ACG 2021 Paterson FSU Ch.11 Quiz
If 1,000 shares of $5 par common stock are reacquired by a corporation for $12 a share, by how much will total stockholders' equity change?
$12,000 decrease Solution: Stockholders' equity is reduced by the cost of acquiring the treasury stock: 1,000 shares x $12 per share = $12,000.
Maker-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding since its inception. No dividends were declared in the first two years. If the company pays $375,000 of dividends in the third year, how much will common stockholders receive?
$135,000 Solution: Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the two years in arrears and the current year. Total dividend = 10,000 x 8% x $100 = $80,000 Preferred dividends in arrears for two years ($80,000 × 2) = $160,000 Preferred for current year = $80,000 Total dividends to preferred stockholders = $240,000 Total dividends available = $375,000 Dividends available to common stockholders = $135,000
Maker-Bot Corporation has 10,000 shares of 7%, $100 par value, cumulative preferred stock outstanding since its inception. No dividends were declared in the first two years. If the company pays $350,000 of dividends in the third year, how much will common stockholders receive?
$140,000 Solution: Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the two years in arrears and the current year. Total dividend = 10,000 x 7% x $100 = $70,000 Preferred dividends in arrears for two years ($70,000 × 2) = $140,000 Preferred for current year = $70,000 Total dividends to preferred stockholders = $210,000 Total dividends available = $350,000 Dividends available to common stockholders = $140,000
Red Corporation's December 31, 2020 balance sheet showed the following: 6% preferred stock, $50 par value, cumulative, 30,000 shares authorized; 12,000 shares issued $ 600,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value - preferred stock 60,000 Paid-in capital in excess of par value - common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 Red Corporation declared and paid a $100,000 cash dividend on December 15, 2020. If the company's dividends in arrears prior to that date were $48,000, Red Corporation's common stockholders received
$16,000 Solution: Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $48,000. Current year dividend to preferred stockholders = 12,000 x $50 x 6% = $36,000 Total paid to preferred stockholders = $48,000 + 36,000 = $84,000 Total paid to common stockholders = $100,000 - 84,000 = $16,000
Ramona, Inc. has 3,000 shares of 6%, $100 par, cumulative preferred stock and 80,000 shares of $4 par common stock outstanding. Last year the board of directors declared and paid a $12,000 dividend. This year the dividend declared and paid was $25,000. What amount of this dividend will be paid to the preferred stockholders?
$24,000 Solution: Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the prior year and the current year. Total dividend = 3,000 x 6% x $100 = $18,000Preferred dividends in arrears for prior year ($18,000 - $12,000) = $6,000Preferred dividends for current year = 18,000Total dividends to preferred stockholders = $24,000
Ramona, Inc. has 2,500 shares of 6%, $100 par, cumulative preferred stock and 80,000 shares of $4 par common stock outstanding. Last year the board of directors declared and paid a $5,000 dividend. This year the dividend declared and paid was $30,000. What amount of this dividend will be paid to the preferred stockholders?
$25,000 Solution: Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the prior year and the current year. Total dividend = 2,500 x 6% x $100 = $15,000 Preferred dividends in arrears for prior year ($15,000 - $5,000) = $10,000 Preferred dividends for current year = 15,000 Total dividends to preferred stockholders = $25,000
ABC Corporation has cumulative preferred stock on which it pays dividends of $10,000 per year. The dividends are in arrears for two years. If the corporation plans to distribute $55,000 as dividends in the current year, how much will the common stockholders receive?
$25,000 Solution: Stockholders who own cumulative preferred stock receive an allocation for each of the past two years (i.e., the preferred stock is in arrears for two years meaning dividends were not paid in those years) and an allocation for the current year. The remaining balance, if there is any, is allocated to the common stockholders. Preferred dividends in arrears for two years ($10,000 × 2) = $20,000 Preferred for current year = 10,000 Total dividends to preferred stockholders = $30,000 Total dividends available = $55,000 Dividends available to common stockholders = $25,000
Vista, Inc. has 300,000 shares of common stock outstanding. A 30% stock dividend was declared and issued. How many shares are outstanding after the stock dividend?
$390,000 Solution: The number of outstanding shares is multiplied by the percentage of the stock dividend to get the total new shares to be issued. The new shares plus the original shares outstanding are then added together: 300,000 + (300,000 x 30%) = 390,000 shares.
A partial list of a corporation's accounts shows the following account balances: Retained earnings, $315,000 Treasury stock, $10,000 Dividends payable, $30,000 Paid-in capital in excess of par value, $55,000Common stock, $215,000 How much is total stockholders' equity?
