ACCT Ch 10 LS

Select those statements below that are true about cash dividends.

On the declaration date, liabilities are increased. On the payment date, current assets are decreased.

Which of the following reports net income relative to average stockholders' equity in dollars?

ROE

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

When the dividends have been declared

For U.S. GAAP reporting purposes, mandatorily redeemable preferred stock is classified as

a liability

Assuming that two companies operating in the same industry are profitable, which of the following companies is more likely to pay dividends to its stockholders?

a mature company

The effect of a large stock dividend on the accounting equation includes:

an increase in common stock. no effect on total stockholders' equity. a decrease in retained earnings.

Common stock that has not been assigned a par value is referred to as:

no-par stock

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

not paid in a given year

Which of the following shares are eligible to receive dividends?

outstanding shares

The number of shares issued represents the number of shares:

sold

Shareholders' equity is another common term for _____ equity.

stockholders

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

paid-in

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

par value

A business that is co-owned by two or more persons, and whose investors have unlimited liability, is called a

partnership

Amounts earned by the corporation and not paid out in dividends are referred to as

retained earnings

Earned capital increases ____.

retained earnings

Distributions of stock to current shareholders of a corporation are called what type of distribution?

stock dividend; stock split

The number of shares outstanding equals the number of shares ______.

issued minus the number of shares in treasury

Farley Corp. has 50,000 shares of $1 par value common stock issued and outstanding. Farley declares a 10% stock dividend when the fair value of the stock is $9 per share. Which of the following entries will be included in the entries required to record the declaration and payment of the stock dividend?

Debit stock dividends $45,000. Credit common stock $5,000. Credit additional paid-in capital $40,000.

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

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

_____ _____ represents a corporation's own stock that it has reacquired.

treasury stock

Daffy Duct, Inc. issued 10,000 shares of $1 par value common stock at $5 per share. The effect of this transaction on the accounting equation includes a:

$50,000 increase in total assets. $50,000 increase in total stockholders' equity.

When a cash dividend is declared and paid in the same year, the total effects on the balance sheet include which of the following?

Decrease assets. Decrease stockholders' equity.

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

Right to vote on certain matters

Which of the following has limited liability for its owners, but passes income through to its investors and avoids double taxation?

S corporation

True or false: The total net income earned by a corporation on behalf of its shareholders and not paid out as dividends is called retained earnings.

True

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

articles of incorporation

A corporation may repurchase its shares of stock because management

believes the market price of the stock is undervalued.

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

corporation

Double taxation represents a disadvantage for

corporations

Special contractually granted features can make preferred stock:

cumulative redeemable convertible

The P/E ratio is calculated by ______.

dividing the stock price by EPS

What types of companies frequently do not pay dividends?

growth companies unprofitable companies

An accumulated deficit ______.

indicates accumulated net losses means that Retained earnings has a debit balance

The acronym "IPO" stands for

initial public offering

Corporations raise capital by

issuing stock

Redeemable preferred stock with a fixed redemption date is reported

on the balance sheet as a liability.

Earnings per share measures the net income earned

per share of common stock

Treasury stock:

reduces stockholders' equity. is a contra-equity account. is shares of stock no longer outstanding.

The purpose of the statement of shareholders' equity is to

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

Which of the following will decrease the par value of shares?

stock split

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. As a result of this transaction, Refurbish's:

stockholders' equity on the balance sheet will be $10,000 higher. treasury stock on the balance sheet will equal $4,000.

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-_____ stock account.

treasury

Which of the following transactions is the most common type of property dividend?

A distribution of shares of stock held as an investment to stockholders of the corporation.

On March 1, 2018, Fresh Corp. declared a dividend of $3,000. The record date is March 20, 2018, and the payment date is April 1, 2018. The journal entry required on April 1, 2018, will include which of the following entries?

Debit dividends payable $3,000. Credit cash $3,000.

Convertible Redeemable Cumulative

Marcus turn in his preferred stock and receives common shares in exchange. Nurbert Inc. demands return of preferred stock at the pre-specified amount During the current year, Petra Inc. pays dividends that were not declared last year

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

Statement of stockholders' equity only

True or false: The board of directors is responsible for establishing corporate policies.

True

When does a dividend become a liability to a corporation?

