Accounting Chapter 10: Stockholders' Equity

Distributions of stock to current shareholders of a corporation are called what type of distribution? (Select all that apply.)

Stock dividend Stock split

In a corporation, the stockholders' potential loss is

limited to the amount of the investment.

The statement of shareholders' equity reports

the changes in each shareholder equity account.

Historically, par value was considered to be

the value of the company's shares of stock.

Shares of stock that are repurchased are referred to as ___ stock.

treasury

The contra account used to record a company's repurchase of its own common stock is the BLANK stock account.

treasury

Shares of stock previously sold by the corporation that are repurchased are called

treasury stock.

Wyanot Company issued 1,000 shares of its 5%, $100 par value, cumulative preferred stock for $110 cash per share. The journal entry to record this transaction includes:

$10,000 credit to Additional paid-in capital - preferred. $110,000 debit to Cash. $100,000 credit to Preferred stock.

Dilution Solutions, Inc. repurchased 500 shares of its $2 par value common stock for $10,000. The journal entry to record this transaction includes:

$10,000 debit to Treasury stock. $10,000 credit to Cash.

X-Co issued 1,000 shares of its 5%, $10 par value, cumulative preferred stock for $100 cash per share. The journal entry to record this event includes:

$100,000 debit to Cash. $10,000 credit to Preferred stock. $90,000 credit to Additional paid-in capital.

On January 1, 2021, Bank & Rupp, Inc. issued 100,000 shares of $1 par value common stock and 1,000 shares of $50 par value, 6%, cumulative preferred stock. No dividends were declared in 2021. In 2022, Bank & Rupp declared and paid dividends to both common and preferred stockholders. A $1 dividend was paid to common stockholders. Assuming all shares originally issued are outstanding, the total dividend paid to the preferred stockholders equals

$6,000

Wok N Roll, Inc. began on January 1, 2021 by issuing 100,000 shares of $1 par value common stock and 1,000 shares of $100 par value, 5%, cumulative preferred stock. No dividends were declared in 2021 or 2022. In 2023, Wok N Roll declared and paid dividends to common and preferred stockholders. A $0.50 dividend was paid to common stockholders. Assuming all shares originally issued are outstanding, the total dividend declared and paid in 2023 equals:

$65,000

Refurbish, Inc., bought 1,000 shares of its own stock for $8,000. Later it resold the shares for $10,000. The journal entry to record the sale of treasury stock includes a(n)

$8,000 credit to Treasury stock $2,000 credit to Additional paid-in capital

Daffy Duct, Inc. issued 10,000 shares of $1 par value common stock at $10 per share. The journal entry to record this transaction includes:

$90,000 credit to Additional paid-in capital $100,000 debit to Cash $10,000 credit to Common stock

Refurbish, Inc., reissued 1,000 shares of its treasury stock for $10,000. Prior to the reissuance, the Treasury stock balance was $12,000, which included the $8,000 cost of the 1,000 shares reissued. After recording this transaction,

Additional paid-in capital will be increased by $2,000 Treasury stock will equal $4,000

Limited liability and ease of raising outside capital are advantages of this business form:

Corporation

Justin Corp. issues 10,000 shares of $1 par value common stock for $5 per share. The journal entry to record this transaction will include which of the following?

Credit to additional paid-in capital $40,000 Credit to common stock $10,000

When a corporation issues shares of common stock for an amount above par, which of the following entries occur?

Credit to common stock Credit to additional paid-in capital

Knorr issues 1,000 shares of $2 par value common stock for $10 per share. The journal entry to record this transaction will include which of the following?

Credit to common stock $2,000 Credit to additional paid-in capital $8,000

On April 1, 2021, Rawlings declares a dividend of $0.30 per share. Rawlings has 100,000 shares authorized, and 40,000 issued and outstanding. The date of record is April 28, and the payment date is May 15. Which of the following entries is included in the journal entry on May 15?

