CHAPTER 11

A corporation declared a cash dividend of $1.20 per share on 40,000 shares of common stock on April 15. The dividend is to be paid one month later on May 15 to stockholders of record on April 30. The correct entry to be recorded on the date of payment of May 15 will include a

debit to the Dividends Payable account and a credit to the Cash account.

Woodland Company declared a cash dividend of $2.00 per share on 50,000 shares of common stock on July 15. The dividend is to be paid one month later on August 15 to stockholders of record on July 31. The correct entry to be recorded on the date of payment of August 15 will include a

debit to the Dividends Payable account and a credit to the Cash account.

Woodland Company declared a cash dividend of $2.00 per share on 50,000 shares of common stock on July 15. The dividend is to be paid one month later on August 15 to stockholders of record on July 31. The correct entry to be recorded on the date of declaration of July 15 will include a

debit to the Dividends account and a credit to the Dividends Payable account. Solution: Three dates are relevant to dividends: (i) the date of declaration, (ii) the date of record, and (iii) the date of payment. The dividend becomes a liability to the corporation on the date of declaration. The company journalizes the following on the date of declaration: It debits the Dividends account and it credits Dividends Payable account. Nothing is journalized on the date of record. On the date of payment, the company journalizes the payment and reduction in the payable as follows: it debits Dividends Payable and credits Cash.

The date on which a cash dividend becomes a binding legal obligation is on the

declaration date

On which dates are entries for cash dividends required?

declaration date and payment date

Placing a restriction on retained earnings will

disclose that a portion of retained earnings is unavailable for dividends.

Corporations have several officers who manage the corporation. One such officer is the treasurer. The treasurer

has custody of the corporation's funds and maintains the company's cash position

Dividends in arrears on cumulative preferred stock

must be paid before common stockholders can receive a dividend

The two ways that a corporation can be classified based on whether their ownership is traded on a stock exchange are

publicly held and privately held.

If everything else is held constant, what will cause earnings per share to increase?

purchase of treasury stock

All of the following statements regarding retained earnings are true except

retained earnings represents a claim on cash.

Stockholders have certain rights. One of these rights is called residual claim. The term residual claim refers to a stockholders' right to

share in assets upon liquidation in proportion to their holdings.

Dividends in arrears on cumulative preferred stock

should be disclosed in the notes to the financial statements.

A disadvantage of the corporate form of organization is

tax treatment

Corporations have several officers who manage the corporation. The officer who has custody of the corporation's funds and maintains the company's cash position is the

treasurer

The officer that is generally responsible for maintaining the cash position of the corporation is the

treasurer

A corporation issues 3,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to:

Common Stock $30,000 and Paid-in Capital in Excess of Par Value $12,000.

If a company issues 5,000 shares of $5 par value common stock for $210,000, the account

Common Stock will be credited for $25,000.

Which of the following is an advantage of the corporate organizational form?

Continuous life

A corporation issued 3,000 shares of $5 par value common stock for $6 per share. Which of the following is included in the journal entry to record the issuance?

Credit to Common Stock for $15,000 Solution: The journal entry will increase the cash account for the total issue price, increase the common stock account for the par value per share times the number of shares issued, and increase paid-in capital in excess of par value for the excess received above par value. Debit to Cash = 3,000 x $6 = $18,000 Credit to Common stock = 3,000 x $5 = $15,000 Credit to Paid-in capital in excess of par value = 3,000 x ($6 - $5) = $3,000

A corporation issued 5,000 shares of $15 par value preferred stock at $18 per share. Which of the following will be part of the journal entry to record the issuance?

Credit to Paid-in Capital in Excess of Par Value—Preferred Stock for $15,000

Which type of stock can be in arrears?

Cumulative preferred stock

A partial list of a corporation's accounts shows the following account balances: Retained earnings, $375,000 Treasury stock—common, $20,000 Paid-in capital in excess of par value—common, $60,000 Treasury stock—preferred, $20,000 Common stock, $200,000 Preferred stock, $175,000 Paid-in capital in excess of par value—preferred, $60,000 How much is total stockholders' equity?