$575,000 Solution: *Total stockholders' equity = Retained earnings - treasury stock + paid-in capital in excess of par value + common stock* Total stockholders' equity = $315,000 - $10,000 + $55,000 + $215,000 = $575,000 Note: Dividends Payable is a liability.
Outstanding stock of the West Corporation included 40,000 shares of $5 par common stock and 10,000 shares of 6%, $10 par non-cumulative preferred stock. In 2019, West declared and paid dividends of $4,000. In 2020, West declared and paid dividends of $12,000. How much of the 2020 dividend was distributed to preferred shareholders?
$6,000 Solution: Dividend to preferred shareholders = 10,000 x $10 x 6% = $6,000
Spiral Corporation's December 31, balance sheet shows the following: 8% preferred stock, $10 par value, cumulative, 40,000 shares authorized; 18,000 shares issued $180,000 Common stock, $1 par value, 4,000,000 shares authorized; 2,700,000 shares issued, 2,460,000 shares outstanding, $2,700,000 Paid-in capital in excess of par value - preferred stock, $180,000 Paid-in capital in excess of par value - common stock, $51,500,000 Retained earnings, $23,000,000Treasury stock (40,000 shares), $1,050,000 The company's total stockholders' equity is
$76,510,000 Solution: *Total stockholders' equity = Preferred stock + Common stock + Paid-in capital in excess of par (for preferred stock & common stock) + Retained earnings - Treasury stock* Total stockholders' equity = $180,000 + 2,700,000 + 180,000 + 51,500,000 + 23,000,000 - 1,050,000 = $76,510,000
Spiral Corporation's December 31, balance sheet shows the following: 8% preferred stock, $10 par value, cumulative,40,000 shares authorized; 18,000 shares issued $180,000 Common stock, $1 par value, 4,000,000 shares authorized; 2,700,000 shares issued, 2,460,000 shares outstanding, $2,700,000Paid-in capital in excess of par value - preferred stock, $180,000Paid-in capital in excess of par value - common stock, $51,500,000Retained earnings, $23,000,000Treasury stock (40,000 shares), $1,050,000 The company's total stockholders' equity is
$76,510,000 Solution: Total stockholders' equity = Preferred stock + Common stock + Paid-in capital in excess of par (for preferred stock & common stock) + Retained earnings - Treasury stock Total stockholders' equity = $180,000 + 2,700,000 + 180,000 + 51,500,000 + 23,000,000 - 1,050,000 = $76,510,000
Danielle Inc. has 10,000 shares of 4%, $40 par, non-cumulative preferred stock and 50,000 shares of $4 par common stock outstanding. Both the common stock and the preferred stock have been outstanding since the company began last year. No dividends were paid last year. The board of directors declared a $100,000 dividend this year. What amount of the total dividend will be paid to common stockholders?
$84,000 Solution: Before the common stockholders receive any dividends, preferred stockholders must be paid their dividends before anything can be paid to common stockholders. Also, this preferred stock is non-cumulative so dividends are never in arrears. Preferred stockholder dividend = 10,000 x 4% x $40 = $16,000Total dividends available = $100,000Dividends available to common stockholders = $84,000
A partial list of a corporation's accounts shows the following account balances: Retained earnings, $400,000Treasury stock—common, $20,000Paid-in capital in excess of par value—common, $55,000Treasury stock—preferred, $30,000Common stock, $200,000Preferred stock, $180,000Paid-in capital in excess of par value—preferred, $60,000 How much is total stockholders' equity?
$845,000 Solution: *Total stockholders' equity = Retained earnings - treasury stock--common + paid-in capital in excess of par value--common - treasury stock--preferred + common stock + preferred stock + paid-in capital in excess of par value--preferred* Total stockholders' equity = $400,000 - $20,000 + $55,000 - $30,000 + $200,000 + $180,000 + $60,000 = $845,000
The following information pertains to Benedict Company for the current year: Average total assets, $300,000 Average common stockholders' equity, $150,000 Sales revenue, $100,000 Net income, $25,000 Dividends on common stock, $6,000 Dividends on preferred stock, $4,000 What is the company's return on common stockholders' equity for the current year?
14% Solution: *Return on common stockholders' equity = net income less preferred dividends divided by average common stockholders' equity.* Return on common stockholders' equity = (25,000 - 4,000)/150,000 = 14%
The following information is for Hutchinson Company: Net income, $920,000 Preferred stock dividends, $100,000 Common stock dividends, $50,000 Beginning common stockholders' equity, $4,000,000 Ending common stockholder's equity, $5,000,000 Average market price of common stockholders' equity, $6,000,000What is the return on common stockholders' equity?
