Chapter 15: Stockholders' Equity

Payout Ratio

the ratio of cash dividends to net income

Bramble Corp. declared a $229000 cash dividend. It currently has 12600 shares of 5%, $100 par value cumulative preferred stock outstanding. It is one year in arrears on its preferred stock. How much cash will Bramble distribute to the common stockholders? None. $166000. $103000. $126000.

$103000.

Waterway Industries has outstanding 642000 shares of $2 par common stock and 127000 shares of no-par 6% preferred stock with a stated value of $5. Dividends have been paid in every year except the past two years and the current year.Assuming that $267000 will be distributed, and the preferred stock is cumulative and participating, how much will the common stockholders receive? $139370. $152649. $ 76200. $127630.

$127630.

Vaughn Manufacturing has 163000 shares of $10 par value common stock and 81500 shares of $10 par value, 4%, cumulative, participating preferred stock outstanding. Dividends on the preferred stock are one year in arrears. Assuming that Vaughn wishes to distribute $260000 as dividends, the common stockholders will receive $108410. $194800. $ 65200. $151590.

$151590.

The following information has been taken from the ledger accounts of Sage Corporation. Total income since incorporation $334,000 Total cash dividends paid 62,000 Total value of stock dividends distributed 32,000 Gains on treasury stock transactions 17,000 Unamortized discount on bonds payable 33,000 Determine the current balance of retained earnings.

$240000 Total income since incorporation $334,000 Less: Total cash dividends paid $62,000 and Total value of stock dividends 32,000 94,000 Current balance of retained earnings $240,000 The unamortized discount on bonds payable is shown as a contra liability; the gains on treasury stock are recorded as additional paid-in capital.

Bramble Corp. has outstanding 599000 shares of $2 par common stock and 129000 shares of no-par 6% preferred stock with a stated value of $5. The preferred stock is cumulative and nonparticipating. Dividends have been paid in every year except the past two years and the current year.Assuming that $96000 will be distributed as a dividend in the current year, how much will the preferred stockholders receive? $34700. $96000. $77400. $38700.

$96000.

Direct costs incurred to sell stock such as underwriting costs should be accounted for as 1. a reduction of additional paid-in capital. 2. an expense of the period in which the stock is issued. 3. an intangible asset. 3 1 or 3 1 2

1

Special Characteristics of the Corporate Form that Affect Accounting

1. Influence of state corporate law 2. Use of the capital stock or share system 3. Development of a variety of ownership investments

Two methods of allocating proceeds:

1. proportional method 2. incremental method

Bramble Corp., has 5000 shares of 4%, $50 par value, cumulative preferred stock and 100000 shares of $1 par value common stock outstanding at December 31, 2021, and December 31, 2020. The board of directors declared and paid an $7900 dividend in 2020. In 2021, $38200 of dividends are declared and paid. What are the dividends received by the preferred stockholders in 2021? $20000 $10000 $27900 $12100

12100

A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to Accumulated Depletion. Retained Earnings. A paid-in capital account. Accumulated Depreciation.

A paid-in capital account.

A corporations must submit _____________________ to the state in which incorporation is desired

Articles of Incorporation

Which of the following represents the total number of shares that a corporation may issue under the terms of its charter? Issued shares Outstanding shares Unissued shares Authorized shares

Authorized shares

25,000 shares reacquired by Pearl Corporation for $50 per share were exchanged for undeveloped land that has an appraised value of $1,497,000. At the time of the exchange, the common stock was trading at $57 per share on an organized exchange. Prepare the journal entry to record the acquisition of land assuming that the purchase of the stock was originally recorded using the cost method.

Land 1425000 Treasury Stock 1250000 Paid in Capital from T.S 175000

Which of the following best describes a possible result of treasury stock transactions by a corporation? May increase but not decrease retained earnings. May decrease but not increase net income. May increase net income if the cost method is used. May decrease but not increase retained earnings.

May decrease but not increase retained earnings.