Solution: Total stockholders' equity = Retained earnings - treasury stock--common + paid-in capital in excess of par value--common - treasury stock--preferred + common stock + preferred stock + paid-in capital in excess of par value--preferred Total stockholders' equity = $375,000 - $20,000 + $60,000 - $20,000 + $200,000 + $175,000 + $60,000 = $830,000

Which of the following would not be considered an advantage of the corporate form of organization?

Taxation, government regulation

Which of the following is a stockholder's right?

The right to share in the corporate earnings through receipt of dividends

Which of the following is false with regards to corporations?

The shares of stock of privately held corporations are traded on stock exchanges.

What is a common reason a company acquire treasury stock?

To reissue the shares to officers and employees under bonus and stock compensation plans

A corporation issued 1,000 shares of its $3.00 par value common stock for $12.00 per share and later repurchased 50 of those shares for $9.00 per share. Which of the following will be debited when the repurchase of the shares is journalized?

Treasury Stock for $450 Solution: The journal entry to record the acquisition of a company's own stock (i.e., treasury stock) will increase the treasury stock account (i.e., a contra stockholders' equity account) and it will also decrease the cash account for the total cost to acquire. The cost of the treasury stock: 50 shares x $9/share = $450. Debit the Treasury Stock account to increase it.

A corporation issued 1,000 shares of its $1.00 par value common stock for $8.00 per share and later repurchased 200 of those shares for $3.00 per share. Which of the following will be debited when the repurchase of the shares is journalized?

Treasury Stock for $600

A corporation issued 1,000 shares of its $2.00 par value common stock for $10.00 per share and later repurchased 100 of those shares for $14.00 per share. Which of the following will be recorded when the repurchase of the shares is journalized?

Treasury Stock will be debited for $1,400

A corporation issued 1,000 shares of its $3.00 par value common stock for $12.00 per share and later repurchased 100 of those shares for $16.00 per share. Which of the following will be recorded when the repurchase of the shares is journalized?

Treasury Stock will be debited for $1,600 Solution: The journal entry to record the acquisition of a company's own stock (i.e., treasury stock) will increase the treasury stock account (i.e., a contra stockholders' equity account) and it will also decrease the cash account for the total cost to acquire. The cost of the treasury stock: 100 shares x $16/share = $1,600. Debit the Treasury Stock account to increase it.

Which of the following is not a characteristic of corporations?

Unlimited liability for owners

Which of the following is not considered to be a characteristic of the corporate form of organization?

Unlimited liability of stockholders, Fewer Taxes

A corporation began business by issuing 200,000 shares of $3 par value common stock for $19 per share. During its first year, the corporation sustained a net loss of $100,000. The year-end account balances would show

a $3,200,000 credit balance in Paid-in Capital in Excess of Par Value account. Solution: When issuing common stock for more than its par value, credit the common stock account for the par value and credit the Paid-in capital account in excess of par value—Common stock the for excess. Common stock = 200,000 shares x $3/share = $600,000 Paid-in capital in excess of par value—Common stock = 200,000 shares x ($19/share - $3/share) = $3,200,000 Retained earnings = $100,000 (debit balance due to the loss)

If a corporation's stock is traded on a stock exchange, such as the New York Stock Exchange (NYSE), the corporation is classified as

a publicly held corporation

Which one of the following is not an advantage of corporations?

additional taxes

Stockholders of a corporation directly elect

board of directors

Preferred stock has preference or priority over common stock in

both the claim on dividends and the claim on corporate assets when corporations liquidate.

What is the total stockholders' equity based on the following account balances? Common Stock has a $1,300,000 balance. Paid-In Capital in Excess of Par has a $100,000 balance. Retained Earnings has a $360,000 credit balance. Treasury Stock has a $60,000 balance.