When it is declared by the board of directors

Preferred stock tends to have attributes of

both bonds and common stock.

Preferred stock carries priority over common stock:

both for dividends and at dissolution

Additional reporting requirements for corporations serve to protect

both investors and creditors

Research shows that which stock dividends tend to cause a drop in the stock price of the company declaring the dividend?

both large and small stock dividends

The dividend payment date is when ______.

cash is paid to satisfy the dividend liability

The journal entry to record a large stock dividend includes a debit to Stock Dividends and a credit to:

common stock

Proceeds from issuing new par value common stock are credited to

common stock additional paid in capital

A business that is organized as a separate legal entity with limited liability for its owners is a

corporation

Additional taxes and more paperwork are the two primary disadvantages of this business form:

corporation

A ______ balance in retained earnings indicates an accumulated deficit.

debit

Preferred stock:

generally does not have voting rights. is useful for raising capital without reducing common stockholders' control. has preference as to dividends.

No-par value stock is common stock that:

has not been assigned a par value

Preferred stock is advantageous in that it:

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

An S corporation enjoys which benefit?

no double taxation

A stock dividend causes a stockholder's percentage ownership in a company to ______.

remain the same Rationale: A stock dividend reduces Retained Earnings (-SE) and increases Common Stock (+SE). The stockholders receive the same percentage so their percentage ownership remains the same.

Green Company declares and issues a 20% stock dividend. The stock dividend will cause total stockholders' equity to

remains the same

Declaration Date Date of Record Payment Date

The board of directors officially approves a dividend Stock records are finalized to determine which stockholders are to receive payment Dividends payable is decreased

A wealthy individual in the business community who risks investment funds on promising new businesses is referred to as a(n)

angel investor

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.

Reynolds Corp. has 100,000 shares of $1 par value common stock issued and outstanding. Reynolds declares a 20% stock dividend when the fair value of the stock is $8 per share. The debit to stock dividends is

$160,000 Rationale: 100,000 x 20% = 20,000 shares x $8 = $160,000

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

invested capital

In a corporation, the stockholders' potential loss is

limited to the amount of the investment.

Earnings per share measures the ______ earned per share of common stock

net income

The term treasury stock refers to

stock that is repurchased by the issuing corporation.

The advantages to the corporate form of business include

transferability of ownership. ease of raising capital.

On April 1, 2018, 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. Rationale: 40,000 x $.30 = $12,000

Unpaid dividends on cumulative preferred stock are referred to as dividends in _____.

arrears

Preferred stock has a mixture of attributes of both equity and _____.

debt

The date on which a cash dividend becomes a liability to a corporation is the

declaration date

Match the level of risk exposure for investors with the respective type of investment. Bonds Preferred stock Common stock

lowest middle highest

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

False

True or false: A 100% stock dividend requires the same record keeping as a stock split.

False Rationale: A stock split requires all records be changed to reflect the new par value.

Under IFRS, preferred stock is typically reported as:

a liability

A stock dividend ______.

has no effect on each stockholder's ownership percentage Rationale: A stock dividend reduces Retained Earnings (-SE) and increases Common Stock (+SE). The stockholders receive the same percentage so their percentage ownership remains the same.

A small stock dividend is valued at

market value

Stockit, Inc. issued 100,000 shares of the 1,000,000 shares authorized. Stockit has repurchased 10,000 of its shares. The number of shares authorized represents the:

maximum number of shares Stockit is allowed to sell.

A common reason for companies repurchasing their own shares is that they

may want to redistribute corporate cash without paying dividends.

ROE relates ______.

net income to the average stockholders' equity

Which type of corporation is regulated by the Securities and Exchange Commission?

public

A corporation is owned by its

shareholders

The statement of shareholders' equity reports

the changes in each shareholder equity account.

_____ _____ firms provide additional financing to start up corporations.

venture capital

Which of the following provides additional financing to a firm in exchange for a percentage ownership in the company before it issues stock through an initial public offering?

venture capital firm

LLCs and LLPs share which of the following characteristics?

Double taxation avoidance Limited liability Unlimited number of owners

Identify what is needed to calculate the PE ratio.

Earnings per share Stock price

Daffy Duct, Inc. issued 10,000 shares of no-par value common stock at $10 per share. Miss Hap, the bookkeeper, recorded the transaction with a $100,000 debit to Cash and $100,000 credit to Common stock. Which of the following is true?