__________________________ can result from excessive depreciation or amortization charges, expensing capital expenditures, excessive write downs of inventories or receivables, or any other understatement of assets or overstatement of liabilities

Secret Reserves

Swifty Corporation acquired 18200 shares of its own common stock at $21 per share on February 5, 2020, and sold 9100 of these shares at $28 per share on August 9, 2021. The fair value of Swifty's common stock was $25 per share at December 31, 2020, and $26 per share at December 31, 2021. The cost method is used to record treasury stock transactions. What account(s) should Swifty credit in 2021 to record the sale of 9100 shares? Treasury Stock for $254800. Treasury Stock for $227500 and Retained Earnings for $27300. Treasury Stock for $191100 and Paid-in Capital from Treasury Stock for $63700. Treasury Stock for $191100 and Retained Earnings for $63700.

Treasury Stock for $191100 and Paid-in Capital from Treasury Stock for $63700.

Secret Reserves

a corporation undervalues the recorded assets as a result of the issuance of stock for property or services

Liquidating Dividend

a dividend not based on retained earnings

Companies express preferred stock with a par value as _______________________________________________

a percentage of the par value

The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the pro forma method. the proportional method. the incremental method. either the proportional method or the incremental method.

either the proportional method or the incremental method.

Redeemable Preferred Stock

has a mandatory redemption period or a redemption feature that the issuer cannot control

According to the FASB, redeemable preferred stock should be included with common stock. included as a liability. included in stockholders' equity. included as a contra item in stockholders' equity.

included as a liability.

A stock split ____________ the number of shares outstanding and ___________ the par or stated value per share

increases, decreases

Treasury stock _____ (is/ is not) an asset and is essentially the same as unissued capital stock

is not

Treasury shares are shares: held as an investment of the corporation. issued but not outstanding. issued and outstanding. held as an investment by the treasurer of the corporation.

issued but not outstanding.

A dividend which is a return to stockholders of a portion of their original investments is a: liquidating dividend. participating dividend. property dividend. liability dividend.

liquidating dividend.

The preemptive right enables a stockholder to: retain their ownership interest if additional stock is issued. receive cash dividends after other classes of stock with the preemptive right. sell capital stock back to the corporation at the option of the stockholder. receive unequal amounts of dividends on a percentage basis as the preferred stockholders.

retain their ownership interest if additional stock is issued.

Participating Preferred Stock

share ratably with the common stockholders in any profit distributions beyond the prescribed rate

All dividends, except for _______________________, reduce the total stockholders equity in the corporation

stock dividends

Stock Dividend

the issuance by a corporation of its own stock to its stockholders on a pro rata basis, without receiving any consideration

In a corporate form of business organization, legal capital is best defined as: the total capital raised by a corporation within the limits set by the Securities and Exchange Commission. the amount of capital the state of incorporation allows the company to accumulate over its existence. the par value of all capital stock issued. the amount of capital the federal government allows a corporation to generate.

the par value of all capital stock issued.

Common Stock

the residual corporate interest that bears the ultimate risks of loss and receives the benefits of success

Contributed (Paid In) Capital

the total amount paid in on capital stock - the amount provided by stockholders to the corporation for use in the business

Which of the following features of preferred stock makes it more like a debt than an equity instrument? Participating Voting Noncumulative Redeemable

Redeemable

Which dividends do not reduce stockholders' equity? Liquidating dividends Cash dividends Stock dividends Property dividends

Stock dividends

Convertible Preferred Stock

allows stockholders, at their option, to exchange preferred shares for common stock at a predetermined ratio

When declaring a property dividend, a corporation should restate at fair value the property it will distribute, recognizing gain or loss as a difference between the property's fair value and carrying value at _________________________________

date of declaration

The entries for declaration and payment of a cash dividend is not made on the date of payment. date of payment and date of declaration. date of declaration. date of record.

date of record.

In January 2020, Sheridan Company, a newly formed company, issued 9900 shares of its $12 par common stock for $17 per share. On July 1, 2020, Sheridan Company reacquired 990 shares of its outstanding stock for $14 per share. The acquisition of these treasury shares decreased the number of issued shares. decreased total stockholders' equity. increased total stockholders' equity. did not change total stockholders' equity.

decreased total stockholders' equity.

