Chapter 15 Adaptive Practice

Why did the practice of paying dividends to shareholders decline sharply during the 1980s and 1990s? Because taxes on dividends were high to the point of being prohibitive Because the market, in general, was slow and most companies made little profit Because companies focused on growth and reinvestment of profits Because investors did not expect to receive dividends

Because companies focused on growth and reinvestment of profits

Murphy Industries uses the cost method to account for treasury stock transactions. If the firm recently spent $85,000 to purchase 4,000 shares of treasury stock, how should it record this transaction in its books? Murphy should debit Treasury Stock for $85,000 and debit Cash for $85,000. Murphy should credit Treasury Stock for $85,000 and credit Cash for $85,000. Murphy should credit Treasury Stock for $85,000 and debit Cash for $85,000. Murphy should debit Treasury Stock for $85,000 and credit Cash for $85,000.

Murphy should debit Treasury Stock for $85,000 and credit Cash for $85,000.

Which of the following will affect the additional paid-in capital? Corporate earnings Issuance of par-value stock at a price over par Issuance of no-par stock Payment of dividends

Issuance of par-value stock at a price over par

O'Brien Industries paid above par value to acquire treasury stock. They held the treasury stock for three months and then sold it again for a price higher than the acquisition price. If O'Brien uses the cost method to account for treasury stock transactions, what effect would the resale of the treasury stock have on additional paid-in capital, retained earnings, and total stockholders' equity? It would have no effect on additional paid-in capital, total stockholders' equity, and retained earnings. It would decrease both additional paid-in capital and total stockholders' equity and have no effect on retained earnings. It would increase additional paid-in capital, total stockholders' equity, and retained earnings. It would increase both additional paid-in capital and total stockholders' equity and have no effect on retained earnings.

It would increase both additional paid-in capital and total stockholders' equity and have no effect on retained earnings.

Of the firms described below, which is most likely concerned about the threat of a takeover attempt? Jefferson Inc. opts to purchase 150,000 of its 1 million outstanding shares, bringing its total number of treasury shares to 175,000. Jefferson Inc. opts to sell 100,000 of its treasury shares, bringing its total number of outstanding shares to 950,000 and its total number of treasury shares to 50,000. Jefferson Inc. opts to purchase 300,000 of its 1 million outstanding shares, bringing its total number of treasury shares to 350,000. Jefferson Inc. opts to sell 50,000 of its treasury shares, bringing its total number of outstanding shares to 900,000 and its total number of treasury shares to 100,000.

Jefferson Inc. opts to purchase 300,000 of its 1 million outstanding shares, bringing its total number of treasury shares to 350,000.

Which of the following types of stock includes such disadvantages as coming with high taxes, causing reduced flexibility in paying dividends, and considering the price for the stock to be legal capital? No-par stock Watered stock Common stock Preferred stock

No-par stock

Which of the following serves as the basis for cash dividends paid? Number of shares authorized Number of shares issued Number of shares outstanding Number of shares outstanding less the number of treasury shares

Number of shares outstanding

Which of the following can be used to measure a company's profitability? Dividend to asset ratio Return on common stockholders' equity Payout ratio Book value per share

Return on common stockholders' equity

Keene Corporation uses the cost method to account for treasury stock. After a recent transaction, the firm recorded an $18,000 debit to Cash and a $5,000 debit to Paid-in Capital from Treasury Stock. What else should Keene have recorded in relation to this transaction? a $13,000 credit to Treasury Stock a $23,000 credit to Treasury Stock a $23,000 debit to Treasury Stock a $13,000 debit to Treasury Stock

a $23,000 credit to Treasury Stock

The journal entry on the date of declaration of a large common stock dividend should include a credit to Paid-in Capital in Excess of Par. a debit to Retained Earnings. a credit to Cash. a debit to Common Stock Dividend Payable.

a debit to Retained Earnings.