18.22% Solution: *Return on common stockholders' equity = Net income minus preferred stock dividends divided by the average common stockholders' equity* Return on common stockholders' equity = (920,000 - 100,000)/(4,000,000 + 5,000,000)/2) = 18.22%.
Consider the following data for a corporation: Net income, $800,000Preferred stock dividends, $50,000Market price per share of stock, $25Average common stockholders' equity, $4,000,000Cash dividends declared on common stock, $20,000 What is the payout ratio?
2.5% Solution: *Payout ratio is cash dividends declared to common stockholders divided by net income.* Payout ratio = $20,000/$800,000 = 2.5%
The following data is available for Box Corporation: Common stock, par $10 (authorized 30,000 shares) $250,000 Treasury stock (at cost $15 per share) $1,200 Based on the data, how many shares of common stock are issued?
25,000 Solution: The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $250,000 and common stock has a $10 par value per share the company the company must have 25,000 shares of common stock outstanding (i.e., $250,000/$10 per share = 25,000 shares).
Carlyle Corporation reported net income of $340,000 and paid dividends of $100,000 on its common stock and $40,000 on its preferred stock. Common stockholders' equity was $1,600,000 at the start of the year and $2,000,000 at the end of the year. Total assets were $2,250,000 at the start of the year and $2,750,000 at the end of the year. What is the company's payout ratio?
29.41% Solution: *Payout ratio = cash dividends declared on common stock divided by net income* Payout ratio = 100,000/340,000 = 29.41%.
Guy Jenkins Inc. had net income of $600,000, net sales of $10,000,000, paid dividends of $180,000 to the common stockholders, and paid dividends of $60,000 to preferred stock holders. How much is the company's payout ratio?
30% Solution: *Payout ratio is computed by dividing total cash dividends declared on common stock by net income.* Payout ratio = $180,000/$600,000 = 30%
Vista, Inc. has 225,000 shares of common stock outstanding. A 40% stock dividend was declared and issued. How many shares are outstanding after the stock dividend?
315,000 Solution: The number of outstanding shares is multiplied by the percentage of the stock dividend to get the total new shares to be issued. The new shares plus the original shares outstanding are then added together: 225,000 + (225,000 x 40%) = 315,000 shares.
Vista, Inc. has 250,000 shares of common stock outstanding. A 40% stock dividend was declared and issued. How many shares are outstanding after the stock dividend?
350,000 Solution: *The number of outstanding shares is multiplied by the percentage of the stock dividend to get the total new shares to be issued. The new shares plus the original shares outstanding are then added together*: 250,000 + (250,000 x 40%) = 350,000 shares.
A corporation is authorized to sell 1,000,000 shares of common stock. Today there are 400,000 shares outstanding, and the board of directors declares a 10% stock dividend. How many shares will be issued as a stock dividend?
40,000 Solution: This number of outstanding shares is multiplied by the percentage of the stock dividend to get the total new shares to be issued. 400,000 shares outstanding x 10% = 40,000 new shares to be issued.
The following data is available for Red Carpet Corporation at December 31: Common stock, par $4 (authorized 500,000 shares) $200,000 Treasury stock (at cost $20 per share) $10,000Based on the data, how many shares of common stock are outstanding?
49,500 Solution: The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $200,000 and common stock has a $4 par value per share the company the company must have 50,000 shares of common stock issued (i.e., $200,000/$4 per share = 50,000 shares). This company has treasury stock. Treasury stock is a corporation's own stock that has been reacquired. With $10,000 of treasury stock recorded on the company's books and a $20 cost per share the company must have 500 shares of its own common stock being held as treasury stock. The number of outstanding shares equals the number of issued shares minus the number of shares reacquired (i.e., treasury shares). This company has 79,800 shares outstanding (i.e., 50,000 - 500 = 49,500).
The following data is available for Red Carpet Corporation at December 31: Common stock, par $5 (authorized 250,000 shares) $400,000 Treasury stock (at cost $15 per share) $ 3,000Based on the data, how many shares of common stock are outstanding?
79,800 Solution: The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $400,000 and common stock has a $5 par value per share the company the company must have 80,000 shares of common stock issued (i.e., $400,000/$5 per share = 80,000 shares).This company has treasury stock. Treasury stock is a corporation's own stock that has been reacquired. With $3,000 of treasury stock recorded on the company's books and a $15 cost per share the company must have 200 shares of its own common stock being held as treasury stock. The number of outstanding shares equals the number of issued shares minus the number of shares reacquired (i.e., treasury shares). This company has 79,800 shares outstanding (i.e., 80,000 - 200 = 79,800).