$1,700,000 Solution: Stockholders' equity: Paid-in capital: Common stock, $1,300,000 Paid-In Capital in Excess of Par, $100,000 Retained earnings, $360,000 Total paid in capital and retained earnings, $1,760,000 Less: Treasury stock, $60,000 Total stockholders' equity, $1,700,000

At the start of its first year, a corporation issued 10,000 shares of 7%, $100 par value, cumulative preferred stock and 40,000 shares of $1 par value common stock. There were no dividends declared in the first year. In its second year, the corporation declared and paid dividends of $150,000. What is the amount of dividends received by the common stockholders in the second year?

$10,000 Solution: The preferred stock is cumulative so there are never dividends in arrears. Annual dividend to be paid to preferred shareholders = 10,000 shares x (7% x $100) = $70,000 Dividends in arrears = Annual dividend to be paid to preferred stockholders - Dividend paid to preferred stockholders Dividend in arrears = $70,000 - 0 = $70,000 Second year dividend to preferred stockholders = Annual dividend to be paid to preferred stockholders + dividends in arrears Second year dividend to preferred stockholders =$70,000 + 70,000 = $140,000 Dividend paid to common stockholders = Dividend - Dividend to preferred stockholders Dividend to common stockholders = $150,000 - 140,000 = $10,000

If 1,000 shares of $6 par common stock are reacquired by a corporation for $10 a share, by how much will total stockholders' equity change?

$10,000 decrease Solution: Stockholders' equity is reduced by the cost of acquiring the treasury stock: 1,000 shares x $10 per share = $10,000.

The following data is available for a certain corporation at December 31: Common stock, par $2 (authorized 300,000 shares) $ 250,000 Treasury stock (at cost $10 per share) $ 1,200 Based on the data, how many shares of common stock are outstanding?

$124,880

A corporation has 10,000 shares of 7%, $100 par value, cumulative preferred stock outstanding since its inception. No dividends were declared in the first two years of business. The company declares and pays $375,000 of dividends in its third year. How much of the third year's dividend will be paid to common stockholders?

$165,00 Solution: Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the two years in arrears and the current year. Total dividend = 10,000 x 7% x $100 = $70,000 Preferred dividends in arrears for two years ($70,000 × 2) = $140,000 Preferred for current year = $70,000 Total dividends to preferred stockholders = $210,000 Total dividends available = $375,000 Dividends available to common stockholders = $165,000

A corporation's December 31, 2021 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 15,000 shares issued $ 300,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value - preferred stock 60,000 Paid-in capital in excess of par value - common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 The corporation declared and paid a $75,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $27,000, the corporation's common stockholders would receive

$24,000 Solution: Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $27,000. Current year dividend to preferred stockholders = 15,000 x $20 x 8% = $24,000 Total paid to preferred stockholders = $27,000 + 24,000 = $51,000 Total paid to common stockholders = $75,000 - 51,000 = $24,000

A corporation has 2,000 shares of cumulative preferred stock with a $100 par value per share and a 5% dividend rate. The dividends are in arrears for two years. If the corporation plans to distribute $55,000 as dividends in the current year, how much will the common stockholders receive?

$25,000 Solution: Stockholders who own cumulative preferred stock receive an allocation for each of the past two years (i.e., the preferred stock is in arrears for two years meaning dividends were not paid in those years) and an allocation for the current year. The remaining balance, if there is any, is allocated to the common stockholders. Preferred dividend for current year = 2,000 shares x $100/share x 5% = $20,000 Preferred dividends in arrears for two years ($10,000 × 2) = $20,000 Total dividends to preferred stockholders = $30,000 Total dividends available = $55,000 Dividends available to common stockholders = $55,000 - 30,000 = $25,000

A corporation's December 31, 2021 balance sheet showed the following: 8% preferred stock, $20 par value, cumulative, 30,000 shares authorized; 15,000 shares issued $ 300,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value - preferred stock 60,000 Paid-in capital in excess of par value - common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 The corporation declared and paid a $75,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $24,000, the corporation's common stockholders would receive

$27,000

A corporation has 8,000 shares of 5%, $50 par, non-cumulative preferred stock and 50,000 shares of $3 par common stock outstanding. Both the common stock and the preferred stock have been outstanding since the company began last year. No dividends were paid last year. The board of directors declared a $50,000 dividend this year. What amount of the total dividend will be paid to common stockholders?