The disclosures for __________ should be made in the equity section of the balance sheet rather than the notes to the financial statements. conversion or exercise prices call prices liquidation preferences dividend preferences

liquidation preferences

Current Manufacturing has 200,000 shares of unissued capital stock and 100,000 shares of treasury stock. When compiling its balance sheet, Current should ____________ shares as an asset. treat only the unissued capital treat only the treasury treat all of these not treat any of these

not treat any of these

When using the cost method of accounting for treasury stock, a "gain" from the sale of this stock should be reflected as an increase in the firm's retained earnings. paid-in capital from treasury stock transactions. an increase in the value of the firm's common stock. ordinary earnings on the income statement.

paid-in capital from treasury stock transactions.

The capital stock section of the balance sheet should include which of the following? common stock dividends distributable, common stock, and excess over par—preferred common stock, preferred stock, and excess over par—preferred preferred stock, common stock, and common stock dividends distributable excess over par—preferred, retained earnings, and common stock

preferred stock, common stock, and common stock dividends distributable

The return on common stockholders' equity is often used to measure a company's liquidity. profitability. solvency. net worth.

profitability

Jewel Manufacturing uses the cost method to account for treasury stock. After a recent treasury stock transaction, the firm recorded a $200,000 debit to Treasury Stock and a $200,000 credit to Cash. These entries suggest that Jewel has outstanding stock worth $200,000 and treasury stock worth $200,000. sold $200,000 of treasury stock that it had purchased earlier in the year for $400,000. made $200,000 from the sale of existing treasury stock. spent $200,000 to acquire shares of treasury stock.

spent $200,000 to acquire shares of treasury stock.

Golden Corporation has just purchased several thousand shares of treasury stock for an amount greater than the stock's par value. If Golden uses the cost method to account for its treasury stock, then it should debit the Treasury Stock account for the full cost of the shares acquired. the Treasury Stock account for the par value of the shares acquired and the Retained Earnings account for the portion of the purchase price that exceeds par value. the Paid-in Capital in Excess of Par account for the full cost of the shares acquired. the Treasury Stock account for the par value of the shares acquired and the Paid-in Capital in Excess of Par account for the portion of the purchase price that exceeds par value.

the Treasury Stock account for the full cost of the shares acquired.

When journalizing the sale of common stock, a debit to cash that is greater than the credit to the common stock account means that the common stock was sold at a discount. the common stock is worth more than its current market value. a gain on the sale of stock is a part of the transaction. the stated value of the common stock is less than the per share price investors were willing to pay.

the stated value of the common stock is less than the per share price investors were willing to pay.

Coral Company issues 6,000 shares of its $5 par value common stock having a fair value of $25 per share and 9,000 shares of its $15 par value preferred stock having a fair value of $20 per share for a lump sum of $297,000. What are the proceeds allocated to the common stock? $135,000 $150,000 $162,000 $118,800

$135,000 To determine the proceeds, you must first find the fair value for the common stock ($25 X 6,000 = $150,000), then the fair value for the preferred stock ($20 X 9,000 = $180,000). Next, add those two amounts together to determine the aggregate fair value amount, which is $330,000 ($150,000 + $180,000). To find the amount allocated to common stock, divide the fair value amount for common stock by the aggregate fair value amount, then multiply this by the lump sum the stocks were sold for: ($150,000 / $330,000) X $297,000 = $135,000.

On December 1, 2020, Albertson Industries took 40,000 shares of its $10 par value common stock out of treasury and traded them for a used machine. Albertson originally issued these shares at $30 each, and it later repurchased them for $40 each. On the date of the exchange, Albertson's common stock had a per-share fair value of $55. By how much will the stock-for-equipment exchange increase Albertson's total stockholders' equity? $2,200,000 $1,600,000 $400,000 $1,800,000

$2,200,000 When stock is exchanged for a machine the value of the machine will be the fair value of the stock. Because Albertson could have sold these 40,000 shares on the open market for 40,000 x $55 = $2,200,000, this is the amount assigned to the machine. To record the exchange, Albertson credits Treasury Stock for $1,600,000 (40,000 x $40) and Paid-in Capital from Treasury Stock $600,000 ($2,200,000 - $1,600,000) $600,000, for a total increase in stockholders' equity of $2,200,000 ($1,600,000 + $600,000).