In its first year, Raydine Inc. reported sales revenue of $1,100,000, net income of $186,000 and paid dividends of $26,000 to common stockholders. It also paid dividends on its 10,000 shares of 6%, $100 par value, noncumulative preferred stock. Common stockholders' equity was $1,200,000 at the start of the year and $1,600,000 at the end of the year. How much is the company's return on common stockholders' equity in its first year?
9.0% Solution: The return on common stockholders' equity is calculated by dividing the net income less the preferred stockholders' dividends by the average common stockholders' equity: [$186,000 - (10,000 shares x $100/share x 6%)] ÷ [($1,200,000 + $1,600,000) ÷ 2] = 9%.
The 13th Street Grill issued 10,000 of $1 par value common stock for $5 per share. Which of the following will be part of the journal entry to record the issuance?
A credit of $10,000 to Common Stock Solution: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 10,000 x $5 = $50,000 Credit to Common stock = 10,000 x $1 = $10,000 Credit to Paid-in capital in excess of par value = 10,000 x ($5 - $1) = $40,000
Dynatech issues 1,000 shares of $10 par value common stock at par. Which of the following will be part of the journal entry to record the issuance?
A credit to Common Stock for $10,000 Solution: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 1,000 x $10 = $10,000 Credit to Common stock = 1,000 x $10 = $10,000 Credit to Paid-in capital in excess of par value = 1,000 x ($10 - $10) = $0
Willett Company declared a cash dividend of $1.00 per share on 20,000 shares of common stock on December 15. The dividend is to be paid one month later on January 15 to stockholders of record on December 30. Which of the following summarizes the effects of the journal entry recorded on the date of payment on January 15?
It decreases liabilities and decreases assets. Solution: Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. The company journalizes the following on the date of declaration: It debits the Cash Dividend account (i.e., it decreases stockholders' equity) for the amount of the dividend, and it credits Dividends Payable (i.e., it decreases liabilities) for the same amount. Nothing is journalized on the date of record. On the date of payment, the company journalizes the payment and reduction in the payable as follows: it debits Dividends Payable (i.e., it reduces liabilities) and credits Cash (i.e., it reduces assets) for the amount of the dividend paid.
Nichols Corporation declared a cash dividend of $1.20 per share on 40,000 shares of common stock on April 15. The dividend is to be paid one month later on May 15 to stockholders of record on April 30. The correct entry to be recorded on the date of record of April 30 will include a debit to the Cash Dividends account and a credit to the Cash account. debit to the Cash Dividends account and a credit to the Dividends Payable account. None of these debit to the Dividends Payable account and a credit to the Cash Dividends account. debit to the Dividends Payable account and a credit to the Cash account.
None of these Solution: Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. The company journalizes the following *on the date of declaration: It debits the Cash Dividends account for the amount of the dividend, and it credits Dividends Payable for the same amount.* Nothing is journalized on the date of record. On the date of payment, the company journalizes the payment and reduction in the payable as follows: it debits Dividends Payable and credits Cash for the amount of the dividend paid.
Which statement about stock dividends is true?
Stock dividends do not change total stockholders' equity. Solution: A stock dividend moves amounts from retained earnings to paid-in capital and does not affect the total stockholders' equity amount. Total stockholders' equity stays the same as a result of stock dividends. A stock dividend has no effect on total stockholders' equity. Cash dividends require journal entries on the declaration date and date of payment, but not the record date. Cash dividends decrease stockholders' equity on the declaration date.
Which of the following is not a common reason for acquiring treasury stock? To reissue the shares to officers and employees under bonus and stock compensation plans. To increase the number of shares outstanding To have additional shares available for use in acquiring other companies. To increase the earnings per share. To increase the trading of the company's stock in the securities market.
To increase the number of shares outstanding Solution: The acquisition of treasury stock increases the trading of a company's stock and makes the treasury shares available for distribution as part of a bonus or compensation plan or use in an acquisition of another company. Treasury stock reduces the number of shares outstanding thus increasing the earnings per share.
A corporation issued 1,000 shares of its $3.00 par value common stock for $12.00 per share and later repurchased 50 of those shares for $9.00 per share. Which of the following will be debited when the repurchase of the shares is journalized?
Treasury Stock for $450 Solution: The journal entry to record the acquisition of a company's own stock (i.e., treasury stock) will increase the treasury stock account (i.e., a contra stockholders' equity account) and it will also decrease the cash account for the total cost to acquire. The cost of the treasury stock: 50 shares x $9/share = $450. Debit the Treasury Stock account to increase it.
