ACCT Ch 10 LS
Select those statements below that are true about cash dividends.
On the declaration date, liabilities are increased. On the payment date, current assets are decreased.
Which of the following reports net income relative to average stockholders' equity in dollars?
ROE
When should a corporation record a liability for dividends in arrears on its cumulative preferred stock?
When the dividends have been declared
For U.S. GAAP reporting purposes, mandatorily redeemable preferred stock is classified as
a liability
Assuming that two companies operating in the same industry are profitable, which of the following companies is more likely to pay dividends to its stockholders?
a mature company
The effect of a large stock dividend on the accounting equation includes:
an increase in common stock. no effect on total stockholders' equity. a decrease in retained earnings.
Common stock that has not been assigned a par value is referred to as:
no-par stock
The term "dividends in arrears" refers to preferred stock dividends that are:
not paid in a given year
Which of the following shares are eligible to receive dividends?
outstanding shares
The number of shares issued represents the number of shares:
sold
Shareholders' equity is another common term for _____ equity.
stockholders
_____ capital is the amount of money paid into a company by its owners.
paid-in
The legal capital per share of stock that is assigned when the corporation is first established is referred to as _____ _____.
par value
A business that is co-owned by two or more persons, and whose investors have unlimited liability, is called a
partnership
Amounts earned by the corporation and not paid out in dividends are referred to as
retained earnings
Earned capital increases ____.
retained earnings
Distributions of stock to current shareholders of a corporation are called what type of distribution?
stock dividend; stock split
The number of shares outstanding equals the number of shares ______.
issued minus the number of shares in treasury
Farley Corp. has 50,000 shares of $1 par value common stock issued and outstanding. Farley declares a 10% stock dividend when the fair value of the stock is $9 per share. Which of the following entries will be included in the entries required to record the declaration and payment of the stock dividend?
Debit stock dividends $45,000. Credit common stock $5,000. Credit additional paid-in capital $40,000.
Morgan Company issued cumulative preferred stock. What additional special feature(s) could also have been granted to preferred stock holders?
The right to redeem the preferred shares for cash The right to convert the shares to common shares
_____ _____ represents a corporation's own stock that it has reacquired.
treasury stock
Daffy Duct, Inc. issued 10,000 shares of $1 par value common stock at $5 per share. The effect of this transaction on the accounting equation includes a:
$50,000 increase in total assets. $50,000 increase in total stockholders' equity.
When a cash dividend is declared and paid in the same year, the total effects on the balance sheet include which of the following?
Decrease assets. Decrease stockholders' equity.
Which of the following are included in the rights of common stockholders?
Right to vote on certain matters
Which of the following has limited liability for its owners, but passes income through to its investors and avoids double taxation?
S corporation
True or false: The total net income earned by a corporation on behalf of its shareholders and not paid out as dividends is called retained earnings.
True
The number of shares authorized is set forth in the company's:
articles of incorporation
A corporation may repurchase its shares of stock because management
believes the market price of the stock is undervalued.
Limited liability and ease of raising outside capital are advantages of this business form:
corporation
Double taxation represents a disadvantage for
corporations
Special contractually granted features can make preferred stock:
cumulative redeemable convertible
The P/E ratio is calculated by ______.
dividing the stock price by EPS
What types of companies frequently do not pay dividends?
growth companies unprofitable companies
An accumulated deficit ______.
indicates accumulated net losses means that Retained earnings has a debit balance
The acronym "IPO" stands for
initial public offering
Corporations raise capital by
issuing stock
Redeemable preferred stock with a fixed redemption date is reported
on the balance sheet as a liability.
Earnings per share measures the net income earned
per share of common stock
Treasury stock:
reduces stockholders' equity. is a contra-equity account. is shares of stock no longer outstanding.
The purpose of the statement of shareholders' equity is to
report the changes and the sources of the changes in shareholder equity accounts.
Which of the following will decrease the par value of shares?
stock split
Refurbish, Inc. reissued 1,000 shares of its treasury stock for $10,000. Prior to the reissuance, the Treasury stock balance was $12,000, which included the $8,000 cost of the 1,000 shares reissued. As a result of this transaction, Refurbish's:
stockholders' equity on the balance sheet will be $10,000 higher. treasury stock on the balance sheet will equal $4,000.
