Chapter 15: Stockholders' Equity

(L.O. 3) At the beginning of 2017, M.R. Magoo Company had retained earnings of $100,000. During the year M.R. Magoo reported net income of $50,000, sold treasury stock at a gain of $18,000, declared a cash dividend of $30,000, and declared and issued a small stock dividend of 1,500 shares ($10 par value) when the market value of the stock was $20 per share. The amount of retained earnings available for dividends at the end of 2017 was: A. $ 90,000. B. $105,000. C. $108,000. D. $123,000.

$ 90,000; Retained Earnings: Cash Dividend = 30,000 Stock Dividend = 30,000 Total Dividends = 60,000 *(1,500 × $20 = $30,000) Beginning Balance....100,000 Net Income....................50,000 ............................................150,000 (150,000 - 60,000) = 90,000

(L.O. 3) M. Wauboosie Company has 280,000 shares of $10 par value common stock outstanding. During the year M. Wauboosie declared a 5% stock dividend when the market price of the stock was $24 per share. Two months later M. Wauboosie declared a $.60 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by: A. $168,000. B. $176,400. C. $336,000. D. $512,400.

$512,400; Stock dividend: [ (280,000 × .05) = 14,000 => (14,000 × $24 ) = ]... $336,000 Cash dividend: 280,000 + 14,000 = 294,000 × $.60................................+176,400 Decrease in retained earnings.....................................$512,400 14,000 = (280,000 × .05)

(L.O. 3) Mildred Corporation owned 2,000 shares of Lester Corporation. These shares were purchased in 2016 for $18,000. On October 15, 2017, Mildred declared a property dividend of 1 share of Lester for every 10 shares of Mildred held by a stockholder. On that date, when the market price of Lester was $14 per share, there were 18,000 shares of Mildred outstanding. What gain and net reduction in retained earnings would result from this property dividend? Gain....Net Reduction in Retained Earnings A. $0....$16,200 B. $0....$25,200 C. $9,000....$ 7,200 D. $9,000....$16,200

...Gain......Net Reduction in Retained Earnings $9,000..........................$16,200; A transfer of a non-monetary asset to a stockholder or to another entity in a non-reciprocal transfer should be recorded at fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset. On the date of declaration (10/15/17), Mildred Corporation will make the following journal entries for the 1,800 shares of Lester Corporation stock it will distribute (18,000 shares/10 shares = 1,800 shares). Equity Investments....................................................9,000 ....Unrealized Holding Gain or Loss Income..................9,000 Retained Earnings (1,800 × $14).........................25,200 ....Property Dividends Payable..........................................25,200 In the first entry, a gain on the appreciation of stock of $9,000 is recorded and is computed by taking the difference between the fair value of the stock at $14 and its cost of $9 ($18,000/2,000 shares) and multiplying the difference by the number of shares to be distributed. ($14 − $9 = $5 × 1,800 shares = $9,000). A gain of $9,000 is recorded. In the second entry, retained earnings is debited for $25,200 which is the fair value of the stock to be distributed ($14 × 1,800 shares = $25,200). Retained earnings is decreased by $25,200, but this is partially offset when the gain of $9,000 on appreciation of stock is closed to retained earnings.

(L.O. 1) Aguirre Company issues 500 shares of its $5 par value common stock having a market value of $25 per share and 750 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $24,000. How would the proceeds be allocated between the common and preferred stock? Common Stock....Preferred Stock A. $ 2,500....................$21,500 B. $10,909....................$13,091 C. $12,500....................$15,000 D. $12,750....................$11,250

Common Stock....Preferred Stock $10,909....................$13,091

(L.O. 1) When a corporation sells stock to investors, the transaction will increase Contributed Capital....Earned Capital A. Yes....No B. Yes....Yes C. No....Yes D. No....No

Contributed Capital....Earned Capital Yes....No

(L.O. 3) Tillie Corporation has a current ratio (Current Assets/Current Liabilities) of 2:1. How will the payment of a cash dividend declared two weeks ago affect the following? Current Ratio....Working Capital A. Increase....No Effect B. Decrease....Decrease C. Increase....Increase D. No Effect....Decrease

Current Ratio....Working Capital ....Increase................No Effect; The payment of a cash dividend, previously declared, will cause the current ratio to increase because current assets (Cash) and current liabilities (Dividends Payable) decrease by the same amount. For example, if current assets were $100,000 and current liabilities were $50,000, the current ratio would be 2:1 and working capital would be $50,000 ($100,000 − $50,000). If a previously declared $10,000 cash dividend was paid, current assets would drop to $90,000 and current liabilities would drop to $40,000. Thus, after the payment of the dividend, the current ratio would be 2.25:1 ($90,000/$40,000), but working capital would still be $50,000 ($90,000 −$40,000).

