d. there is no change.

c. the balances of different accounts in stockholders' equity will change, but total stockholders' equity is unchanged.

88. A company can increase its return on equity ratio by a. issuing a small stock dividend. b. decreasing net income. c. using more debt in its capital structure. d. selling more capital stock.

c. using more debt in its capital structure ROE = net income - preferred dividends/ average common stockholders' equity Accounting Rule: issuing a small stock dividend simply transfers funds from retained earnings to another capital account. Decreasing net income reduces the numerator of the ROE ratio. Selling more capital stock increases the denominator of the ROE ratio. Financing more with debt than equity, decreases the denominator of the ROE ratio.

81. A company has total stockholders' equity of $7,400,000. The company has outstanding 300,000 shares of $1 par value common stock and 20,000 shares of 8% preferred stock, $100 par value. (No dividends are in arrears.) What is the book value per share of common stock? a. $9.00 b. $24.06 c. $24.66 d. $18.00

d. $18.00 7,400,000-(20,000 x 100)/300,000= $18.00

77. A company reported the following information in its financial statements • Net income: $70,000 • Preferred dividends: $10,000 • Common stockholders' equity: $200,000 • Common shares outstanding: 50,000 What is the book value per share? a. $1.20 b. $1.40 c. $3.80 d. $4.00

d. $4.00 Book value per share = Common Stockholders' Equity/ Outstanding Shares 200,000/50,000= $4.00 Accounting Rule: book value or equity value per share of stock is the amount each share would receive if the company were liquidated on the basis of amounts reported on the balance sheet. Book value or equity per share equals common stockholders' equity divided by outstanding common shares.

55. A stock dividend is considered small when it is a dividend of a. less than 30% but greater than 25% of the corporation's outstanding stock. b. between 20% and 50% of the corporation's outstanding stock. c. more than 30% of the corporation's outstanding stock. d. 25% or less of the corporation's outstanding stock.

d. 25% or less of the corporation's outstanding stock

73. A company has a net income of $100,000; cash dividends to common stockholders of $7,500; and cash dividends to preferred shareholders of $2,500. Which value is the company's payout ratio? a. 5.0% b. 2.5% c. 10.0% d. 7.7%

d. 7.7% Payout ratio= Cash Dividends/(Net Income-Preferred Dividends) 100,000-2,500=97,500 7,500/97,500=0.77 or 7.7% Accounting Rule: The payout ratio, is the ratio of cash dividends to net income. If preferred stock is outstanding, this ratio equals cash dividends paid to common stockholders, divided by net income available to common stockholders.

70. How would the declaration and subsequent issuance of a 10% stock dividend by a company affect each of the following when the fair value of the shares exceeds the par value of the stock? Common Stock; Additional Paid-in Capital a. No effect ;No effect b. No effect; Increase c. Increase; No effect d. Increase; Increase

d. Increase; Increase D- Retained earnings C-Common stock dividend distributable C-Paid-in capital in excess of par- common stock D-Common stock dividend distributable C-Common stock

43. All of the following decreases retained earnings except a. a property dividend. b. a stock dividend. c. a cash dividend. d. a liquidating dividend.

d. a liquidating dividend

42. The chronological order of dates for cash dividends are a. date of record, date of declaration, date of payment. b. date of annual Board of Directors meeting, date of payment, date of record, date of declaration. c. date of annual Board of Directors meeting, date of record, date of declaration, date of payment. d. date of declaration, date of record, date of payment.

d. date of declaration, date of record, date of payment.

