Accounting - Chapter 13

When common stock is issued in exchange for a noncash asset, the transaction should be recorded at

the fair market value of the asset acquired or the fair market value of the stock, whichever can be determined more objectively.

The amount of a corporation's retained earnings that has been restricted/appropriated should be reported in the notes to the financial statements. true or false?

true

The cost of treasury stock is deducted from total paid-in capital and retained earnings in determining total stockholders' equity.

true

The declaration and issuance of a stock dividend does not affect the total amount of a corporation's assets, liabilities, or stockholders' equity. true or false?

true

The journal entry to record the purchase of treasury stock will cause total stockholders' equity to decrease by the amount of the cost of the treasury stock.

true

Advantages of a corporation

1. *separate legal existence* (a corp exists separately from it's owners.) 2. *continuous life.* (a corp life is separate from its owners; therefore, it exists indefinitely) 3. *raising large amounts of capital.* (is suited for raising large amounts of money from shareholders) 4. *ownership rights are easily transferable.* (sells shares of ownership, called stock. The stockholders of a public company can transer their shares of stock to other stockholders through stock markets) 5. *limited liability.* (creditors usually may not go beyond the assets of the corp to satisfy their claims. Thus, the financial loss that a stockholder may suffer is limited to the amt invested)

The number of shares of outstanding stock is equal to the number of shares authorized minus the number of shares issued. true or false?

false

The paid-in capital from sale of treasury stock account is debited if the sales price of the treasury stock sold is greater than its cost.

false

after application is approved, the state

grants a charter or articles of incorporation which formally create the corporation

cumulative preferred stock

has a right to receive regular dividends that were not declared (pain) in prior years.

A restriction/appropriation of retained earnings

has no effect on total retained earnings

The price at which a stock can be sold depends upon a number of factors. Which statement below is not one of those factors?

how high the par value

Disadvantages of the corporation

1. *owner is separate from management.* (stockholders control management through a board of directors. The board of directors should represent shareholder interests; however, the board is often more closely tied to management than to shareholders. as a result, the board of directors and management may not always behave in the best interests of stockholders.) 2. *double taxation of dividends.* (as a separate legal entity, a corp is subject to taxation. Thus, net income distributed as dividends will be taxed once at the corp level, and then again at the individual level. ) 3. *regulatory costs.* (must satisfy many requirements, such as those required by the sarbanes-oxley Acy. )

A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease. true or false?

true

Although preferred stockholders have a greater chance of receiving a regular dividend, common stockholders have a greater chance of receiving large dividends. true or false?

true

If the dividend amount of preferred stock, $50 par value, is quoted as 8%, then the dividends per share would be $4. true or false?

true

One of the prerequisites to paying a cash dividend is sufficient retained earnings. true or false?

true

Stockholders' equity

includes retained earnings and paid-in capital

What is the total stockholders' equity based on the following data? Common Stock $800,000 Excess of Issue Price Over Par 375,000 Retained Earnings (deficit) 25,000

$1,150,000 800,000 + 375,000 - 25,000

The Dayton Corporation began the current year with a retained earnings balance of $25,000. During the year, the company corrected an error made in the prior year, which was a failure to record depreciation expense of $3,000 on equipment. Also, during the current year, the company earned net income of $12,000 and declared cash dividends of $5,000. Compute the year end retained earnings balance.

$29,000 12,000 - 5,000= 7,000 25,000 + 7,000= 32,000 32,000- 3,000= 29,000

Miriah Inc. has 6,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2006. What is the annual dividend on the preferred stock?

$30,000 in total 6,000 x .05 x 100

The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 60,000 shares were originally issued and 5,000 were subsequently reacquired. What is the amount of cash dividends to be paid if a $1 per share dividend is declared?

$55,000 60,000-5,000=55,000 x 1= 55,000

The charter of a corporation provides for the issuance of 100,000 shares of common stock. Assume that 45,000 shares were originally issued and 5,000 were subsequently reacquired. What is the amount of cash dividends to be paid if a $2 per share dividend is declared?

$80,000 45,000-5,000=40,000 x 2=80,000

What is the total stockholders' equity based on the following data? Common Stock $510,000 Excess of Issue Price Over Par 375,000 Retained Earnings (deficit) 50,000

$835,000. 510,000 + 375,000 - 50,000

on the balance sheet, stockholders' equity is reported by its two main sources

1. capital contributed to the corp by stockholders, called paid-in capital or contributed capital. 2. net income retained in the business, called retained earnings.

4 types of Dvidends

1. cash 2. stock. 3. strip. 4. Property.

credit normal balance

1. common stock account 2. preferred stock account. 3. retained earnings account. 4. paid-in capital in excess of par.