A corporation issued 1,000 shares of its $1.00 par value common stock for $8.00 per share and later repurchased 200 of those shares for $3.00 per share. Which of the following will be debited when the repurchase of the shares is journalized?
Treasury Stock for $600 Solution: The journal entry to record *the acquisition of a company's own stock (i.e., treasury stock) will increase the treasury stock account (i.e., a contra stockholders' equity account) and it will also decrease the cash account for the total cost to acquire.* The cost of the treasury stock: 200 shares x $3/share = $600. Debit the Treasury Stock account to increase it.
A corporation issued 1,000 shares of its $2.00 par value common stock for $10.00 per share and later repurchased 100 of those shares for $15.00 per share. Which of the following will be recorded when the repurchase of the shares is journalized?
Treasury Stock will be debited for $1,500. Solution: The journal entry to record the acquisition of a company's own stock (i.e., treasury stock) will increase the treasury stock account (i.e., a contra stockholders' equity account) and it will also decrease the cash account for the total cost to acquire. The cost of the treasury stock: 100 shares x $15/share = $1,500. Debit the Treasury Stock account to increase it.
Which of the following does not affect retained earnings? Stock dividends Net income Additional investments by stockholders Net loss Dividends
additional investments by stockholders Solution: Retained earnings is increased by revenues and it is decreased by expenses and dividends. In other words, retained earnings is increased by net income (i.e., net income = revenue exceeds expenses) and decreased by net losses. Additional investments by stockholders have no impact on retained earnings. Retained earnings are increased by net income, decreased by a net loss, and decreased by dividends.
Which of the following is a feature associated with preferred stock? Preference to assets in the event of liquidation Dividend preference Cumulative dividends Dividends in arrears are not considered to be a liability All of the answer choices are correct
all of the answer choices are correct Solution: Preferred stockholders have priority over common stockholders in receiving dividends, priority over common stockholders to receive assets when a corporation is liquidated, and if cumulative, are entitled to receive current and unpaid prior-year dividends before common stockholders receive any dividends. However, dividends in arrears are not considered to be a liability; the board of directors is not under an obligation to declare dividends.
Those most responsible for hiring the Chief Executive Officer is (are) the
board of directors Solution: Stockholders legally own the corporation, but they do not manage its operations directly. Rather, the shareholders elect a board of directors, and the board of directors chooses a chief executive office who performs daily management functions to operate the corporation.
Preferred stock has preference or priority over common stock in
both the claim on dividends and the claim on corporate assets when corporations liquidate. Solution: All corporations issue common stock. Common stock represents the residual ownership of a corporation. Some corporations also issue preferred stock. Preferred stock has two advantages or preferences over common stock, including a liquidation preference and a dividend preference.
Corporations have several officers who manage the corporation. The officer who has overall responsibility for managing the business is the
chief executive officer Solution: The chief executive officer (CEO) has overall responsibility for managing the business. Other officers help the chief executive officer operate the corporation. One such officer is the controller. The controller is the chief accounting officer. The controller maintains the corporation's accounting records, systems of internal controls, and prepares its financial statements, tax returns, and internal reports. In contrast, the treasurer has custody of the corporation's funds and maintains the company's cash position.
Corporations have several officers who manage the corporation. The officer who maintains the corporation's accounting records, systems of internal controls, and prepares its financial statements, tax returns, and internal reports is the
controller Solution: The chief executive officer (CEO) has overall responsibility for managing the business. Other officers help the chief executive officer operate the corporation. One such officer is the controller. The controller is the chief accounting officer. The controller maintains the corporation's accounting records, systems of internal controls, and prepares its financial statements, tax returns, and internal reports. In contrast, the treasurer has custody of the corporation's funds and maintains the company's cash position.
Nixon Corporation issues 30,000 shares of $100 par value preferred stock for cash at $110 per share. The entry to record the transaction will include a
credit to Preferred Stock for $3,000,000 and a credit to Paid-in Capital in Excess of Par Value for $300,000. Solution: When a company issues preferred stock, it debits the cash it receives from the stockholder, it credits preferred stock for the par value of the stock issued. and it credits paid-in capital in excess of par value--preferred stock for any amount received in excess of par value. Debit cash for $3,300,000 (i.e., 30,000 shares x $110 per share). Credit preferred stock for $3,000,000 (i.e., 30,000 shares x $100 per share). Credit paid-in capital in excess of par--preferred stock for $300,000 (i.e., 30,000 shares x $10 per share).