Shares of stock that are repurchased are referred to as _____ stock.
treasury
The contra account used to record a company's repurchase of its own common stock is the-_____ stock account.
treasury
Which of the following transactions is the most common type of property dividend?
A distribution of shares of stock held as an investment to stockholders of the corporation.
On March 1, 2018, Fresh Corp. declared a dividend of $3,000. The record date is March 20, 2018, and the payment date is April 1, 2018. The journal entry required on April 1, 2018, will include which of the following entries?
Debit dividends payable $3,000. Credit cash $3,000.
Convertible Redeemable Cumulative
Marcus turn in his preferred stock and receives common shares in exchange. Nurbert Inc. demands return of preferred stock at the pre-specified amount During the current year, Petra Inc. pays dividends that were not declared last year
Which financial statement summarizes the changes in the balance of each stockholders' equity account?
Statement of stockholders' equity only
True or false: The board of directors is responsible for establishing corporate policies.
True
When does a dividend become a liability to a corporation?
When it is declared by the board of directors
Preferred stock tends to have attributes of
both bonds and common stock.
Preferred stock carries priority over common stock:
both for dividends and at dissolution
Additional reporting requirements for corporations serve to protect
both investors and creditors
Research shows that which stock dividends tend to cause a drop in the stock price of the company declaring the dividend?
both large and small stock dividends
The dividend payment date is when ______.
cash is paid to satisfy the dividend liability
The journal entry to record a large stock dividend includes a debit to Stock Dividends and a credit to:
common stock
Proceeds from issuing new par value common stock are credited to
common stock additional paid in capital
A business that is organized as a separate legal entity with limited liability for its owners is a
corporation
Additional taxes and more paperwork are the two primary disadvantages of this business form:
corporation
A ______ balance in retained earnings indicates an accumulated deficit.
debit
Preferred stock:
generally does not have voting rights. is useful for raising capital without reducing common stockholders' control. has preference as to dividends.
No-par value stock is common stock that:
has not been assigned a par value
Preferred stock is advantageous in that it:
has priority over common stock when dividends are declared. has priority over common stock at liquidation.
An S corporation enjoys which benefit?
no double taxation
A stock dividend causes a stockholder's percentage ownership in a company to ______.
remain the same Rationale: A stock dividend reduces Retained Earnings (-SE) and increases Common Stock (+SE). The stockholders receive the same percentage so their percentage ownership remains the same.
Green Company declares and issues a 20% stock dividend. The stock dividend will cause total stockholders' equity to
remains the same
Declaration Date Date of Record Payment Date
The board of directors officially approves a dividend Stock records are finalized to determine which stockholders are to receive payment Dividends payable is decreased
A wealthy individual in the business community who risks investment funds on promising new businesses is referred to as a(n)
angel investor
Dilution Solutions, Inc. repurchased 500 shares of its $2 par value common stock for $10,000. The journal entry to record this transaction includes:
$10,000 debit to Treasury stock. $10,000 credit to Cash.
Reynolds Corp. has 100,000 shares of $1 par value common stock issued and outstanding. Reynolds declares a 20% stock dividend when the fair value of the stock is $8 per share. The debit to stock dividends is
$160,000 Rationale: 100,000 x 20% = 20,000 shares x $8 = $160,000
The amount of money paid into a company by its owners is referred to as:
invested capital
In a corporation, the stockholders' potential loss is
limited to the amount of the investment.
Earnings per share measures the ______ earned per share of common stock
net income
The term treasury stock refers to
stock that is repurchased by the issuing corporation.
The advantages to the corporate form of business include
transferability of ownership. ease of raising capital.
On April 1, 2018, Rawlings declares a dividend of $0.30 per share. Rawlings has 100,000 shares authorized, and 40,000 issued and outstanding. The date of record is April 28, and the payment date is May 15. Which of the following entries is included in the journal entry on May 15?
Debit dividends payable $12,000. Rationale: 40,000 x $.30 = $12,000
Unpaid dividends on cumulative preferred stock are referred to as dividends in _____.
arrears
Preferred stock has a mixture of attributes of both equity and _____.
debt
The date on which a cash dividend becomes a liability to a corporation is the
declaration date
Match the level of risk exposure for investors with the respective type of investment. Bonds Preferred stock Common stock
lowest middle highest
True or false: A corporation is owned by debt and equity holders.
False
True or false: A 100% stock dividend requires the same record keeping as a stock split.