In 2020, Jensen Trucking reported a net income of $1,060,000, earnings per share on common stock of $5, and dividends on preferred stock of $200,000. If their income tax rate for 2020 was 30% and their payout ratio on common stock was 25%, how much did they pay in cash dividends for common stock in 2020? $322,500. $241,250. $265,000. $215,000.

$215,000. The payout ratio is calculated by dividends paid to common stockholders divided by net income available to common stockholders.Therefore, 25% = dividends / ($1,060,000 - $200,000).$860,000*0.25 = $215,000.

Charlie Corporation purchased 30,000 shares of Bravo Converting for $270,000 in 2016. On October 30, 2020, Charlie declares a property dividend in which one share of Bravo will be distributed for every ten shares of Charlie outstanding. At that time, market price of Bravo is $28 per share. If there are 270,000 shares of Charlie outstanding, how much gain and net reduction in retained earnings Charlie recognize? $0 gain and $243,000 net reduction in retained earnings $513,000 gain and $243,000 net reduction in retained earnings $513,000 gain and $108,000 net reduction in retained earnings $0 gain and $756,000 net reduction in retained earnings

$513,000 gain and $243,000 net reduction in retained earnings Charlie is distributing one share of Bravo stock for every 10 shares of Charlie stock outstanding. This means it is distributing 27,000 of its 30,000 shares in Bravo (1 / 10 [270,000]). The fair value of the 27,000 shares is $756,000 ($28 * 27,000). When Charlie purchased these shares in 2016, it paid $243,000 for them ([$270,000 / 30,000] * 27,000). Thus, the declared dividend results in a $513,000 gain ($756,000 - $243,000) and a $243,000 net reduction ($513,000 - $756,000) in retained earnings.

Carlson Heating and Cooling had the following stockholders' equity information: 12/31/2020 12/31/2019 Common stock $75,000 $60,000 4% preferred stock 350,000 350,000 Retained earnings 90,000 75,000 Net income 35,000 32,000 Carlson's rate of return on common stock equity for 2020 is 14.0%. 23.3%. 21.2%. 31.1%.

14% The rate of return on common stock equity is calculated by subtracting preferred dividends from net income and then dividing by average common stockholders' equity. Carlson paid preferred stock dividends of $14,000 in both 2019 and 2020 ($350,000*0.04). Average common stockholders' equity is calculated by taking the average of the sum of the values of the common stock and the retained earnings for both 2019 and 2020. Therefore, ($35,000 - $14,000) / [($90,000 + 75,000 + 75,000 + 60,000)/2] = $21,000/$150,000 = 14.0%

Which of the following are primary considerations management must make before declaring a cash dividend? 1. The tax impact on stockholders of the receipt of the dividends 2. The legal permissibility of the dividend 3. The availability of funds to pay the dividend 1, 2, and 3 3 only 1 and 2 only 2 and 3 only

2 and 3 only

In which order should the following sections generally be placed when preparing the statement of stockholders' equity? 1. Additions 2. Beginning balance 3. Deductions 4. Ending balance 3, 1, 2, 4 2, 3, 1, 4 1, 3, 2, 4 2, 1, 3, 4

2, 1, 3, 4

Bishop Insulation reported the following information in its 2019 and 2020 financial statements: Cash dividends for 2020 $5,000 Net income for 2020 $87,000 Market price of stock, 12/31/2019 $10 Market price of stock, 12/31/2020 $12 Common stockholders' equity 12/31/2019 $1,000,000 Common stockholders' equity 12/31/2020 $1,200,000 Outstanding common shares, 12/31/2020 100,000 Preferred dividends for 2020 $10,000 The rate of return on common stock equity in 2020 for Bishop Insulation is 6.5%. 7.0%. 6.4%. 7.9%.

7.0% The rate of return on common stock equity is calculated by subtracting preferred dividends from net income and then dividing by average common stockholders' equity. Therefore, ($87,000 - $10,000) / [($1,000,000 + $1,200,000)/2] = $77,000 / $1,100,000 = 7.0%

Under which of the following circumstances will total stockholders' equity increase? After either a stock dividend or a stock split. After a stock dividend but not a stock split. After a stock split but not a stock dividend. After neither a stock dividend nor a stock split.

After neither a stock dividend nor a stock split.