$30,000 Solution: Before the common stockholders receive any dividends, preferred stockholders must be paid their dividends before anything can be paid to common stockholders. Also, this preferred stock is non-cumulative so dividends are never in arrears. Preferred stockholder dividend = 8,000 x 5% x $50 = $20,000 Total dividends available = $50,000 Dividends available to common stockholders = $30,000

A partial list of a corporation's accounts shows the following account balances: Retained earnings, $280,000 Treasury stock, $10,000 Dividends payable, $30,000 Paid-in capital in excess of par value, $60,000 Common stock, $175,000 How much is total stockholders' equity?

$505,000 Solution: Total stockholders' equity = Retained earnings - treasury stock + paid-in capital in excess of par value + common stock Total stockholders' equity = $280,000 - $10,000 + $60,000 + $175,000 = $505,000 Note: Dividends Payable is a liability.

A corporation's December 31, 2021 balance sheet showed the following: 6% preferred stock, $50 par value, cumulative, 30,000 shares authorized; 12,000 shares issued $ 600,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value - preferred stock 60,000 Paid-in capital in excess of par value - common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 The corporation declared and paid a $100,000 cash dividend on December 15, 2021. If the company's dividends in arrears prior to that date were $12,000, the corporation's common stockholders would receive

$52,000 Solution: Dividends to preferred stockholders include dividends in arrears plus the current year's dividend. Dividends in arrears = $12,000. Current year dividend to preferred stockholders = 12,000 x $50 x 6% = $36,000 Total paid to preferred stockholders = $12,000 + 36,000 = $48,000 Total paid to common stockholders = $100,000 - 48,000 = $52,000

A corporation's balance sheet shows the following: Preferred stock, $20 par value, 8% cumulative, 30,000 shares authorized; 15,000 shares issued $ 300,000 Common stock, $10 par value, 3,000,000 shares authorized; 1,950,000 shares issued, 1,920,000 shares outstanding 19,500,000 Paid-in capital in excess of par value - preferred stock 60,000 Paid-in capital in excess of par value - common stock 27,000,000 Retained earnings 7,650,000 Treasury stock (30,000 shares) 630,000 What is the corporation's total stockholders' equity?

$53,880,000 Solution: Preferred stock, $300,000 Common stock, $19,500,000 Paid-in capital in excess of par value—preferred stock, $60,000 Paid-in capital in excess of par value—Common stock, $27,000,000 Total paid-in capital, $46,860,000 Add: Retained earnings, $7,650,000 Less: Treasury stock, ($630,000) Total stockholders' equity, $53,880,000

A corporation's December 31, balance sheet shows the following: 8% preferred stock, $10 par value, cumulative, 40,000 shares authorized; 18,000 shares issued $180,000 Common stock, $1 par value, 4,000,000 shares authorized; 2,700,000 shares issued, 2,460,000 shares outstanding, $2,700,000 Paid-in capital in excess of par value - preferred stock, $180,000 Paid-in capital in excess of par value - common stock, $51,500,000 Retained earnings, $23,000,000 Treasury stock (40,000 shares), $1,050,000 The company's total stockholders' equity is

$76,510,000. Solution: Total stockholders' equity = Preferred stock + Common stock + Paid-in capital in excess of par (for preferred stock & common stock) + Retained earnings - Treasury stock Total stockholders' equity = $180,000 + 2,700,000 + 180,000 + 51,500,000 + 23,000,000 - 1,050,000 = $76,510,000

A corporation has 10,000 shares of 6%, $100 par value, cumulative preferred stock and 20,000 shares of $1 par value common stock outstanding at the end of the current year. Last year was its first year, and it did not declare a dividend in its first year. This year, it declares and pays $200,000 in dividends. What is the amount of dividends received by the common stockholders in the current year?