False Rationale: A stock split requires all records be changed to reflect the new par value.
Under IFRS, preferred stock is typically reported as:
a liability
A stock dividend ______.
has no effect on each stockholder's ownership percentage Rationale: A stock dividend reduces Retained Earnings (-SE) and increases Common Stock (+SE). The stockholders receive the same percentage so their percentage ownership remains the same.
A small stock dividend is valued at
market value
Stockit, Inc. issued 100,000 shares of the 1,000,000 shares authorized. Stockit has repurchased 10,000 of its shares. The number of shares authorized represents the:
maximum number of shares Stockit is allowed to sell.
A common reason for companies repurchasing their own shares is that they
may want to redistribute corporate cash without paying dividends.
ROE relates ______.
net income to the average stockholders' equity
Which type of corporation is regulated by the Securities and Exchange Commission?
public
A corporation is owned by its
shareholders
The statement of shareholders' equity reports
the changes in each shareholder equity account.
_____ _____ firms provide additional financing to start up corporations.
venture capital
Which of the following provides additional financing to a firm in exchange for a percentage ownership in the company before it issues stock through an initial public offering?
venture capital firm
LLCs and LLPs share which of the following characteristics?
Double taxation avoidance Limited liability Unlimited number of owners
Identify what is needed to calculate the PE ratio.
Earnings per share Stock price
Daffy Duct, Inc. issued 10,000 shares of no-par value common stock at $10 per share. Miss Hap, the bookkeeper, recorded the transaction with a $100,000 debit to Cash and $100,000 credit to Common stock. Which of the following is true?
This entry is correct
Dividends ______ paid on treasury shares.
are not
Munster Inc. pays its attorney fees of $12,000 by issuing 1,000 shares of $1 par value common stock. The shares have a current market value of $12 per share. Munster's journal entry to recognize the issuance of stock should include
debit to legal fees for $12,000 credit to common stock for $1,000 credit to additional paid in capital for $11,000
A 2-for-1 stock split increases the marketability of the stock because
the market price per share decreases.
Historically, par value was considered to be
the value of the company's shares of stock.
Bagel, Inc. issued 50,000 shares of the 100,000 authorized. It has since repurchased 5,000 of its shares. The number of shares outstanding equals ______ shares.
45,000 Rationale: The 45,000 shares outstanding equals the number issued of 50,000 minus the 5,000 shares bought back by the company.
True or false: Common shares issued with a stated value are recorded in the same manner as par value stock.
True
True or false: No gain or loss is reported when treasury stock is reissued because GAAP does not consider transactions between a corporation and its owners to be profit-making activities.
True
The journal entry to record a large stock dividend includes:
debit to Stock Dividends credit to Common stock
Positive _____ represent the key to a company's long-run survival.
income
Evaluation of the company's profitability requires consideration of the amount of a company's earnings in relation to the size of the
investment
Stockit Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock outstanding. In its first 2 years of business, Stockit did not declare a dividend. Stockit's balance sheets at the end of its first 2 years of business should include:
no dividends payable
Issuing 1,000 shares of 5%, $100 par value, cumulative preferred stock for $100 cash per share affects the accounting equation by:
increasing total stockholders' equity. increasing total assets.
Under IFRS, preferred stock dividends typically are reported as:
interest expense
Which of the following are sources of shareholders' equity?
retained earnings, paid-in capital
Shareholders influence a company by
voting for the board of directors.
If a corporation repurchases its own common stock, the stock is referred to as:
treasury stock
On January 1, 2018, Bank & Rupp, Inc. issued 100,000 shares of $1 par value common stock and 1,000 shares of $50 par value, 6%, cumulative preferred stock. No dividends were declared in 2018. In 2019, Bank & Rupp declared and paid dividends to both common and preferred stockholders. A $1 dividend was paid to common stockholders. Assuming all shares originally issued are outstanding, the total dividend paid to the preferred stockholders equals
$6,000 Rationale: Since the preferred stock is cumulative, $6,000 (=1,000 shares x $50 par x 6% x 2 years) must be paid to preferred stockholders before the common stockholders may receive a $1 dividend.
Refurbish, Inc., bought 1,000 shares of its own stock for $8,000. Later it resold the shares for $10,000. The journal entry to record the sale of treasury stock includes a(n) ______.