Debit dividends payable $12,000.

Match the source of capital with the account in which it is recognized.

Earned capital > Retained earnings Invested capital > Common stock

True or false: A corporation is owned by debt and equity holders.

False - Reason: A corporation is owned by its shareholders, who are equity holders.

___ capital is the amount of money paid into a company by its owners.

Invested, Contributed, or Paid-in

Albert Inc. has both common and preferred stock outstanding. Which should be listed first in the stockholders' equity section of the balance sheet?

Preferred stock

The rights of common stockholders typically include which of the following?

Right to distribution of assets in liquidation. Right to dividends when declared. Right to vote for corporate directors.

Which of the following is included in the rights of common stockholders?

Right to vote Wrong: Right to dividend payment every year. - Reason: Stockholders have a right to dividends when distributed, but not necessarily every year.

Which financial statement summarizes the changes in the balance of each stockholders' equity account?

Statement of stockholders' equity only

Morgan Company issued convertible preferred stock. What additional special feature(s) could also have been granted to preferred stock holders?

The right to convert the shares to common shares The right to redeem the preferred shares for cash

Morgan Company issued cumulative preferred stock. What additional special feature(s) could also have been granted to preferred stock holders?

The right to convert the shares to common shares The right to redeem the preferred shares for cash

When a company repurchases its own securities, the stock is recorded in which account?

Treasury stock

When should a corporation record a liability for dividends in arrears on its cumulative preferred stock?

When the dividends have been declared

When treasury stock is purchased, the cost of treasury stock is reported as

a reduction in shareholders' equity.

Canton, Inc. issued 10,000 shares of $1 par value common stock at $10 per share. Mr. Smart, the bookkeeper, recorded this transaction with a $100,000 debit to Cash and a $100,000 credit to Common stock. As a result of this entry,

additional paid-in capital will be understated. common stock will be overstated.

The number of shares authorized is set forth in the company's:

articles of incorporation

When a business incorporates, it must file its ______ with the state in which it incorporates.

articles of incorporation

How is treasury stock reported in the financial statements?

as a contra-equity account

The total number of shares that a company may sell is referred to as ___ shares.

authorized

A frequent reason for a stock split is to

cause the market price per share to decline

Proceeds from issuing new par value common stock above par are credited to

common stock additional paid in capital

Dilution Solutions, Inc. repurchased 1,000 shares of its $1 par value common stock for $5,000. The journal entry to record this transaction includes a $5,000 BLANK to Treasury Stock

debit

Preferred stock has a mixture of attributes of both equity and

debt

Retained earnings are:

decreased by dividends. all of the company's earnings not distributed to stockholders. increased by net income. sometimes called earned capital.

A distribution of a company's accumulated prior earnings is a(n)

dividend

When a corporation distributes assets of the company to its investors, it is referred to as a(n)

dividend

A distribution of a company's accumulated prior earnings is a(n) ______.

dividend Wrong: retained earnings - Reason: Retained earnings is what remains after the company declares dividends which is the distribution of a company's accumulated prior earnings.

Additional shares issued to existing owners without an exchange of cash may be in the form of stock ___ or stock ___

dividends; splits

Investors who acquire preferred stock:

do not have voting rights. have preference as to dividends.

The dividend payment date is when:

e

Positive ___ represent the key to a company's long-run survival. (Enter only one word.)

earnings, income, profit, earning, profits, or incomes

The advantages to the corporate form of business include

ease of raising capital. transferability of ownership. Wrong: double taxation for the corporation. - Reason: Double taxation is a disadvantage.

Preferred stock is "preferred" over common stock by providing preferred stock holders with these rights:

first right to specified amount of dividends preference in distribution of assets during dissolution of corporation

Preferred stock:

has preference as to dividends. generally does not have voting rights. is useful for raising capital without reducing common stockholders' control. Wrong: must be issued before any common stock is issued. - Reason: Common stock must be issued before any preferred stock can be issued.