What is meant by the capital of a corporate organization? The assets of a business organization that are durable and last a long period of time. The cash held by the organization at the point in time when the reference to capital is made. Money borrowed to finance the operations of the organization. Amounts paid-in and earned that represents stockholders' equity in the corporation.

Amounts paid-in and earned that represents stockholders' equity in the corporation.

Which of the following is a primary source of stockholders' equity? Contributions by stockholders but not income retained by the corporation Both income retained by the corporation and contributions by stockholders Income retained by the corporation but not contributions by stockholders Appropriated retained earnings

Both income retained by the corporation and contributions by stockholders

How is the return on common stockholders' equity calculated? By dividing net income by average common stockholders' equity. By dividing net income less preferred dividends by average common stockholders' equity. By dividing net income less preferred dividends by ending common stockholders' equity. By dividing net income by ending common stockholders' equity.

By dividing net income less preferred dividends by average common stockholders' equity.

Which of the following is a part of stockholders' equity? Unearned revenue Callable preferred stock Redeemable preferred stock Mezzanine shares

Callable preferred stock

Which of the following is considered an ownership interest in a corporation? Additional paid-in capital Capital stock Retained earnings Earned capital

Capital stock

Which of the following are two major categories into which stockholders' equity is generally classified? Earned capital and contributed capital Contributed capital and appropriated capital Retained earnings and unappropriated capital Appropriated capital and retained earnings

Earned capital and contributed capital

Which of the following does the SEC encourage companies that consistently pay dividends to do in their annual report? Disclose the method used for calculating dividends. Calculate their level of liquidity both before and after paying dividends. Show the percentage of dividends paid to both preferred and common stockholders. Indicate whether they intend to continue paying dividends in the future.

Indicate whether they intend to continue paying dividends in the future.

The preemptive right enables a stockholder to do which of the following? Share proportionately in any new issues of stock of the same class Sell capital stock back to the corporation at the option of the stockholder Receive the same amount of dividends on a percentage basis as the preferred stockholders Receive cash dividends before other classes of stock without the preemptive right

Share proportionately in any new issues of stock of the same class

The columnar format is gaining in popularity for which of the following financial documents? Statement of stockholders' equity Balance sheet Income statement Statement of cash flows

Statement of stockholders' equity

Why does a stock dividend require a formal journal entry in the financial accounting records when a stock split does not? Stock dividends represent a transfer from retained earnings to capital stock. Stock splits increase the relative book value of an individual's stock holdings. Stock dividends increase the relative book value of an individual's stock holdings. Stock dividends are payable on the date they are declared.

Stock dividends represent a transfer from retained earnings to capital stock.

Arnold Enterprises has issued and outstanding both common stock and preferred stock. Which of the following will have no effect on Arnold's book value per share for common stock? The payment of a previously declared cash dividend on the common stock. The declaration of a stock dividend on preferred payable in preferred stock when the market price of the preferred is equal to its par value. A 2-for-1 split of the common stock. The declaration of a stock dividend on common stock payable in common stock when the market price of the common is equal to its par value.

The payment of a previously declared cash dividend on the common stock.

Bishop Insulation reported the following information in its 2019 and 2020 financial statements: Common stock dividends for 2020 $5,000 Net income for 2020 $87,000 The market price of a stock, 12/31/2019 $10 The market price of a stock, 12/31/2020 $12 Common stockholders' equity 12/31/2019 $1,000,000 Common stockholders' equity 12/31/2020 $1,200,000 Outstanding common shares, 12/31/2020 $100,000 Preferred dividends for 2020 $10,000 The payout ratio in 2020 for Bishop Insulation is 5.7%. 6.5%. 13.0%. 17.2%.

The payout ratio is calculated by dividends paid to common stockholders divided by net income available to common stockholders. Therefore, $5,000 / ($87,000 - $10,000) = 6.5%.

Lewis Industries owns 600,000 shares of Compton Corporation, which it originally purchased for $8 each. On December 1, 2020, Lewis declares it will distribute these shares to its stockholders as a dividend with a December 31 date of payment. The shares have a market price of $7 on the declaration date and $9 on the distribution date. If Lewis' carrying value for the shares is $5, how much of a reduction in stockholders' equity should it record as a result of this distribution? $3,000,000 $2,400,000 $5,400,000 $4,800,000

The reduction is equal to the carrying value of the stock, which is $3,000,000 ($5 per share * 600,000 shares).