$8,000 credit to Treasury stock $2,000 credit to Additional paid-in capital
Stockit, Inc. sold 100,000 shares of the 1,000,000 shares it is allowed to sell. Stockit has repurchased 10,000 of its own shares. The number of shares authorized equals ______ shares.
1,000,000
Which of the following occurs on the date of record?
A list of shareholders that are entitled to receive a dividend is made.
Shareholders' equity consists of which of the following items?
Amounts invested by shareholders Amounts earned by the corporation
If Squid Roe Inc.'s P/E ratio is 12 and Bagel's is 20, then investors expect ______.
Bagel's earnings to grow at a faster rate than Squid Roe's
Stock splits Stock splits and stock dividends Stock dividends
Cause the par value per share to change Cause total stockholders' equity to remain the same Require a journal entry
Mars Inc. issues 5,000 shares of no par stock for $100,000. Which of the following entries is required?
Credit common stock.
When a corporation issues shares of common stock for an amount above par, which of the following entries occur?
Credit to additional paid-in capital Credit to common stock
Bank, Rupp & Baroque, Inc. began on January 1, 2018 by issuing 100,000 shares of $1 par value common stock and 1,000 shares of $50 par value, 6% cumulative preferred stock. No dividends were declared in 2018. In 2019, Bank, Rupp & Baroque declared and paid a $1.00 dividend to its common stockholders. Which of the following is true?
Dividends in arrears should be disclosed in the notes to the 2018 financial statements.
Which of the following are included in the duties of the board of directors?
Establish corporate policies. Appoint officers to manage the corporation.
Allison Company's board of directors assigns a $2 stated value to its no-par common stock. If Allison sells 10,000 shares for $10 per share, the Common Stock account should be credited for:
Rationale: $2 x 10,000 shares
Small stock dividend Large stock dividend
Recognized at market value Recognized at par value
Earned Capital Invested Capital
Retained earnings Common stock
The rights of common stockholders typically include which of the following?
Right to distribution of assets in liquidation. Right to dividends when declared. Right to vote for corporate directors.
When a company declares and pays a cash dividend, what are the financial statement effects?
Stockholders' equity decreases.
Ima Rich purchased 100 shares of Stockits, Inc.'s $1 par value common stock for $5 per share. Which statement is true regarding the effect of this transaction on Stockits' financial statements?
Stockholders' equity on the balance sheet increases.
Authorized Shares Issued Shares Outstanding Shares
Total number of shares available to sell as indicated in the company's articles of incorporation Total number of shares of stock issued (sold) to investors The number of shares issued less treasury shares repurchased by the corporation
_____ investors are wealthy individuals in the business community willing to risk investment funds on a promising business venture.
angel
Cumulative preferred stock is entitled to receive current dividends plus dividends in _____ before any future common dividends can be paid.
arrears
When a business incorporates, it must file its ______ with the state in which it incorporates.
articles of incorporation
A business that incorporates must file a document with the state, which includes a description of the business activities, the shares to be issued, and the composition of the board of directors. Which of the following terms are used to describe this document?
articles of incorporation corporate charter
For a specific corporation, the total number of shares available to sell are referred to as:
authorized
The total number of shares that a company may sell is referred to as _____ shares.
authorized
Before common dividends can be paid, the ______ preferred stock must be paid ______.
cumulative; dividends in arrears
Dilution Solutions, Inc. repurchased 1,000 shares of its $1 par value common stock for $5,000. The journal entry to record this transaction includes a $5,000 _____ to Treasury Stock.
debit
The journal entry to record reissuing treasury stock at a price below the cost of the treasury stock includes:
debit to Cash debit to Additional Paid-in Capital credit to Treasury Stock
If dividends are not paid during a specific year, the amount of preferred stock dividends in arrears should be:
disclosed in the financial statement notes
A distribution of a company's accumulated prior earnings is a(n) ______.
dividend
When a corporation distributes assets of the company to its investors, it is referred to as a(n)
dividend
When a noncash asset is distributed to stockholders, it is called a property _____.
dividend
A(n) _____corporation is considered closely held with few owners, whereas a(n) _____ corporation is available to any investor who wants to purchase shares of stock on the stock exchange.
private; public
The date on which a company determines the registered owners of the stock who will receive a dividend is referred to as the
record date
Green Company declares and issues a 20% stock dividend. The stock dividend will cause total assets to
remain the same
When does a corporation record an increase in dividends payable?
