Chapter 11 Quiz

A company reported net income of $6 million. During the year the average number of common shares outstanding was 3 million. The price of a share of common stock at the end of the year was $5. There were 400,000 shares of preferred stock outstanding on average and no dividends were declared and the preferred stock is noncumulative. Use the information above to answer the following question. The EPS is approximately: A) $2.00 B) $0.40 C) $1.76 D) $1.86

Answer: $2.00 EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding = ($6,000,000 − $0) ÷ 3,000,000 shares = $2.00 per share

Which of the following statements about the benefits enjoyed by the owners of common stock is not correct? A) If the company ceases operations, stockholders share in any assets remaining before creditors have been paid B) Investors in a corporation are called stockholders C) Stockholders receive a share of the corporation's profits when distributed as dividends D) Some classes of common stock can carry more votes than others

Answer: A If the company ceases operations, stockholders share in any assets remaining before creditors have been paid Residual claim means that, if the company ceases operations, stockholders share in any assets remaining after (rather than before) creditors have been paid

Which of the following statements about issued and outstanding stock is correct? A) Issued stock equals the sum of outstanding stock and treasury stock B) Outstanding stock includes all stock issued by a corporation C) Outstanding stock includes stock in the hands of investors, as well as treasury stock in the hands of the corporation D) Issued stock is equal to authorized stock

Answer: A Issued stock equals the sum of outstanding stock and treasury stock Issued shares are the shares of stock that have been distributed by the corporation. Outstanding shares are shares that are currently held by stockholders (not the corporation itself). Treasury shares are issued shares that have been reacquired by the company. As such, issued stock includes outstanding stock and treasury stock.

A corporation declared a stock dividend on November 1 and issued 9,000 shares of stock to its stockholders. Prior to the dividend, the balance in Retained Earnings was $850,000, the number of shares of $5 par value stock issued and outstanding was 60,000, and the market value of the stock was $12. This stock dividend will cause total stockholders' equity to: A) remain unchanged B) decrease by $108,000 C) increase by $45,000 D) decrease by $63,000

Answer: A remain unchanged Stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. This changes the composition of stockholders' equity, not the total amount

A company declared a $0.80 per share cash dividend. The company has 100,000 shares authorized, 45,000 shares issued, and 42,000 shares of common stock outstanding. What is the journal entry to record the dividend declaration? A) Debit Dividends and credit Dividends Payable for $33,600 B) Debit Dividends and credit Dividends Payable for $36,000 C) Debit Dividends Payable and credit Cash for $80,000 D) Debit Dividends Payable and credit Cash for $36,000

Answer: A Debit Dividends and credit Dividends Payable for $33,600 The journal entry to record the dividend declaration includes a debit to Dividends and credit Dividends Payable for $33,600 (or 42,000 shares outstanding × dividend rate of $0.80 per share)

A stock dividend: A) will not change any of the accounts within stockholders' equity B) will reduce Retained Earnings like a cash dividend does C) will reduce stockholders' equity like a cash dividend does D) is accounted for like a stock split

Answer: B will reduce Retained Earnings like a cash dividend does Both a stock dividend and a cash dividend reduce Retained Earnings. However, stock dividends are recorded by transferring an amount from Retained Earnings to contributed capital accounts. This changes the composition of stockholders' equity, not the total amount. A stock split is not the same as a stock dividend; no journal entry is recorded for a stock split.

A cumulative dividend preference means that: A) preferred stockholders are paid their full fixed dividend rate each period as long as the company is in operation B) unpaid cash dividends to preferred stockholders must be replaced with stock dividends during the current period C) unpaid dividends to preferred stockholders accumulate and must be paid before common stockholders receive dividends D) preferred stockholders are paid dividends before common stockholders are paid dividends for the current year only

Answer: C unpaid dividends to preferred stockholders accumulate and must be paid before common stockholders receive dividends A cumulative dividend preference is the preferred stock feature that requires current dividends not paid in full to accumulate for every year in which they are not paid. These cumulative unpaid amounts (called dividends in arrears) must be paid before any common dividends can be paid.

A company has the following paid-in capital: Preferred stock, 6%, $5 par value, 100,000 shares authorized, 20,000 shares issued and outstanding $500,000 Common stock, $9 par value, 300,000 shares authorized, 110,000 shares issued and outstanding $990,000 Use the information above to answer the following question. If the company pays a $15,000 dividend and the preferred stock is noncumulative, what is the amount the common stockholders will receive? A) $0 B) $9,900 C) $15,000 D) $9,000

Answer: D $9,000 Current preferred dividend = Number of shares outstanding × Par value × Annual dividend rate = 20,000 shares × $5 per share × 0.06 = $6,000 Amount paid to common stockholders = Total dividends declared − Amount paid to preferred stockholders = $15,000 − $6,000 = $9,000

A company reported net income of $6 million. During the year the average number of common shares outstanding was 3 million. The price of a share of common stock at the end of the year was $5. There were 400,000 shares of preferred stock outstanding on average and no dividends were declared and the preferred stock is noncumulative. Use the information above to answer the following question. The Price/Earnings ratio is approximately: A) 2.84 B) 2.00 C) 12.50 D) 2.50

Answer: D 2.50 Price/Earnings (P/E) ratio = Current stock price (per share) ÷ EPS = $5.00 ÷ $2.00 = 2.50

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: A) total stockholders' equity will be understated B) equity will be overstated C) total assets will be overstated D) Additional Paid-In Capital will be understated

Answer: D Additional Paid-In Capital will be understated The entry should have included a debit to Cash for $100,000, a credit to Common Stock for $10,000 (or 10,000 shares × par value of $1 per share), and a credit to Additional Paid-In Capital for $90,000 [or 10,000 shares × (issue price of $10 − par value of $1 per share). As a result of the entry that was recorded, the Common Stock account is overstated and the Additional Paid-In Capital was understated