Smithson Corporation issues 50,000 shares of $75 par value preferred stock for cash at $100 per share. The entry to record the transaction will include a
credit to Preferred Stock for $3,750,000 and a credit to Paid-in Capital in Excess of Par Value for $1,250,000. Solution: When a company issues preferred stock, it debits the cash it receives from the stockholder, it credits preferred stock for the par value of the stock issued. and it credits paid-in capital in excess of par value--preferred stock for any amount received in excess of par value. Debit cash for $5,000,000 (i.e., 50,000 shares x $100 per share). Credit preferred stock for $3,750,000 (i.e., 50,000 shares x $75 per share). Credit paid-in capital in excess of par--preferred stock for $1,250,000 (i.e., 50,000 shares x $25 per share).
Which type of stock can be in arrears?
cumulative preferred stock Solution: Some corporations issue preferred stock. Preferred stock designates a dividend stated in dollars or as a percentage of par value. If the corporation declares a dividend in a given year then it must pay the preferred stockholders their designated dividend before it can pay any dividends to common stockholders. Preferred stock is either cumulative or noncumulative. If it is cumulative then dividends not paid to preferred stockholders in past years are in arrears and the corporation must pay all dividends in arrears in addition to paying preferred stockholders their current year dividend before the corporation can pay any dividends to common stockholders. Whether preferred stock is cumulative and in arrears should be disclosed in footnotes of the corporation's annual report.
Nichols Corporation declared a cash dividend of $1.20 per share on 40,000 shares of common stock on April 15. The dividend is to be paid one month later on May 15 to stockholders of record on April 30. The correct entry to be recorded on the date of declaration of April 15 will include a
debit to the Cash Dividends account and a credit to the Dividends Payable account. Solution: Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. The company journalizes the following on the date of declaration: It debits the Cash Dividends account for the amount of the dividend, and it credits Dividends Payable for the same amount. Nothing is journalized on the date of record. On the date of payment, the company journalizes the payment and reduction in the payable as follows: it debits Dividends Payable and credits Cash for the amount of the dividend paid.
On which dates are entries for cash dividends required?
declaration date and the payment date - not on the record date
Which of the following is not considered to be a characteristic of the corporate form of organization? Ability to acquire capital through the issuance of stock Fewer taxes Limited liability of stockholders Transferable ownership rights Continuous life
fewer taxes Solution: Characteristics of corporations include: (i) separate legal existence, (ii) continuous life, (iii) ability to raise capital (e.g., via issuing stock), (iv) transferable ownership rights, (v) limited liability of stockholders, (vi) corporation management (e.g., elect board of directors), (vii) government regulations, and (viii) additional taxes.
Which of these is a disadvantage of corporations? Transferable ownership rights Ability to raise capital All of these are advantages of corporations Continuous life Government regulations
government regulations Solution: Corporations are more heavily regulated than other types of businesses, and the added government regulation is a disadvantage that is costly to corporations. Separate legal existence is a major advantage of a corporation. A continuous life is a major advantage of a corporation; corporations do not terminate even when its owners die. Transferable ownership rights is a major advantage of a corporation; stock of a corporation is bought and sold more easily that ownership interests of partnerships or proprietorships. Ability to acquire capital is an advantage of corporations; corporations can more easily acquire capital (i.e., financing from new or existing owners) more easily than partnerships and proprietorships.
Corporations have several officers who manage the corporation. One such officer is the chief executive officer. The chief executive officer
has overall responsibility for managing the business. Solution: The chief executive officer (CEO) has overall responsibility for managing the business. Other officers, such as the controller (i.e., chief accounting officer) and treasurer help the CEO.
Andrews Company declared a cash dividend of $1.00 per share on 20,000 shares of common stock on January 15. The dividend is to be paid one month later on February 15 to stockholders of record on January 31. Which of the following summarizes the effects of the journal entry recorded on the date of payment on February 15?
it decreases liabilities and decreases assets Solution: Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. The company journalizes the following on the date of declaration: It debits the Cash Dividend account (i.e., it decreases stockholders' equity) for the amount of the dividend, and it credits Dividends Payable (i.e., it increases liabilities) for the same amount. Nothing is journalized on the date of record. *On the date of payment, the company journalizes the payment and reduction in the payable as follows: it debits Dividends Payable (i.e., it reduces liabilities) and credits Cash (i.e., it reduces assets) for the amount of the dividend paid.*
Willett Company declared a cash dividend of $1.00 per share on 20,000 shares of common stock on December 15. The dividend is to be paid one month later on January 15 to stockholders of record on December 30. Which of the following summarizes the effects of the journal entry recorded on the date of payment on January 15?
it decreases liabilities and it decreases assets
Which one of the following is false concerning a retained earnings restriction? It is reported on the income statement. It generally is disclosed in the notes to the financial statements. It makes a portion of the balance of retained earnings unavailable for dividends. It may arise from legal, contractual, or voluntary causes. All of these are true
it is reported on the income statement Solution: Retained earnings restrictions makes a portion of the balance of retained earnings unavailable for dividends. Retained earnings restrictions may arise from legal, contractual, or voluntary causes. Retained earnings restrictions are generally is disclosed in the notes to the financial statements. Retained earnings restrictions are not reported on the financial statements.
