CH 8 Notes

Identify the true impact of a stock split.

After a stock split, the number of shares authorized, issued, and outstanding increase proportionately. After a stock split, existing stockholders receive additional shares of stock in ratios such as 2:1 or 3:1 or 4:1 (as some common examples). After a stock split, no accounting entry is required.

The payment (declaration/payment/ex-dividends) date occurs two business days before the record date; this gives buyers and sellers of publicly traded stocks sufficient time to pay for the purchase and to deliver the stock certificate, respectively.

ex-dividends

Stock dividends are:

issued in proportion to the number of shares that each shareholder owns.

If the stock dividend percentage is less than 20 to 25 percent (i.e., a small stock dividend), the (par/market) value of additional common shares issued is transferred from retained earnings to common stock for the par value and to additional paid-in capital for the market value minus the par value. Listen to the complete question

market

The portion of equity in a subsidiary not attributable, directly or indirectly, to the parent company (reporting entity) is referred to as the (unusual/noncontrolling/extraordinary) interest.

noncontrolling

The term capitalizing retained earnings refers to the fact that stock dividends cause a permanent transfer of some:

retained earnings to paid-in capital.

Firm C has 10 percent, $80 par value cumulative preferred stock, 9,000 shares authorized, 7,000 issued, and 6,000 shares outstanding. Dividends are paid annually. Dividends were not paid in the prior three years. The total dividend requirement in the current year to pay dividends in arrears as well as the current year's preferred dividend is:

6,000 x $80 x 10% x 4 = $192,000

Companies reacquire their own common stock and hold it as treasury stock:

to later be resold for cash if additional capital is needed. because the management of these companies believe that the market price for their common stock is temporarily low and will soon recover. for future use for employee stock purchase plans.

Accumulated other comprehensive income (loss) is a stockholders' equity category that may include which of the following components?

Changes in certain pension or other postretirement benefit items Unrealized gains or losses on available-for-sale investments

Accumulated other comprehensive income (loss) is a stockholders' equity category that may include which of the following components?

Cumulative foreign translation adjustments Gains or losses on certain derivative instruments

The entry (on a per share basis) to record the issuance of $10 par value common stock at a market value (price) of $13 per share is:

DR Cash 13 CR Common Stock 10 CR Additional Paid-in Capital 3

The entry to record the purchase of treasury stock is:

Dr. Treasury Stock Cr. Cash

Which of the following statements are true regarding common stock terminology?

In most states, stock with par value cannot be issued for a price less than the par value per share. Some firms assign a stated value per share, which is effectively treated the same as the par value per share.

Identify the true effects on the financial statements of a company if it purchases treasury stock.

Its total assets will decrease. There will be no effect on its total liabilities.

Identify the similarities between preferred stock and bonds payable.

Liquidating value (for preferred) and maturity value (for bonds) both represent a fixed claim to assets. Preferred stock and bonds payable are both usually callable and may be convertible. Dividends (for preferred) and interest (for bonds) both normally represent a fixed claim to income.

Which of the following statements regarding net income (loss) and retained earnings are correct?

Net income for the period increases retained earnings. Retained earnings represent the cumulative earnings the corporation has retained for use in the business.

Identify the differences between preferred stock and bonds payable.

Preferred stock has no maturity date; bond principal must be paid at maturity. Preferred dividends are not an expense and are not deductible for tax purposes; bond interest is an expense and is deductible for tax purposes. Preferred dividends may be legally skipped; bond interest must be paid, or the firm faces legal action, possibly leading to bankruptcy.

Preferred stock is different from common stock in that preferred stock:

has a limited claim on the company's assets in the event of liquidation. has several debt-like features. does not generally have voting rights. has historically been viewed as having less risk than common stock. must be paid dividends before any dividends can be paid on common stock. may be callable and/or convertible. has a limited claim on the company's assets in the event of liquidation.

Additional paid-in capital:

is a component of stockholders' equity. is sometimes referred to as capital in excess of par.

The number of issued (authorized/issued/treasury) shares is the number of shares of stock that have actually been transferred from the corporation to the stockholders.

issued

Cash account is debited for the (market/par) value per share of common stock issued.

market

The market value per share of common stock for a company decreases immediately after it issues a stock dividend because _____.

more number of shares of stock are now outstanding, and the total market value of the company's total shares do not change

In most states, the (par/stated/slate) value per share represents the legal capital on the corporation.

par

Paid-in capital includes:

preferred stock additional paid-in capital common stock

Common stock is an example of what is sometimes referred to as (contributed/earned) capital.

contributed

Immediately after the issuance of a stock dividend, the market value per share of common stock for the company should normally:

decrease because more shares of stock are now outstanding, but the total market value of all shares remains the same.

The entry to record the issuance of common stock for a price greater than the par value per share includes which of the following?

A credit to Additional Paid-in Capital account for the excess of the market value (price) over the par value per share. A credit to Common Stock account for the par value per share. A debit to Cash account for the market value (price) per share.

Stockholders' equity captions usually seen in a balance sheet include:

Accumulated other comprehensive income (loss) Preferred stock Retained earnings common stock additional paid-in capital treasury stock

Identify the requirements that must be met for a corporation to pay a cash dividend.

The declaration of a cash dividend must not result in a violation of any existing contractual agreements such as bond covenants. The board of directors must declare the dividend first to pay a cash dividend.

In the context of determining the ending balance of retained earnings within the statement of changes in retained earnings which of the following is true?

Treasury stock purchases have no effect on retained earnings. Net income needs to be added (positive amount) to retained earnings Stock splits have no effect on retained earnings The beginning balance of Retained Earnings account needs to be added (positive amount) Cash dividends for common and preferred stock need to be subtracted (negative amount) Stock dividends need to be subtracted (negative amount) Stock splits have no effect on retained earnings

The entry to record an issuance of a small stock dividend (when the market price per share of stock is greater than the par value per share) includes:

a credit to Additional Paid-in Capital account for the difference between the market price and par value per dividend share issued. a debit to Retained Earnings account for the market price per dividend share issued.

The effects on the financial statements of the sale of treasury stock at a price greater than the treasury shares were purchased for include:

an increase to total assets. no effect on total liabilities

The effects on the financial statements of the sale of treasury stock for a price greater than the treasury shares were purchased for include:

an increase to total stockholders' equity. an increase to cash.

Common stockholders:

are the ultimate owners of the corporation; they have a residual ownership claim to the corporation's asset. experience no upper limit to the value of their ownership interests. do not have any personal liability for corporate debts and thus cannot be forced by creditors to invest additional amounts to make up for losses. have a claim to all assets that remain in the entity after all liabilities and preferred stock claims have been satisfied.

Companies reacquire their own common stock and hold it as treasury stock:

as a defensive move to thwart a takeover by another company. because management wants to shrink the supply of its own stock in the market to drive up the price per share. for future use for the acquisition of other companies. to later be resold for cash if additional capital is needed.

The number of (authorized/issued/outstanding/treasury) shares is stated in the corporate charter that is filed with the state of incorporation.

authorized