On the declaration date
The most important advantage to the corporate form of business is
limited liability
Stock splits have the following effects on stockholders' equity
no change on stockholders' equity
Squid Roe Inc.'s P/E ratio is 12. Which of the following statements is true?
Investors are willing to pay 12 times the current year's earnings per share of stock.
Match the business form with the correct description. Sole Proprietorship Corporation
Most common form of business Highest volume of total sales, earnings, assets, and employees
Just In Thyme, Inc. has the following end of year equity balances: Common stock of $20,000; Additional paid-in capital of $30,000; and Retained earnings of $50,000. If Just In Thyme repurchases $10,000 of its stock, the total stockholders' equity balance would equal ______.
$90,000 Rationale: $20,000 + 30,000 + 50,000 - 10,000
Limited liability companies and limited liability partnerships share which of the following characteristics?
No double taxation Limited personal liability Unlimited number of owners
Peter Inc. issues 15,000 shares of no par stock for $500,000. Common stock should be:
Credited for $500,000
When a company repurchases its own securities, the stock is recorded in which account?
Treasury stock
Refurbish, Inc., reissued 1,000 shares of its treasury stock for $10,000. Prior to the reissuance, the Treasury stock balance was $12,000, which included the $8,000 cost of the 1,000 shares reissued. After recording this transaction, ______.
Treasury stock will equal $4,000 Additional paid-in capital will be increased by $2,000
True or false: Some states allow corporations to issue no-par value common stock.
True
The effect of a large stock dividend on the accounting equation includes ______ in retained earnings.
a decrease
A journal entry is required for which of the following?
a large stock dividend
The journal entry to record the resale of treasury stock below cost will result in a debit to cash and:
additional paid-in capital
When treasury shares are reissued for an amount greater than cost, the amount over the cost increases
additional paid-in capital.
Additional reporting requirements of corporations are intended to ensure
adequate disclosure of information needed by investors and creditors.
Retained earnings are:
all of the company's earnings not distributed to stockholders. increased by net income. decreased by dividends. sometimes called earned capital.
The amount of dividends paid out relative to the share price is referred to as:
dividend yield
Similar to a stock split, a stock _____ also distributes additional shares of stock to existing stockholders on a pro rata basis at no cost to the stockholders.
dividends
The dividend payment date is when:
dividends payable is decreased. cash is decreased.
The dividend yield is calculated by dividing:
dividends per share by the stock price per share
Investors who acquire preferred stock:
do not have voting rights. have preference as to dividends.
An IPO:
is when a private company goes public. stands for initial public offering.
A frequent reason for a stock split is to
cause the market price per share to decline.
The exchange of a company's common shares for non-cash consideration should be recognized at the _____ value of the goods or services received.
fair
A stock dividend typically causes the stock price to ______.
decrease
Preferred stockholders:
have the right to receive dividends only in the years the board of directors declares dividends.
Issuing 1,000 shares of 5%, $100 par value, cumulative preferred stock for $110 in cash per share affects the accounting equation by:
increasing total assets. increasing additional paid-in capital. increasing total stockholders' equity.
A credit balance in retained earnings indicates that
net income has exceeded the dividends distributed to shareholders.
An accumulated deficit in retained earnings indicates that the company has
net losses.
Attracting outside investment is easier for corporations than for sole proprietorship and partnerships because:
ownership interest can easily be transferred among individual investors transfer of ownership interest does not change the organization's operations
A company's past profits that are not paid out in dividends are ______.
retained earnings
A debit balance in retained earnings indicates that
the company has an accumulated deficit.
Wok N Roll, Inc. began on January 1, 2018 by issuing 100,000 shares of $1 par value common stock and 1,000 shares of $100 par value, 5%, cumulative preferred stock. No dividends were declared in 2018 or 2019. In 2020, Wok N Roll declared and paid dividends to common and preferred stockholders. A $0.50 dividend was paid to common stockholders. Assuming all shares originally issued are outstanding, the total dividend declared and paid in 2020 equals:
$65,000 Rationale: Cumulative preferred stock receives 1,000 shares x $100 par x 5% x 3 years and common stock receives 100,000 shares x $0.50.
A small stock dividend is usually less than ______% of the number of shares of stock outstanding.
25
Who owns and controls a corporation?
shareholders
Another common term for stockholders' equity is:
shareholders' equity
A ______ stock dividend is less than 25% of the outstanding shares of stock.
small