Preferred stock is advantageous in that it:

has priority over common stock when dividends are declared. has priority over common stock at liquidation.

Preferred stockholders:

have the right to receive dividends only in the years the board of directors declares dividends.

Issuing 1,000 shares of 5%, $100 par value, cumulative preferred stock for $110 in cash per share affects the accounting equation by:

increasing additional paid-in capital. increasing total assets. increasing total stockholders' equity.

Issuing 1,000 shares of 5%, $100 par value, cumulative preferred stock for $100 cash per share affects the accounting equation by:

increasing total stockholders' equity. increasing total assets.

Issuing 1,000 shares of 5%, $100 par value, cumulative preferred stock for $110 in cash per share affects the accounting equation by:

increasing total stockholders' equity. increasing total assets. increasing additional paid-in capital.

The amount of money paid into a company by its owners is referred to as:

invested capital

Evaluation of the company's profitability requires consideration of the amount of a company's earnings in relation to the size of the

investment.

The number of shares outstanding equals the number of shares

issued minus the number of shares in treasury

The most important advantage to the corporate form of business is

limited liability. Wrong: regulation. - Reason: Regulation is a disadvantage to the corporate form of business. double taxation. - Reason: Double taxation is a disadvantage for corporations.

Stockit Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock outstanding. In its first 2 years of business, Stockit did not declare a dividend. Stockit's balance sheets at the end of its first 2 years of business should include:

no dividends payable

The term "dividends in arrears" refers to preferred stock dividends that are:

not paid in a given year

Retained earnings of $100,000 represent a corporation's cumulative earnings Blank______ and is shown on the Blank______.

not paid out by dividends; balance sheet and statement of retained earnings

Retained earnings of $100,000 represent a corporation's cumulative earnings ______ and is shown on the ______.

not paid out by dividends; balance sheet and statement of retained earnings Wrong: declared; statement of retained earnings and income statement - Reason: Dividends, not earnings, are "declared". Retained earnings represents the earnings "kept" by the company and is shown on the balance sheet and the statement of retained earnings.

Which of the following shares are eligible to receive dividends?

outstanding

The legal capital per share of stock that is assigned when the corporation is first established is referred to as

par value

Preferred stock is "preferred" over common stock by providing preferred stockholders with these rights:

preference in distribution of assets during dissolution of corporation first right to specified amount of dividends

Which of the following is typically presented first in the equity section of the balance sheet?

preferred stock

The contra account used to record a company's repurchase of its own common stock is the stock account.

record date.

Special contractually granted features can make preferred stock:

redeemable convertible cumulative

Corporations will declare a stock split in order to ______.

reduce the market price of a share of stock and make it more attractive to some investors Wrong: increase the market price of a share of stock to help maximize the stockholders' wealth - Reason: A stock dividend increases the number of shares outstanding and is recorded with a debit to Retained Earnings (-SE) and credit to Common Stock (+SE). The increase in shares should cause a decrease, not increase, in the price since there are more shares outstanding and no change in total SE. increase a stockholders' ownership percentage in the corporation - Reason: The stockholders receive the same percentage so their percentage ownership remains the same.

The purpose of the statement of shareholders' equity is to

report the changes and the sources of the changes in shareholder equity accounts.

A company's past profits that are not paid out in dividends are

retained earnings

Earned capital increases ____.

retained earnings

A corporation's accumulated, undistributed net income or loss is referred as

retained earnings.

Another common term for stockholders' equity is:

shareholders' equity

A corporate charter:

specifies the shares of stock to be issued. describes the business activities. names the board of directors.

The term treasury stock refers to

stock that is repurchased by the issuing corporation.

Shareholders' equity is another common term for ___ equity. (Do not use shareholders)

stockholders', owners', or stockholders

A corporation is owned by its

stockholders, shareholders, investors, or common stockholders