(L.O. 2) On February 1, 2017, Martin Company reacquired 8,000 shares of its $30 par value common stock for $32 per share. Martin uses the cost method to account for treasury stock. What journal entry should Martin make to record the acquisition of treasury stock? ....................................................................Debit.............Credit A....Treasury stock..........................240,000 ........Additional paid-in capital......16,000 ............Cash................................................................256,000 B....Treasury stock..........................240,000 ......Retained earnings.......................16,000 ............Cash................................................................256,000 C....Retained earnings.................256,000 ............Cash................................................................256,000 D....Treasury stock..........................256,000 ............Cash................................................................256,000

D....Treasury stock..........................256,000 ............Cash................................................................256,000; (8,000 Shares x $32)

(L.O. 2) Crawford Company acquired treasury stock for cash at a price in excess of its par value. Three months later the treasury stock was sold at a price that exceeded its acquisition price. Assume that Crawford Company uses the cost method to account for treasury stock transactions. What effect would the resale of the treasury stock have on the following items? Additional Paid-in Capital...Retained Earnings...Total Stockholders' Equity A. Increase....No Effect....Increase B. Decrease....No Effect....Decrease C. Increase....Increase....Increase D. No Effect....No Effect....No Effect

Increase....No Effect....Increase

(L.O. 3) Foerch Corporation declared a stock dividend of 4,000 shares when the par value was $1 per share, and the market value was $5 per share. How does the entry to record this declaration affect total stockholders' equity? A. No effect. B. $ 4,000 increase. C. $ 4,000 decrease. D. $20,000 decrease.

No effect; The declaration of a stock dividend has no effect on total stockholders' equity.

(L.O. 3) What is the most likely effect of a stock split on the par value per share and the number of shares outstanding? Par Value Per Share....Number of Shares Outstanding A. Decrease....Increase B. Decrease....No effect C. Increase....Increase D. No effect....No effect

Par Value Per Share..Number of Shares Outstanding ...........Decrease....................................Increase

Bodhi Corporation had the following information in its financial statements for the years ended 2016 and 2017: Cash Dividends for the year 2017...............................................................$ 5,000 Net Income for the year ended 2017.........................................................62,000 Market price of stock, 12/31/16...............................................................................10 Market price of stock, 12/31/17................................................................................12 Common stockholders' equity, 12/31/016............................................1,100,000 Common stockholders' equity, 12/31/17..............................................1,200,000 Outstanding shares, 12/31/17........................................................................120,000 Preferred dividends for the year ended 2017.........................................10,000 (L.O. 4) What is the Book Value Per Share for Bodhi Corporation for the year ended 2017? Price Earnings Ratio....Book Value Per Share A. 21.3....$ 9.58 B. 21.3....$10.00 C. 27.7....$ 9.58 D. 27.7....$10.00

Price Earnings Ratio....Book Value Per Share ............... 27.7 .....................................$10.00; The Price Earnings Ratio is computed by dividing the market price of the stock by the earnings per share [$12/($52,000/120,000) = 27.7]. The Book Value Per Share is computed by dividing common stockholders' equity by outstanding shares ($1,200,000/120,000 = $10.00).