This entry is correct

Dividends ______ paid on treasury shares.

are not

Munster Inc. pays its attorney fees of $12,000 by issuing 1,000 shares of $1 par value common stock. The shares have a current market value of $12 per share. Munster's journal entry to recognize the issuance of stock should include

debit to legal fees for $12,000 credit to common stock for $1,000 credit to additional paid in capital for $11,000

A 2-for-1 stock split increases the marketability of the stock because

the market price per share decreases.

Historically, par value was considered to be

the value of the company's shares of stock.

Bagel, Inc. issued 50,000 shares of the 100,000 authorized. It has since repurchased 5,000 of its shares. The number of shares outstanding equals ______ shares.

45,000 Rationale: The 45,000 shares outstanding equals the number issued of 50,000 minus the 5,000 shares bought back by the company.

True or false: Common shares issued with a stated value are recorded in the same manner as par value stock.

True

True or false: No gain or loss is reported when treasury stock is reissued because GAAP does not consider transactions between a corporation and its owners to be profit-making activities.

True

The journal entry to record a large stock dividend includes:

debit to Stock Dividends credit to Common stock

Positive _____ represent the key to a company's long-run survival.

income

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

investment

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

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.

Under IFRS, preferred stock dividends typically are reported as:

interest expense

Which of the following are sources of shareholders' equity?

retained earnings, paid-in capital

Shareholders influence a company by

voting for the board of directors.

If a corporation repurchases its own common stock, the stock is referred to as:

treasury stock

On January 1, 2018, 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 2018. In 2019, 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 Rationale: Since the preferred stock is cumulative, $6,000 (=1,000 shares x $50 par x 6% x 2 years) must be paid to preferred stockholders before the common stockholders may receive a $1 dividend.

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

Stockit, Inc. sold 100,000 shares of the 1,000,000 shares it is allowed to sell. Stockit has repurchased 10,000 of its own shares. The number of shares authorized equals ______ shares.

1,000,000

Which of the following occurs on the date of record?

A list of shareholders that are entitled to receive a dividend is made.

Shareholders' equity consists of which of the following items?

Amounts invested by shareholders Amounts earned by the corporation

If Squid Roe Inc.'s P/E ratio is 12 and Bagel's is 20, then investors expect ______.

Bagel's earnings to grow at a faster rate than Squid Roe's

Stock splits Stock splits and stock dividends Stock dividends

Cause the par value per share to change Cause total stockholders' equity to remain the same Require a journal entry

Mars Inc. issues 5,000 shares of no par stock for $100,000. Which of the following entries is required?

Credit common stock.

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

Credit to additional paid-in capital Credit to common stock

Bank, Rupp & Baroque, Inc. began on January 1, 2018 by issuing 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 2018. In 2019, Bank, Rupp & Baroque declared and paid a $1.00 dividend to its common stockholders. Which of the following is true?

Dividends in arrears should be disclosed in the notes to the 2018 financial statements.

Which of the following are included in the duties of the board of directors?

Establish corporate policies. Appoint officers to manage the corporation.

Allison Company's board of directors assigns a $2 stated value to its no-par common stock. If Allison sells 10,000 shares for $10 per share, the Common Stock account should be credited for:

Rationale: $2 x 10,000 shares

Small stock dividend Large stock dividend

Recognized at market value Recognized at par value

Earned Capital Invested Capital

Retained earnings Common 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.

When a company declares and pays a cash dividend, what are the financial statement effects?

Stockholders' equity decreases.

Ima Rich purchased 100 shares of Stockits, Inc.'s $1 par value common stock for $5 per share. Which statement is true regarding the effect of this transaction on Stockits' financial statements?

Stockholders' equity on the balance sheet increases.