Property Dividends (Dividends in Kind)

dividends paid when the corporation distributes assets, such as shares of other corporations, to its shareholders proportionate to their shareholdings instead of distributing cash

Retained Earnings

earned capital of the company

Companies should record stock issued for services or property other than cash at either the fair value of stock issued or the _______ of the noncash consideration received, whichever is clearly more determinable

fair value

Paid In Capital In Excess of Par

indicates any excess over par value paid in by stockholders in return for the shares issued to them

A major disadvantage of no par stock is that some states __________________________ on these issues

levy a high tax

A declared cash dividend is a ____________

liability

Return on Common Stockholders Equity (ROE)

measures profitability from the common stockholders viewpoint

The par value of stock has _______ (no/some) relationship to its fair value

no

"Gains" on sales of treasury stock (using the cost method) should be credited to capital stock. paid-in capital from treasury stock. retained earnings. other income.

paid-in capital from treasury stock.

When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the market value of the services received. par value of the shares issued. market value of the shares issued. the market value of the services received or the market value of the share issues.

par value of the shares issued.

Callable Preferred Stock

permits the corporation, at its option, to call or redeem the outstanding preferred shares at specified future dates and at stipulated prices

Par (Stated) Value Method

records all transactions in the treasury shares at their par value and reports the treasury stock as a deduction from capital stock only

Book Value Per Share

the amount each share would receive if the company were liquidating on the basis of amounts reported on the balance sheet

Earned Capital

the capital that develops from profitable operations

Outstanding Stock

the number of shares of issued stock that stockholders own

Watered Stock

the overvaluation of the stockholders equity resulting from inflated asset values

Trading on Equity

the practice of using borrowed money or issuing preferred stock in hopes of obtaining a higher rate on return on the money used

Preemptive Right

to share proportionately in any new issues of stock of the same class

Dividends are not paid on: treasury common stock. nonparticipating preferred stock. cumulative preferred stock. noncumulative preferred stock.

treasury common stock.

True no par stock should be carried in the accounts at issue price ___________ (with/without) any additional paid in capital or discount reported

without

Bramble Corp. has 100000 shares of $10 par common stock authorized. The following transactions took place during 2020, the first year of the corporation's existence:Sold 19800 shares of common stock for $14.50 per share.Issued 20900 shares of common stock in exchange for a patent valued at $313500.At the end of the Bramble's first year, total paid-in capital amounted to $600600. $313500. $133500. $287100.

$600600.

Companies do not declare or pay cash dividends on ____________ stock

Treasury

If a company cannot determine fair value for any of the classes of stock involved in a lump sum exchange, it may need to use other approaches (T/F)

True

Leverage Buyout (LBO)

the company borrows money to finance stock repurchases

Sunland Company has outstanding 606000 shares of $2 par common stock and 126000 shares of no-par 6% preferred stock with a stated value of $5. The preferred stock is cumulative and nonparticipating. Dividends have been paid in every year except the past two years and the current year.Assuming that $235000 will be distributed as a dividend in the current year, how much will the common stockholders receive? Zero. $159400. $121600. $197200.

$121600.

Vaughn Manufacturing started business in 2015 by issuing 193000 shares of $19 par common stock for $26 each. In 2020, 24000 of these shares were purchased for $38 per share by Vaughn Manufacturing and held as treasury stock. On June 15, 2021, these 24000 shares were exchanged for a piece of property that had an assessed value of $751000. Vaughn's stock is actively traded and had a market price of $44 on June 15, 2021. The cost method is used to account for treasury stock. The amount of paid-in capital from treasury stock transactions resulting from the above events would be $209000. $444000. $741000. $144000.

$144000.

Waterway Industries has outstanding 87000 shares of 5% preferred stock with a $10 par value and 151100 shares of $3 par value common stock. Dividends have been paid every year except last year and the current year. If the preferred stock is cumulative and nonparticipating and $251900 is distributed, the common stockholders will receive $251900. $0. $164900. $208400.

$164900.