Which of the following is a characteristic of partnerships?
limited life Solution: Partners (and proprietorships) can lose more than their investment because the business is not considered to have a separate legal existence from its owners and the partners may be called upon to personally pay the partnership's debts. Thus, partnerships generally lack limited liability and have instead unlimited liability for owners. Two of the disadvantages of a partnership involve the transferring & expansion of ownership which tends to be challenging and difficult, especially compared to corporations where buying and selling ownership can be much easier. Corporations have unlimited lives—not limited ones. An unlimited life is an advantage allowing the business to continue beyond the death of the owners.
Keller Company declared a cash dividend on November 15 to be paid on December 15 to stockholders owning the stock on November 30. Given these facts, the date of December 15, is referred to as the
payment date Solution: Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. Nothing is journalized on the date of record, but the company notes who are the owners of its outstanding stock as of the end of that date. On the date of payment, the company pays the dividend previously declared to the stockholders of record.
The two ways that a corporation can be classified based on whether their ownership is traded on a stock exchange are
publicly held and privately held Solution: Corporations are either publicly held or privately held. A corporation with stock sold on a stock exchange is a publicly held corporation. In contrast, stock of a privately held corporation is not sold on a stock exchange.
A disadvantage of the corporate form of business is ease of transfer of ownership. taxation. continuous existence. limited liability. its status as a separate legal entity
taxation Corporations must pay additional taxes relative to other forms of business and this is a disadvantage that is costly to corporations. Corporations pay income taxes on their incomes, and then when dividends are distributed to stockholders then the stockholders must pay income taxes on the amounts received as dividends. Corporations are described as being subject to "double taxation."
Stockholders of a corporation directly elect
the board of directors Solution: A stockholder does not have the right to participate in management decisions simply because he owns stock. A stockholder has the right to maintain the same percentage of ownership as additional stock is issued, vote in the election for the board of directors, and receive dividends appropriate to their percentage of ownership.
Which of the following is a stockholder's right? None of these The right to participate in management decisions The right to declare a dividend The right to vote in the election of the company president The preemptive right
the preemptive right Solution: Stockholders have certain rights, including (i) to vote in the election of the board of directors, (ii) to share in corporate earnings through receipt of dividends, (iii) to keep the same percentage ownership when new shares are issued (i.e., preemptive right), (iv) share in assets upon liquidation in proportion to their stock holdings. A stockholder does not have the right to participate in management decisions, vote for the company president, declare a dividend, or many other acts.
Which event does not require a journal entry? All of these events require a journal entry The record date of a cash dividend The declaration date of a cash dividend The payment date of a stock dividend The payment date of a cash dividend
the record date of a cash dividend Solution: Entries for cash dividends are required on the declaration date and the payment date, but not on the record date. The declaration and payment dates for stock dividends also requires journal entries. A stock dividend results in a decrease in retained earnings and an increase in paid-in capital
The following information is for Hutchinson Company: Net income, $750,000 Preferred stock dividends, $25,000 Common stock dividends, $100,000 Beginning common stockholders' equity, $5,000,000 Ending common stockholder's equity, $6,000,000 Average market price of common stockholders' equity, $7,500,000What is the payout ratio?
13.33% Solution: Payout ratio = Cash dividends declared on common stock divided by net income Payout ratio = 100,000/750,000 = 13.33%.
For what reason might a company acquire treasury stock?
To reissue the shares to officers and employees under bonus and stock compensation plans Solution: This is one of the reasons why treasury stock is purchased, but it's not the only reason. A signal may be sent to the stock market that management believes the stock is underpriced, not overpriced. Whiles earnings per share is increased by reducing the number of shares outstanding, there is no effect on profit when treasury shares are acquired. Acquiring treasury shares reduces, not increases, the number of shares outstanding.