Which of the following best describes the right to share proportionately in the management of the corporation? The right to share proportionately in any new issues of stock of the same class The right to share proportionately in corporate assets upon liquidation The right to share proportionately in profits and losses The right to vote for directors

The right to vote for directors

Richard's company has been doing very well over the last two years. In the first year their profits went up by $50,000, and in the second year the profits went up by almost $125,000. What impact will this have on stockholders' equity? The stockholders' equity will decrease in proportion to profitability. The stockholders' equity will grow with profitability. The stockholders' equity will grow only if the company adds more liabilities. The stockholders' equity will stay the same regardless of profitability.

The stockholders' equity will grow with profitability.

On February 5, 2019, Gordon Manufacturing acquired 20,000 shares of its own common stock for $25 per share. On August 9, 2020, Gordon sold 10,000 of these shares for $31 each. The fair value of Gordon's common stock was $27 per share on December 31, 2019, and $29 per share on December 31, 2020. If Gordon uses the cost method to record treasury stock transactions, then in 2020, it should record its sale of 10,000 treasury shares by crediting Treasury Stock for $250,000 and Paid-in Capital from Treasury Stock for $60,000. Treasury Stock for $250,000 and Retained Earnings for $60,000. Treasury Stock for $250,000 and Gain on Sale of Treasury Stock for $60,000. Treasury Stock for $310,000.

Treasury Stock for $250,000 and Paid-in Capital from Treasury Stock for $60,000.

If Jon wants to establish a corporation in Maryland, then he will need to submit business organization forms. preemptive right forms. articles of incorporation. articles of ownership interest.

articles of incorporation.

If a company has no preferred stock, they can calculate __________ as total stockholders' equity divided by the number of common stock shares outstanding. stated value per share fair value per share par value per share book value per share

book value per share

Values associated with preferred stock and common stock issued and outstanding and common stock dividends distributable should be found in the retained earnings section of the statement of stockholders' equity. retained earnings section of the balance sheet. dividends section of the income statement. capital stock section of the balance sheet.

capital stock section of the balance sheet.

On the date of its incorporation, Pinnacle Manufacturing issued 50,000 shares of $5 par common stock at $7 per share. Later, over the course of 2020, Pinnacle acquired 10,000 shares of its outstanding common stock at a price of $9 per share and accounted for them using the cost method. Then, in March 2021, Pinnacle sold these shares at a price of $8 per share. Outside of these events, Pinnacle has not issued or acquired any additional common stock. Given this information, Pinnacle's sale of treasury stock must have decreased both the firm's Additional Paid-in Capital account and its Retained Earnings account. decreased the firm's Retained Earnings account but not its Additional Paid-in Capital account. decreased neither the firm's Retained Earnings account nor its Additional Paid-in Capital account. decreased the firm's Additional Paid-in Capital account but not its Retained Earnings account.

decreased the firm's Retained Earnings account but not its Additional Paid-in Capital account. During 2020 reacquired 10,000 shares for $9 per share entry: Debit Treasury Stock 90,000 ($9 par x 10,000 shares) Credit Cash 90,000 ($9 x 10,000 shares) March 2021 Cash 80,000 ($8 x 10,000) Retained Earnings 10,000 ($1 (cost was greater than selling price) x 10,000) Treasury Stock 90,000 ($9 x 10,000) Due to the fact that the Treasury Stock was sold at a lower price than the corporation paid for the stock, the corporation must decrease their Retained Earnings account because they do not have an Additional Paid-in Capital account when the cost method is used.

On January 1, 2020, Hanson Incorporated had an initial public offering of 10,000 shares of $10 par value common stock. The shares sold for $15 each. Six months later, Hanson reacquired 1,000 shares of its stock for $12 per share. The acquisition of these treasury shares decreased the number of issued shares. increased total stockholders' equity. decreased total stockholders' equity. did not change total stockholders' equity.

decreased total stockholders' equity.