Bodhi Corporation had the following information in its financial statements for the years ended 2016 and 2017: Cash Dividends for the year 2017...............................................................$ 5,000 Net Income for the year ended 2017.........................................................62,000 Market price of stock, 12/31/16...............................................................................10 Market price of stock, 12/31/17................................................................................12 Common stockholders' equity, 12/31/016............................................1,100,000 Common stockholders' equity, 12/31/17..............................................1,200,000 Outstanding shares, 12/31/17........................................................................120,000 Preferred dividends for the year ended 2017.........................................10,000 (L.O. 4) What is the Rate of Return on Common Stock Equity and the Payout Ratio for Bodhi Corporation for the year ended 2017? Rate of Return on Common Stock Equity....Payout Ratio A. 5.1%....8.1% B. 4.5%....9.6% C. 5.6%....8.1% D. 5.1%....24.2%

Rate of Return on Common Stock Equity....Payout Ratio ...................................4.5%.......................................................9.6%; The Rate of Return on Stockholders' Equity is computed by dividing net income less preferred dividends ($62,000 − $10,000 = $52,000) by average common stockholders' equity [ $1,100,000 + $1,200,000)/2 = $1,150,000 ]; therefore it is 4.5% The Payout Ratio is computed by dividing cash dividends by net income less preferred dividends ($5,000/$52,000 = 9.6%).

(L.O. 3) How does the declaration of a cash dividend affect the following account balances? Retained Earnings....Current Liabilities....Cash Account A. Decrease....No Effect....Decrease B. Increase....Decrease....No Effect C. Decrease....Increase....No Effect D. Decrease....No Effect....Increase

Retained Earnings..Current Liabilities..Cash Account .........Decrease...................Increase..................No Effect

(L.O. 3) Total stockholders' equity will increase as a result of a: Stock Dividend....Stock Split A. Yes....Yes B. No....No C. Yes....No D. No....Yes

Stock Dividend....Stock Split ...........No................No

(L.O. 1) Which of the following is not a legal restriction related to profit distributions by a corporation? A. The amount distributed to owners must be in compliance with the state laws governing corporations. B. The amount distributed in any one year can never exceed the net income reported for that year. C. Profit distributions must be formally approved by the board of directors. D. Dividends must be in full agreement with the capital stock contracts as to preferences and participation.

The amount distributed in any one year can never exceed the net income reported for that year.

(L.O. 3) Which of the following is not one of the primary considerations management must make before a cash dividend is declared? A. The availability of funds to pay the dividend. B. The legal permissibility of the dividend. C. The effect of inflation on the company and alternative uses of the cash to be paid for dividends. D. The tax impact on stockholders of the receipt of the dividends.

The tax impact on stockholders of the receipt of the dividends.

(L.O. 3) A feature common to both stock dividends and stock splits is: A. a reduction in total stockholders' equity of a corporation. B. a transfer from retained earnings to additional paid-in capital. C. a reduction in par value. D. a change in the number of shares of stock outstanding.

a change in the number of shares of stock outstanding.

(L.O. 1) When stock is purchased by shareholders at a price below par value: A. a liability should be recorded in the financial statements, classified as longterm, and payable upon dissolution of the company to creditors not fully reimbursed. B. a contingent liability exists that is an obligation to the corporation's creditors. C. a contingent liability exists that is an obligation to the corporation. D. the difference between purchase price and par value must be paid by the original shareholder to the corporation before they may sell the stock to another party.

a contingent liability exists that is an obligation to the corporation's creditors.

(L.O. 1) Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as: A. an increase in current liabilities. B. an increase in stockholders' equity. C. a footnote. D. an increase in current liabilities for the current portion and longterm liabilities for the longterm portion.

a footnote; Preferred dividends only become a liability when they are declared by the board of directors. Therefore, preferred dividends in arrears are not recorded as a liability. However, they should be disclosed in a footnote to the financial statements.

(L.O. 1) Stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders: A. are entitled to a dividend every year in which the business earns a profit. B. have the rights to specific assets of the business. C. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership. D. can negotiate individual contracts on behalf of the enterprise.

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

(L.O. 2) In January 2017 Castro Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2017, Castro Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares: A. decreased total stockholders' equity. B. increased total stockholders' equity. C. did not change total stockholders' equity. D. decreased the number of issued shares.

decreased total stockholders' equity.

(L.O. 1) The general rule to be applied when stock is issued for services or property other than cash is that the property or services be recorded at: A. the fair market value of the stock issued. B. the fair market value of the non-cash consideration received. C. either the fair market value of the stock issued or the fair market value of the non-cash consideration received, whichever is more clearly determinable. D. a value that clearly reflects the intentions of the parties entering into the transaction and provides a relevant basis for recording.

either the fair market value of the stock issued or the fair market value of the non-cash consideration received, whichever is more clearly determinable.