Where is common stock listed in the stockholders' equity section of the balance sheet?
as part of paid-in capital Solution: Paid-in capital includes all stock accounts (i.e., common stock and preferred stock) and it also includes all additional paid-in capital accounts. Common stock is listed after preferred stock, if there is any preferred stock. Common stock is listed before retained earnings. Treasury stock is subtracted from stockholders' equity.
The following information pertains to Marsh Company for the current year: Average total assets, $400,000Average common stockholders' equity, $200,000Sales, $120,000Net income, $24,000Dividends on common stock, $9,000Dividends on preferred stock, $6,000 What is the company's return on common stockholders' equity for the current year?
9% Solution: *Return on common stockholders' equity = net income less preferred dividends divided by average common stockholders' equity.* Return on common stockholders' equity = (24,000 - 6,000)/200,000 = 9%
Which one of the following statements is incorrect? All of these statements are correct When preferred stock is noncumulative, any dividend passed in a year is lost forever. Dividends in arrears on preferred are not considered a liability. Dividends may be paid on common stock while dividends are in arrears on preferred stock. Dividends cannot be paid on common stock while any dividend on preferred stock is in arrears.
Dividends may be paid on common stock while dividends are in arrears on preferred stock. Solution: Dividends may not be paid on common stock if preferred dividends are in arrears.
Which one of the following statements is incorrect? Dividends cannot be paid on common stock while any dividend on preferred stock is in arrears. All of these statements are correct Dividends in arrears on preferred are not considered a liability. When preferred stock is noncumulative, any dividend passed in a year is lost forever. Dividends may be paid on common stock while dividends are in arrears on preferred stock.
Dividends may be paid on common stock while dividends are in arrears on preferred stock. Solution: Dividends may not be paid on common stock if preferred dividends are in arrears.
In the stockholders' equity section of the balance sheet, where and how is treasury stock reported?
It is reported as a deduction appearing after both total paid-in capital and retained earnings. Solution: Treasury stock is deducted from total paid-in capital and retained earnings to arrive at total stockholders' equity.
Which of the following accounts is listed first in the stockholders' equity section of the balance sheet?
Preferred stock if preferred stock had been issued. Otherwise, common stock is listed first. Solution: The stockholders' equity section of the balance sheet shows paid-in capital accounts before retained earnings and treasury stock. Within the paid-in capital portion of the equity section, companies report the preferred stock account balance, if the company has outstanding preferred stock. Next, is common stock followed by the paid-in capital in excess of par value accounts.
Black Raptor Inc. has retained earnings of $500,000 and total stockholders' equity of $2,000,000. It has 80,000 shares of $10 par value common stock outstanding, which is currently selling for $25 per share. What will occur if Black Raptor declares a 10% stock dividend on its common stock?
Retained earnings will decrease by $200,000 and total paid-in capital will increase by $200,000. Solution: A 10% stock dividend will increase the number of shares issued by 8,000 shares (80,000 shares x 10%). At a market price of $25 per share, total paid-in capital will increase by $200,000 (8,000 shares x $25/share) and retained earnings will decrease by that same amount.
Black Raptor Inc. has retained earnings of $500,000 and total stockholders' equity of $2,000,000. It has 100,000 shares of $8 par value common stock outstanding, which is currently selling for $30 per share. What will occur if Black Raptor declares a 10% stock dividend on its common stock?
Retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000. Solution: A 10% stock dividend will increase the number of shares issued by 10,000 shares (100,000 shares x 10%). At a market price of $30 per share, total paid-in capital will increase by $300,000 (10,000 shares x $30/share) and retained earnings will decrease by that same amount.
Dynatech issues 1,000 shares of $7 par value common stock at par. Which of the following will be part of the journal entry to record the issuance?
a credit to Common Stock for $7,000 Solution: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 1,000 x $10 = $10,000 Credit to Common stock = 1,000 x $7 = $7,000 Credit to Paid-in capital in excess of par value = 1,000 x ($10 - $7) = $3,000
Franklin Corporation issues 25,000 shares of $50 par value preferred stock for cash at $125 per share. The entry to record the transaction will include a
credit to Preferred Stock for $1,250,000 and a credit to Paid-in Capital in Excess of Par Value for $1,875,000. Solution: When a company issues preferred stock, it debits the cash it receives from the stockholder, it credits preferred stock for the par value of the stock issued. and it credits paid-in capital in excess of par value--preferred stock for any amount received in excess of par value. Debit cash for $3,125,000 (i.e., 25,000 shares x $125 per share). Credit preferred stock for $1,250,000 (i.e., 25,000 shares x $50 per share). Credit paid-in capital in excess of par--preferred stock for $1,875,000 (i.e., 25,000 shares x $75 per share).