3 dates included in a dividend announcement are

1. date of declaration 2. date of record 3. date of payment

Restrictions on Retained Earnings

1. legal 2. contractual 3. discretionary

Corporation may reacquire (purchase) its own stock for a variety of reasons, including

1. provide shares for resale to employees. 2. reissue as bonuses to employees, or 3. support the market price of the stock.

3 conditions for a cash dividend are

1. sufficient retained earnings. 2. sufficient cash 3. formal action by the board of directors.

major rights that accompany ownership of a share of stock

1. the right to vote in matters concerning the corp. 2. The right to share distributions of earnings. 3. The right to share in assets upon liquidation.

The journal entry to issue 1,000,000 shares of $6 par common stock for $8.00 per share on January 2nd would be:

1/2 Cash 8,000,000 Common Stock 6,000,000 aid-In Capital in Excess of Par - C/S 2,000,000

treasury stock

A corporation's own stock that it has reacquired

stock

A share of ownership in a corporation.

Retained Earnings Statement

A summary of the changes in the retained earnings in a corporation for a specific period of time, such as a month or a year.

Restrictions (appropriations)

Amounts of retained earnings that have been limited for use as dividends.

Which of the following is the appropriate general journal entry to record the declaration of a cash dividends?

Cash Dividends Cash Dividends Payable

Which of the following is not characteristic of a corporation?

Cash dividends paid by a corporation are deductible as expenses by the corporation.

The entry to record the issuance of 150 shares of $5 par common stock at par to an attorney in payment of legal fees for organizing the corporation includes a credit to

Common Stock

Earnings per Share formula

Earnings per Share = (net income - preferred dividends) / weighted average common shares outstanding

A corporation is a separate entity for accounting purposes but not for legal purposes.

False

Organizational expenses are classified as intangible assets on the balance sheet.

False

The par value of common stock must always be equal to its market value on the date the stock is issued.

False

When no-par common stock with a stated value is issued for cash, the common stock account is credited for an amount equal to the cash proceeds.

False

common shareholders

Have limited liability and have right to vote.

The sale of treasure stock increases the number of shares outstanding

Number of shares outstanding = number of shares issued - number of shares of treasury stock

The excess of sales price of treasury stock over its cost should be credited to

Paid-In Capital from Sale of Treasury Stock

If common stock is issued for an amount greater than par value, the excess should be credited to

Paid-in Capital in Excess of Par Value.

The term deficit is used to refer to a debit balance in which of the following accounts of a corporation?

Retained Earnings

When a stock dividend is declared, which of the following accounts is credited?

Stock Dividends Distributable

organization of a corporation

Stockholders Board of Directors Officers Employees

Stockholders' Equity

The owners' equity in a corporation.

A corporation can be organized for the purpose of making a profit or it may be nonprofit.

True

For accounting purposes, stated value is treated the same way as par value.

True

The financial loss that each stockholder in a corporation can incur is usually limited to the amount invested by the stockholder.

True

The main source of paid-in-capital is from issuing stock.

True

The two main sources of stockholders' equity are investments contributed by stockholders and net income retained in the business.

True

Under the Internal Revenue Code, corporations are required to pay federal income taxes.

True

cash dividend

a cash distribution of earnings by a corporation to its shareholders.

deficit

a debit balance in retained earnings. such balance results from accumulated net losses.

stock spolits

a reduction in the par or stated value of a common stock and the issuance of a proportionate number of additional shares.

par value

a value assigned to a share of stock and printed on the stock certificate

The par value per share of common stock represents

an arbitrary amount established in the articles of incorporation

Which of the following would result in a credit to retained earnings?

an understatement of a revenue in the prior period

shares of stock

are often assigned a monetary amount, called par value

How is treasury stock shown on the balance sheet?

as a decrease in stockholders' equity

Accounting equation of corporation

assets = Liabilities + Shareholder's Equity

total available to issue to public (amount stated in charter)

authorized shares.

The state charter allows a corporation to issue only a certain number of shares of each class of stock. This amount of stock is called

authorized stock

Retained earnings

changes are summarized in the retained earnings statement

number of shares of stock that a corporation is authorized to issue is stated in the

charter

2 type of stock ownership

common stock and preferred stock

prior period adjustment

corrections of materials errors related to a prior period or periods, excluded from the determination of net income.

inarrears

cumulative preferred stock dividends that have not been paid in prior years.