$80,000 Solution: Dividends must be paid first to preferred stockholders before determining how much of the dividend remains for common stockholders. If preferred stock is cumulative then dividends not paid to preferred stockholders in previous years must be paid in addition to the current year's preferred stockholders' dividend before paying common stockholders. The number of years cumulative preferred stock is in arrears identifies how many prior years of preferred stock dividends had not yet been paid. Preferred stockholders receive the stock's par value per share times the number of outstanding shares times the dividend rate (i.e., stated either as a percentage or a dollar value per share) times one plus the number of years in arrears. Preferred stockholders' dividend = 10,000 shares x $100 per share x 6% x (1+1) = $80,000 Common stockholders receive the remaining dividend = $200,000 - 120,000 = $80,000

A corporation has 10,000 shares of 4%, $40 par, non-cumulative preferred stock and 50,000 shares of $4 par common stock outstanding. Both the common stock and the preferred stock have been outstanding since the company began last year. No dividends were paid last year. The board of directors declared a $100,000 dividend this year. What amount of the total dividend will be paid to common stockholders?

$84,000 Solution: Before the common stockholders receive any dividends, preferred stockholders must be paid their dividends before anything can be paid to common stockholders. Also, this preferred stock is non-cumulative so dividends are never in arrears. Preferred stockholder dividend = 10,000 x 4% x $40 = $16,000 Total dividends available = $100,000 Dividends available to common stockholders = $84,000

What is the total stockholders' equity based on the following account balances? Common Stock has a $750,000 balance. Paid-In Capital in Excess of Par has a $50,000 balance. Retained Earnings has a $175,000 credit balance. Treasury Stock has a $25,000 balance.

$950,000 Solution: Stockholders' equity: Paid-in capital: Common stock, $750,000 Paid-In Capital in Excess of Par, $50,000 Retained earnings, $175,000 Total paid in capital and retained earnings, $975,000 Less: Treasury stock, $25,000 Total stockholders' equity, $950,000

The following information is for Hutchinson Company: Net income, $920,000 Common stock dividends, $100,000 Preferred stock dividends, $50,000 Average total assets, $6,600,000 Average common stockholders' equity, $4,000,000 Average preferred stockholders' equity, $1,000,000 What is the payout ratio?

10.87% Solution: Payout ratio = Cash dividends declared on common stock divided by net income Payout ratio = 100,000/920,000 = 10.87%. Learning objective 8: Evaluate a corporation's dividend and earnings performance from a stockholder's perspective.

The following data is available for a certain corporation at December 31: Common stock, par $2 (authorized 300,000 shares) $ 250,000 Treasury stock (at cost $10 per share) $ 1,200 Based on the data, how many shares of common stock are outstanding?

124,880

The following information is for a given company: Net income, $750,000 Preferred stock dividends, $25,000 Common stock dividends, $100,000 Beginning common stockholders' equity, $5,000,000 Ending common stockholder's equity, $6,000,000 Average market price of common stockholders' equity, $7,500,000 What is the payout ratio?

13.33% Solution: Payout ratio = Cash dividends declared on common stock divided by net income Payout ratio = 100,000/750,000 = 13.33%. Learning objective 8: Evaluate a corporation's dividend and earnings performance from a stockholder's perspective.

The following information is for a certain company: Net income, $750,000 Common stock dividends, $25,000 Preferred stock dividends, $75,000 Average total assets, $7,000,000 Average common stockholders' equity, $5,000,000 Average preferred stockholders' equity, $1,000,000 What is the return on common stockholders' equity?