33. Company A declared a property dividend. The dividend consisted of 10,000 common shares of its investment in Company B. The shares had originally been purchased at $4 per share and had a $1 par. The value of the shares on the declaration date is $7 per share. What is the first journal entry that should be recorded related to this dividend? a. debit retained earnings 70,000 credit property dividends payable 70,000 b. debit retained earnings 70,000 credit property dividends payable 40,000 credit gain 30,000 c. debit investment in Company B 30,000 credit retained earnings 30,000 d. debit investment in Company B 30,000 credit gain on investment 30,000

d. debit investment in Company B 30,000 credit gain on investment 30,000 D- Investment in Company B- 30,000 C- Gain on investment- 30,000 The original investment in Company B's shares needs to be adjusted to fair value which is calculated 10,000 x ($7 - $4) = $30,000. After increasing the carrying value to fair value, the next journal entry is.... D-Retained earnings- 70,000 C- Property Dividends Payable- 70,000 The last journal entry is... D-Property Dividends Payable- 70,000 C-Investment in Company B- 70,000

61. A company declares and distributes a 30% common stock dividend when it has 60,000 shares of $10 par common stock outstanding. The market price per share is $75 at the date of declaration. Which journal entry is prepared? a. debit retained earnings $1,350,000, credit common stock $180,000 and credit paid-in capital in excess of par - common stock $1,170,000. b. debit retained earnings $1,350,000, credit paid-in capital in excess of par - common stock $500,000. c. debit retained earnings $1,350,000 and credit common stock $1,350,000. d. debit retained earnings $180,000 and credit common stock $180,000

d. debit retained earnings $180,000 and credit common stock $180,000 D- Retained Earnings-180,000 C- Common Stock (30% x $10 x 60,000)-180,000 Accounting Rule: Since the dividend exceeds 25%, the par value method is used. Retained earnings is debited and common stock is credited for the stock's par value.

71. On May 1, 2020, a company declared and issued a 10% common stock dividend. Prior to this dividend, the company had 200,000 shares of $1 par value common stock issued and outstanding. The fair value of the company 's common stock was $25 per share on May 1, 2020. As a result of this stock dividend, the company's total stockholders' equity a. increased by $500,000. b. decreased by $500,000. c. decreased by $25,000. d. did not change.

d. did not change

48. A stock split a. increases assets and decreases stockholders' equity. b. decreases assets and increases stockholders' equity. c. increases assets and stockholders' equity. d. has no effect on total stockholders' equity.

d. has no effect on total stockholders' equity

56. A small stock dividend will a. reduce total assets. b. reduce total stockholders' equity. c. increase total stockholders' equity. d. have no effect on total assets or total stockholders' equity.

d. have no effect on total assets or total stockholders' equity

44. When a property dividend is declared, the reduction in retained earnings is for a. the book value of the property on the date of declaration. b. the book value of the property on the date of distribution. c. the fair value of the property on the date of distribution. d. the fair value of the property on the date of declaration.

d. the fair value of the property on the date of declaration. Date of Declaration: D-Investment in company B C-Gain on investment D-Retained earnings C-Property Dividends Payable

50. A company has 400,000 shares issued and outstanding of $1 par common stock. After a 2-for-1 stock split, which of the following statements is FALSE? a. the par value per share decreases to $0.50 per share. b. the number of shares issued is 800,000. c. the number of shares outstanding is 800,000. d. the number of shares issued is 200,000.

d. the number of shares issued is 200,000 Accounting Rule: a 2-for-1 stock split increases the number of shares outstanding while decreasing the par value of the stock. No journal entry is made for a stock split. However, a memorandum note is entered to indicate the changed par value of the shares and the increased number of shares.

54. A shareholder in a company owns 2,000 shares of the company's common stock. The shareholder receives a 7% stock dividend. After the stock dividend, the shareholder will have a a. total of 140 shares of the company's common stock. b. total of 1,860 shares of the company's common stock. c. total of 2,000 shares of the company's common stock. d. total of 2,140 shares of the company's common stock.

d. total of 2,140 shares of the company's common stock. 2,000 x 0.07 = 140 2,000 + 140 = 2,140 It is a capitalization of retained earnings that results in a reduction in retained earnings and a corresponding increase in certain contributed capital accounts (common stock in this case)

How is the rate of return on common stock equity computed?

Net income less preferred dividends/average common stockholders' equity