On January 1, 20xx, Swenson Corporation had 40,000 shares of $10 par value common stock issued and outstanding. All 40,000 shares had been issued in a prior period at $20.00 per share. On February 1, 20xx, Swenson purchased 2,000 shares of treasury stock for $24 per share and later sold the treasury shares for $21 per share on March 1, 20xx. The journal entry to record the purchase of the treasury shares on February 1, 20xx, would include a

debit to Treasury Stock for $48,000. 2,000 x 24

On January 1, 20xx, Swenson Corporation had 40,000 shares of $10 par value common stock issued and outstanding. All 40,000 shares had been issued in a prior period at $20.00 per share. On February 1, 20xx, Swenson purchased 3,000 shares of treasury stock for $21 per share and later sold the treasury shares for $24 per share on March 1, 20xx. The journal entry to record the purchase of the treasury shares on February 1, 20xx, would include a

debit to Treasury Stock for $63,000. 3,000 x 21

The date on which a cash dividend becomes a binding legal obligation is on the

declaration date.

The cumulative effect of the declaration and payment of a cash dividend on a company's financial statements is to

decrease total assets and stockholders' equity.

One of the main disadvantages of the corporate form is the

double taxation of dividends

dividends

earnings distributed to stockholders

Which of the following would appear as a prior-period adjustment?

error in the computation of depreciation expense in the preceding year

Before a stock dividend can be declared or paid, there must be sufficient cash. true or false?

false

Cash dividends are normally paid on shares of treasury stock.true or false?

false

Cash dividends become a liability to a corporation on the date of record. true or false?

false

If 100 shares of treasury stock were purchased for $50 per share and then sold at $60 per share, $1,000 of income is reported in the income statement.

false

If paid-in-capital in excess of par/preferred stock is $30,000, preferred stock is $200,000, paid-in-capital in excess of par/common stock is $20,000, common stock is $525,000, and retained earnings is $105,000 (deficit), the total stockholders' equity is $880,000. true or false?

false

The day on which the board of directors of the corporation distributes a dividend is called the declaration date. true or false?

false

The declaration of a cash dividend decreases a corporation's stockholders equity and decreases its assets. true or false?

false

The declaration of a stock dividend decreases a corporation's stockholders' equity and increases its liabilities. true or false?

false

charter

has number of stocks.

stock dividend

is a distribution of additional shares of a corporation's own stock

some states laws require that corporations maintain a minimum stockholder contribution, called ______________, to protect the creditors.

legal capital

To illustrate, a corporation's organizing costs of $8,500 on Jan 5 are records as follows:

organization expenses ------------8,500 ----------cash ------------------------------8,500 -------------- paid cost of organizing the corp

The excess of issue price over par of common stock is termed a(n)

premium

If the board of directors authorizes a $100,000 restriction of retained earnings for a future plant expansion, the effect of this action is to

reduce the amount of retained earnings available for dividend declarations.

corporation

separate legal entity

earnings per common share (EPS)

sometimes called basic earnings per share. Net income per share of common stock outstanding during a period.

par value is same as

stated value

preferred stock

stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends.

Treasury stock which was purchased for $3,000 is sold for $3,500. As a result of these two transactions combined

stockholders' equity will be increased by $500 3,500 - 3,000

statement of stockholedrs equity

summary of the changes in the stockholders equity in a corporation that have occurred during a specific period of time.

retained earnings

the amount of net income retained in the corporation

paid-in capital

the amount stockholders have invested in the company total amount of cash and other assets paid in to the corporation by stockholders in exchange for capital stock.

premium

the excess of the issue price of a stock over its par value or the excess of the issue price of bonds over their face amount.

discount

the interest deducted from the maturity value of a note or excess of the face amount of bonds over their issue price.

common stock

the most basic form of ownership, including voting rights on major issues, in a company

Stockholders

the owners of a corporation and have limited liability. control corporation by electing a board of directors.

Which of the following is not a right possessed by common stockholders of a corporation?

the right to receive a minimum amount of dividends

outstanding stock

the stock remaining in the hands of stockholders

The retained earnings statement may be combined with the income statement. true or false?

true

Treasury Stock is listed in the stockholders' equity section on the balance sheet.

true

corporations whose shares are not traded publicly are

usually owned by a small group of investors and are called nonpublic or private corporations.

Treasury stock that had been purchased for $6,400 last month was reissued this month for $8,500. The journal entry to record the reissuance would include a credit to

Paid-In Capital from Treasury Stock for $2,100 8,500 - 6,400

A sale of treasury stock may result in a decrease in paid-in-capital. All decreases should be charged to the Paid-In-Capital from Sale of Treasury account.

fasle

first step in forming a corporation is to

file an application of incorporation with the state.