13.50% Solution: Return on common stockholders' equity = Net income minus preferred stock dividends divided by the average common stockholders' equity Return on common stockholders' equity = (750,000 - 75,000)/$5,000,000 = 13.50%.

The following information pertains to a certain company for the current year: Average total assets, $300,000 Average common stockholders' equity, $150,000 Sales revenue, $100,000 Net income, $25,000 Dividends on common stock, $6,000 Dividends on preferred stock, $4,000 What is the company's return on common stockholders' equity for the current year?

14% Solution: Return on common stockholders' equity = net income less preferred dividends divided by average common stockholders' equity. Return on common stockholders' equity = (25,000 - 4,000)/150,000 = 14%

A corporation reported net income of $250,000 and paid dividends of $10,000 on its common stock and $50,000 on its preferred stock. Common stockholders' equity was $1,200,000 at the start of the year and $1,600,000 at the end of the year. Total assets was $1,900,000 at the start of the year and $2,100,000 at the end of the year. What is the company's return on common stockholder's equity?

14.29% Solution: Return on common stockholders' equity = Net income minus preferred stock dividends divided by the average common stockholders' equity Return on common stockholders' equity = (250,000 - 50,000)/(1,200,000 + 1,600,000)/2) = 14.29%.

Consider the following data for a corporation: Net income, $800,000 Preferred stock dividends, $50,000 Market value of common equity, $5,000,000 Beginning common stockholders' equity, $3,800,000 Ending common stockholder's equity, $4,200,000 Common stock dividends, $20,000 What is the payout ratio?

2.50% Solution: Payout ratio = Cash dividends declared on common stock divided by net income Payout ratio = 20,000/800,000 = 2.50%. Learning objective 8: Evaluate a corporation's dividend and earnings performance from a stockholder's perspective.

In the current year, a corporation reported net income of $120,000, paid dividends of $25,000 on common stock, and $20,000 of dividends on preferred stock. The corporation's common stockholders' equity was $450,000 at the beginning of the year and its common stockholders' equity is $550,000 at the end of the year. The company's return on common stockholders' equity for the current year is

20.0% Solution: Return on common stockholders' equity = net income less preferred dividends divided by average common stockholders' equity. Return on common stockholders' equity = (120,000 - 20,000)/[(450,000 + 550,000)/2] = 20%

A corporation reported net income of $340,000 and paid dividends of $100,000 on its common stock and $40,000 on its preferred stock. Common stockholders' equity was $1,600,000 at the start of the year and $2,000,000 at the end of the year. Total assets were $2,250,000 at the start of the year and $2,750,000 at the end of the year. What is the company's payout ratio?

29.41% Solution: Payout ratio = Cash dividends declared on common stock divided by net income Payout ratio = 100,000/340,000 = 29.41%. Learning objective 8: Evaluate a corporation's dividend and earnings performance from a stockholder's perspective.

Consider the following data for a corporation: Net income, $750,000 Preferred stock dividends, $50,000 Market price per share of stock, $25 Average common stockholders' equity, $3,000,000 Cash dividends declared on common stock, $25,000 What is the payout ratio?

3.3% Payout ratio is cash dividends declared to common stockholders divided by net income. Payout ratio = $25,000/$750,000 = 3.3%

A company had net income of $400,000, net sales of $10,000,000, paid dividends of $150,000 to the common stockholders, and paid dividends of $50,000 to preferred stockholders. How much is the company's payout ratio?

37.5% Solution: Payout ratio is computed by dividing total cash dividends declared on common stock by net income. Payout ratio = $150,000/$400,000 = 37.5%

If 1,000 shares of $2 par common stock are reacquired by a corporation for $4 a share, by how much will total stockholders' equity change?

4,000 decrease Solution: Stockholders' equity is reduced by the cost of acquiring the treasury stock: 1,000 shares x $4 per share = $4,000.