Concord Corporation issued 9700 shares of its $10 par value common stock having a fair value of $25 per share and 15500 shares of its $10 par value preferred stock having a fair value of $25 per share for a lump sum of $514000. How much of the proceeds would be allocated to the common stock? $242500 $316151 $197849 $268750

$197849

3 Primary Forms of Business Organization

1. Proprietorship 2. Partnership 3. Corporation

Vaughn Manufacturing has 568000 shares of $10 par value common stock outstanding. During the year, Vaughn declared a 16% stock dividend when the market price of the stock was $28 per share. Four months later Vaughn declared a $0.50 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by $499840. $ 454400. $2874080. $1272320.

$2874080.

The stockholders' equity section of Waterway Industries as of December 31, 2020, was as follows: Common stock, par value $2; authorized 19300 shares; issued and outstanding 9650 shares $ 19300 Paid-in capital in excess of par 33000 Retained earnings 88000 $140300 On March 1, 2021, the board of directors declared a 16% stock dividend, and accordingly 1544 additional shares were issued. On March 1, 2021, the fair value of the stock was $7 per share. For the two months ended February 28, 2021, Waterway sustained a net loss of $15200.What amount should Waterway report as retained earnings as of March 1, 2021? $66624. $80324. $75692. $61992.

$61992.

Reasons corporations purchase their outstanding stock

1. to provide tax efficient distributions of excess cash to shareholders 2. to increase earnings per share and return on equity 3. to provide stock for employee stock compensation contracts or to meet potential merger needs 4. to thwart takeover attempts or to reduce the number of stockholders 5. to make a market in the stock

Dividend in Arrears

a dividend payment associated with cumulative preferred stock that has not been paid, does not account as a liability unless a dividend is declared, but is disclosed in footnotes

Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as an increase in stockholders' equity. a footnote. an increase in current liabilities. an increase in current liabilities for the current portion and long-term liabilities for the long-term portion.

a footnote.

Preferred Stock

a special class of shares that possess certain preferences or features not possessed by common stock

Companies express preferred stock without a par value as ___________________________________________________

a specific dollar per share

Swifty Corporation purchased its own par value stock on January 1, 2020 for $19400 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $11600. The $7800 difference between the cost and sales price should be recorded as a deduction from additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings. retained earnings. net income. additional paid-in capital without regard as to whether or not there have been previous net "gains" from sales of the same class of stock included therein.

additional paid-in capital to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings.

Common stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership. are entitled to a dividend every year in which the business earns a profit. can negotiate individual contracts on behalf of the enterprise. have the rights to specific assets of the business.

bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.

A primary source of stockholders' equity is: income retained by the corporation. appropriated retained earnings. contributions by stockholders. both income retained by the corporation and contributions by stockholders.

both income retained by the corporation and contributions by stockholders.

The issuer of a 5% common stock dividend to common stockholders should transfer from retained earnings to paid-in capital an amount equal to the minimum legal requirements. book value of the shares issued. fair value of the shares issued. par or stated value of the shares issued.

fair value of the shares issued.

A stock dividend __________ the number of shares outstanding and _________________________ par value

increases, does not decrease

Treasury Stock

previously outstanding stock, reacquired after having been issued and fully paid

If the fair value is available, the company allocates the lump sum received among the classes of securities on a _____________ basis

proportional

Direct costs incurred to sell stock should ___________ the amounts paid in account

reduce

Accumulated Other Comprehensive Income

reflects the aggregate amount of the other comprehensive income items

The cumulative feature of preferred stock: limits the amount of cumulative dividends to the par value of the preferred stock. means that the shareholder can accumulate preferred stock until it is equal to the par value of common stock at which time it can be converted into common stock. requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders. enables a preferred stockholder to accumulate dividends until they equal the par value of the stock and receive the stock in place of the cash dividends.

requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.

Cumulative Preferred Stock

requires that if a corporation fails to pay a dividend in any year, it must make it up in a later year before paying any dividends to common stockholders

Cost Method

results in debiting the treasury stock account for the reacquisition cost and in reporting this account as a deduction from the total paid in capital and retained earnings on the balance sheet

The preemptive right of a common stockholder is the right to exclude preferred stockholders from voting rights. share proportionately in corporate assets upon liquidation. share proportionately in any new issues of stock of the same class. receive cash dividends before they are distributed to preferred stockholders.

share proportionately in any new issues of stock of the same class.

Stockholders Equity

the cumulative net contributions by stockholders plus retained earnings