Authorized Shares Issued Shares Outstanding Shares

Total number of shares available to sell as indicated in the company's articles of incorporation Total number of shares of stock issued (sold) to investors The number of shares issued less treasury shares repurchased by the corporation

_____ investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture.

angel

Cumulative preferred stock is entitled to receive current dividends plus dividends in _____ before any future common dividends can be paid.

arrears

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

articles of incorporation

A business that incorporates must file a document with the state, which includes a description of the business activities, the shares to be issued, and the composition of the board of directors. Which of the following terms are used to describe this document?

articles of incorporation corporate charter

For a specific corporation, the total number of shares available to sell are referred to as:

authorized

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

authorized

Before common dividends can be paid, the ______ preferred stock must be paid ______.

cumulative; dividends in arrears

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 _____ to Treasury Stock.

debit

The journal entry to record reissuing treasury stock at a price below the cost of the treasury stock includes:

debit to Cash debit to Additional Paid-in Capital credit to Treasury Stock

If dividends are not paid during a specific year, the amount of preferred stock dividends in arrears should be:

disclosed in the financial statement notes

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

When a noncash asset is distributed to stockholders, it is called a property _____.

dividend

A(n) _____corporation is considered closely held with few owners, whereas a(n) _____ corporation is available to any investor who wants to purchase shares of stock on the stock exchange.

private; public

The date on which a company determines the registered owners of the stock who will receive a dividend is referred to as the

record date

Green Company declares and issues a 20% stock dividend. The stock dividend will cause total assets to

remain the same

When does a corporation record an increase in dividends payable?

On the declaration date

The most important advantage to the corporate form of business is

limited liability

Stock splits have the following effects on stockholders' equity

no change on stockholders' equity

Squid Roe Inc.'s P/E ratio is 12. Which of the following statements is true?

Investors are willing to pay 12 times the current year's earnings per share of stock.

Match the business form with the correct description. Sole Proprietorship Corporation

Most common form of business Highest volume of total sales, earnings, assets, and employees

Just In Thyme, Inc. has the following end of year equity balances: Common stock of $20,000; Additional paid-in capital of $30,000; and Retained earnings of $50,000. If Just In Thyme repurchases $10,000 of its stock, the total stockholders' equity balance would equal ______.

$90,000 Rationale: $20,000 + 30,000 + 50,000 - 10,000

Limited liability companies and limited liability partnerships share which of the following characteristics?

No double taxation Limited personal liability Unlimited number of owners

Peter Inc. issues 15,000 shares of no par stock for $500,000. Common stock should be:

Credited for $500,000

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

Treasury 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, ______.

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

True or false: Some states allow corporations to issue no-par value common stock.

True

The effect of a large stock dividend on the accounting equation includes ______ in retained earnings.

a decrease

A journal entry is required for which of the following?

a large stock dividend

The journal entry to record the resale of treasury stock below cost will result in a debit to cash and:

additional paid-in capital

When treasury shares are reissued for an amount greater than cost, the amount over the cost increases

additional paid-in capital.

Additional reporting requirements of corporations are intended to ensure

adequate disclosure of information needed by investors and creditors.

Retained earnings are:

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

The amount of dividends paid out relative to the share price is referred to as:

dividend yield

Similar to a stock split, a stock _____ also distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders.

dividends

The dividend payment date is when:

dividends payable is decreased. cash is decreased.

The dividend yield is calculated by dividing:

dividends per share by the stock price per share

Investors who acquire preferred stock:

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

An IPO:

is when a private company goes public. stands for initial public offering.

A frequent reason for a stock split is to

cause the market price per share to decline.

The exchange of a company's common shares for non-cash consideration should be recognized at the _____ value of the goods or services received.

fair

A stock dividend typically causes the stock price to ______.

decrease

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

A credit balance in retained earnings indicates that

net income has exceeded the dividends distributed to shareholders.

An accumulated deficit in retained earnings indicates that the company has

net losses.

Attracting outside investment is easier for corporations than for sole proprietorship and partnerships because:

ownership interest can easily be transferred among individual investors transfer of ownership interest does not change the organization's operations

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

retained earnings

A debit balance in retained earnings indicates that

the company has an accumulated deficit.

Wok N Roll, Inc. began on January 1, 2018 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 2018 or 2019. In 2020, 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 2020 equals:

$65,000 Rationale: Cumulative preferred stock receives 1,000 shares x $100 par x 5% x 3 years and common stock receives 100,000 shares x $0.50.

A small stock dividend is usually less than ______% of the number of shares of stock outstanding.

25

Who owns and controls a corporation?

shareholders

Another common term for stockholders' equity is:

shareholders' equity

A ______ stock dividend is less than 25% of the outstanding shares of stock.

small