The following data is available for a certain corporation at December 31: Common stock, par $4 (authorized 500,000 shares) $200,000 Treasury stock (at cost $20 per share) $10,000 Based on the data, how many shares of common stock are outstanding?

49,500 The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $200,000 and common stock has a $4 par value per share the company the company must have 50,000 shares of common stock issued (i.e., $200,000/$4 per share = 50,000 shares). This company has treasury stock. Treasury stock is a corporation's own stock that has been reacquired. With $10,000 of treasury stock recorded on the company's books and a $20 cost per share the company must have 500 shares of its own common stock being held as treasury stock. The number of outstanding shares equals the number of issued shares minus the number of shares reacquired (i.e., treasury shares). This company has 79,800 shares outstanding (i.e., 50,000 - 500 = 49,500).

The following data is available for a certain corporation at December 31: Common stock, par $4 (authorized 500,000 shares) $200,000 Treasury stock (at cost $20 per share) $10,000 Based on the data, how many shares of common stock are outstanding?

49,500 The common stock account records the par value of common stock that has been issued. Given the common stock account's total is $200,000 and common stock has a $4 par value per share the company the company must have 50,000 shares of common stock issued (i.e., $200,000/$4 per share = 50,000 shares). This company has treasury stock. Treasury stock is a corporation's own stock that has been reacquired. With $10,000 of treasury stock recorded on the company's books and a $20 cost per share the company must have 500 shares of its own common stock being held as treasury stock. The number of outstanding shares equals the number of issued shares minus the number of shares reacquired (i.e., treasury shares). This company has 79,800 shares outstanding (i.e., 50,000 - 500 = 49,500).

A partial list of a corporation's accounts shows the following account balances: Retained earnings, $300,000 Treasury stock, $10,000 Dividends payable, $20,000 Paid-in capital in excess of par value, $55,000 Common stock, $200,000 How much is total stockholders' equity?

545,000

The following data is available for a certain corporation at December 31: Common stock, par $5 (authorized 250,000 shares) $400,000 Treasury stock (at cost $15 per share) $ 3,000 Based on the data, how many shares of common stock are outstanding?

79,800

A partial list of a corporation's accounts shows the following account balances: Retained earnings, $400,000 Treasury stock—common, $20,000 Paid-in capital in excess of par value—common, $55,000 Treasury stock—preferred, $30,000 Common stock, $200,000 Preferred stock, $180,000 Paid-in capital in excess of par value—preferred, $60,000 How much is total stockholders' equity?

845,000 Solution: Total stockholders' equity = Retained earnings - treasury stock--common + paid-in capital in excess of par value--common - treasury stock--preferred + common stock + preferred stock + paid-in capital in excess of par value--preferred Total stockholders' equity = $400,000 - $20,000 + $55,000 - $30,000 + $200,000 + $180,000 + $60,000 = $845,000

In its first year, a corporation reported sales revenue of $1,100,000, net income of $186,000 and paid dividends of $26,000 to common stockholders. It also paid dividends on its 10,000 shares of 6%, $100 par value, noncumulative preferred stock. Common stockholders' equity was $1,200,000 at the start of the year and $1,600,000 at the end of the year. How much is the company's return on common stockholders' equity in its first year?

9.0 Solution: The return on common stockholders' equity is calculated by dividing the net income less the preferred stockholders' dividends by the average common stockholders' equity: [$186,000 - (10,000 shares x $100/share x 6%)] ÷ [($1,200,000 + $1,600,000) ÷ 2] = 9%.

A corporation issues 1,000 shares of $7 par value common stock at par. Which of the following will be part of the journal entry to record the issuance?

A credit to Common Stock for $7,000

Which of the following does not affect retained earnings?

Additional investment by stockholders

Which of the following is a feature associated with preferred stock?

All of these Solution: Preferred stockholders have priority over common stockholders in receiving dividends, priority over common stockholders to receive assets when a corporation is liquidated, and if cumulative, are entitled to receive current and unpaid prior-year dividends before common stockholders receive any dividends. However, dividends in arrears are not considered to be a liability; the board of directors is not under an obligation to declare dividends.