(L.O. 2) Treasury stock is: A. canceled as soon as it is acquired. B. a current asset. C. stock owned by the Treasurer of the company. D. included in issued shares.

included in issued shares.

(L.O. 1) Stock that has a fixed per-share amount printed on each stock certificate is called: A. share value stock. B. fixed value stock. C. uniform value stock. D. par value stock.

par value stock.

(L.O. 3) When a corporation declares a property dividend, the corporation should: A. divide the property equally among all stockholders. B. record the dividend by debiting retained earnings for an amount equal to the fair value of the property to be distributed. C. record the dividend by debiting retained earnings for an amount equal to the book value of the property to be distributed. D. record the dividend on its books at the carrying value of the property distributed and inform stockholders as to the fair value of the property so they may individually recognize a gain or loss.

record the dividend by debiting retained earnings for an amount equal to the fair value of the property to be distributed.

(L.O. 3) Two alternatives exist once a credit balance in retained earnings is recorded. It can be left intact and the offsetting assets used in the operations of the business or it can be: A. reduced by a distribution of assets to the stockholders. B. increased as a result of a sale of common stock above par value. C. increased as a result of a sale of treasury stock at an amount in excess of par value. D. reduced by a distribution of assets to creditors.

reduced by a distribution of assets to the stockholders.

(L.O. 3) Unlike a stock split, a stock dividend requires a formal journal entry in the financial accounting records because: A. stock dividends are payable on the date they are declared. B. stock dividends represent a transfer from retained earnings to capital stock. C. stock dividends increase the relative book value of an individual's stock holdings. D. stock splits increase the relative book value of an individual's stock holdings.

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

(L.O. 1) When accountants refer to capital of a corporate organization they mean: A. the cash held by the organization at the point in time when the reference to capital is made. B. the assets of a business organization that are durable and last a long period of time. C. money borrowed to finance the operations of the organization. D. stockholders' equity or owners' equity.

stockholders' equity or owners' equity.

(L.O. 1) The accounting for stockholders' equity is governed by: A. the corporation's board of directors. B. the Securities and Exchange Commission. C. the American Institute of CPAs. D. the business corporation act of the state of incorporation.

the business corporation act of the state of incorporation.

(L.O. 1) In a corporate form of business organization legal capital is best defined as: A. the amount of capital the state of incorporation allows the company to accumulate over its existence. B. the par value of all capital stock issued. C. the amount of capital the federal government allows a corporation to generate. D. the total capital raised by a corporation within the limits set by the Securities and Exchange Commission.

the par value of all capital stock issued.

(L.O. 1) When common stock is sold by a corporation a journal entry is prepared which includes a debit to cash and a credit to the common stock account. If the debit to cash is greater than the credit to the common stock account then it can be assumed that: A. the common stock is worth more than its current market value. B. a gain on the sale of stock is a part of the transaction. C. the common stock was sold at a discount D. the stated value of the common stock is less than the per share price investors were willing to pay.

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

(L.O. 1) Many corporations issue preferred stock in addition to common stock to finance operations. While the preferences given to preferred stock may vary in many situations, the most common preference is: A. they are assured a dividend, usually at a stated rate, before any amount may be distributed to common shareholders. B. preferred shareholders receive a larger dividend than do common shareholders because they have given up the right to vote. C. receipt of dividends every time a common stock dividend is declared. D. the right to convert shares of preferred for shares of common on a basis determined in the preferred stock indenture.

they are assured a dividend, usually at a stated rate, before any amount may be distributed to common shareholders.

(L.O. 1) Normally, stock issued by a corporation has certain rights and privileges that can be restricted only by special contracts at the time the shares are issued. In the absence of restrictive provisions, each share carries all of the following rights except: A. to share proportionately in profits and losses. B. to share proportionately in corporate assets upon liquidation. C. to share proportionately in any new issue of stocks or bonds by the corporation. D. to share proportionately in management of the corporation.

to share proportionately in any new issue of stocks or bonds by the corporation.