Those most responsible for hiring the Chief Executive Officer is (are) the

Board of directors

Which of the following is the appropriate general journal entry to record the payment of a previously declared cash dividend?

Debit the Dividends Payable account and credit the Cash account

A corporation purchases 15,000 shares of its own $20 par value common stock for $35 per share, recording it at cost. What will be the effect on total stockholders' equity?

Decrease by $525,000 Solution: When a company acquires its own stock the acquired stock becomes known as treasury stock. The company reports treasury stock as a contra equity; total stockholders' equity decreases. In this case, it reduces by $525,000 (i.e., 15,000 shares x $35/share = $525,000).

The effect of the declaration of a cash dividend by the board of directors is to

Increase total liabilities and decrease total stockholders' equity.

Forming a corporation does not necessarily involve

Incurring debt

A corporation declared a cash dividend of $1.00 per share on 20,000 shares of common stock on December 15. The dividend is to be paid one month later on January 15 to stockholders of record on December 30. Which of the following summarizes the effects of the journal entry recorded on the date of payment on January 15?

It decreases liabilities and decreases assets.

Which of the following is considered an advantage of the corporate form of organization?

Limited liability of stockholders

Which of the following is a characteristic of partnerships?

Limited life

Which of the following is a characteristic of sole proprietorships?

Low taxation

A corporation declared a cash dividend of $1.00 per share on 20,000 shares of common stock on January 15. The dividend is to be paid one month later on February 15 to stockholders of record on January 31. Which of the following summarizes the effects of the journal entry recorded on the date of record on January 31?

No journal entry is recorded on the date of record.

Which of the following is false with regards to corporations?

Privately held corporations tend to have more shareholders than publicly traded corporations.

Treasury Stock

can be held indefinitely

Corporations have several officers who manage the corporation. The officer who has overall responsibility for managing the business is the

chief executive officer

Corporations have several officers who manage the corporation. The officer who maintains the corporation's accounting records, systems of internal controls, and prepares its financial statements, tax returns, and internal reports is the

controller

The chief accounting officer in a company is known as the

controller

A corporation issues 25,000 shares of $50 par value preferred stock for cash at $125 per share. The entry to record the transaction will include a

credit to Preferred Stock for $1,250,000 and a credit to Paid-in Capital in Excess of Par Value for $1,875,000.

A corporation issues 30,000 shares of $100 par value preferred stock for cash at $110 per share. The entry to record the transaction will include a

credit to Preferred Stock for $3,000,000 and a credit to Paid-in Capital in Excess of Par Value for $300,000. Solution: When a company issues preferred stock, it debits the cash it receives from the stockholder, it credits preferred stock for the par value of the stock issued. and it credits paid-in capital in excess of par value--preferred stock for any amount received in excess of par value. Debit cash for $3,300,000 (i.e., 30,000 shares x $110 per share). Credit preferred stock for $3,000,000 (i.e., 30,000 shares x $100 per share). Credit paid-in capital in excess of par--preferred stock for $300,000 (i.e., 30,000 shares x $10 per share).

A corporation issues 50,000 shares of $75 par value preferred stock for cash at $100 per share. The entry to record the transaction will include a

credit to Preferred Stock for $3,750,000 and a credit to Paid-in Capital in Excess of Par Value for $1,250,000. Solution: When a company issues preferred stock, it debits the cash it receives from the stockholder, it credits preferred stock for the par value of the stock issued. and it credits paid-in capital in excess of par value--preferred stock for any amount received in excess of par value. Debit cash for $5,000,000 (i.e., 50,000 shares x $100 per share). Credit preferred stock for $3,750,000 (i.e., 50,000 shares x $75 per share). Credit paid-in capital in excess of par--preferred stock for $1,250,000 (i.e., 50,000 shares x $25 per share).