Chapter 18 Smart Book

True or false: No journal entry is required on the date of record.

True

A nonreciprocal transfer to owners is referred to as a

property dividend.

What are the effects of a stock split? (Select all that apply.)

-The number of shares outstanding increases. -Par value decreases.

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 retained earnings for the stock dividend is

$16,000 Reason: 100,000 x 20% = 20,000 shares x $8 = $160,000

Canton has 60,000 shares of $10 par issued and outstanding. Canton declares a 2-for-1 stock split. What is the par value and number of shares outstanding after the stock split?

$5 par; 120,000 shares

Which of the following accounts are classified as shareholders' equity?

-Additional paid-in capital -Preferred stock -Net unrealized holding gains on investments

Which of the following transactions are classified as a stock dividend?

A distribution of additional shares of a corporation's stock to current shareholders of the corporation.

On April 1, 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.

In year 1, Pride Corp. issued 10,000 shares of $1 par value common stock for $8 per share. In year 3, Pride repurchased and immediately retired 1,000 shares of the stock at $6 per share. Which of the following entries would be required to retire the shares?

Debit paid-in capital in excess of par $7,000. Paid in excess of par =($8-$1)*1000 shares =$7000

Which of the following accurately describes shareholders' equity?

Ownership interests of the shareholders

The ownership interests of the investors in a corporation are referred to as

Shareholders' equity

When a corporation issues two securities for a single price and the market value of only one security is known, how is the cash received allocated?

The cash received is allocated first to the security for which the fair value is known, and the remainder is allocated to the other security.

When does a dividend become a liability to a corporation?

When it is declared by the board of directors

Mandatorily redeemable preferred stock is reported as

a liability on the balance sheet.

A restriction of retained earnings signifies that

a portion of retained earnings is not available for dividends.

A frequent reason for a stock split is to

cause the market price per share to decline

The journal entry to record a stock split effected in the form of dividends may include which of the following? (Select all that apply.)

debit to paid-in-capital debit to retained earnings credit to common stock

When a company issues different classes of shares, it must

distinguish the rights for each class of stock.

A distribution of assets to shareholders is referred to as a(n) _____.

dividend

In order to receive a dividend, investors must purchase shares of stock before the

ex-dividend date.

Property dividends are valued at

fair value

For IFRS reporting, the critical feature that distinguishes a liability from equity is if

if the issuer is required to deliver cash or another financial instrument to the holder

What is the effect of the repurchase of treasury stock on the return on shareholders' equity ratio?

increase

The most likely reason for a company to declare a reverse stock split is to

increase the market value of the shares.

A repurchase of treasury stock will Blank______ a company's return on equity because net income is divided by a Blank______ amount of equity.

increase; smaller

The most important advantage to the corporate form of business is

limited liability

In a corporation, shareholders' liability is

limited to the amount of the investment.

Return on shareholders' equity indicates the percent of corporate earnings for each dollar of total equity invested in the corporation, whereas the earnings-price ratio reflects the percentage earned for each dollar of

market value of common stock.

The return on shareholders' equity ratio is computed by dividing

net income by average shareholders' equity.

Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from what type of sources?

nonowner

What type of corporations include churches, hospitals, universities, and charities?

not-for-profit

When investors purchase shares of stock, it is classified as

paid-in capital

The return to common shareholders' equity is calculated by subtracting Blank______ from net income and dividing that amount by average Blank______.

preferred dividends; shareholders' equity attributed to common shareholders

Which type of stock usually has a high par value and a percentage of par value dividend rate?

preferred stock

The two types of corporations are

profit and not-for-profit.

The effect of share issue costs is to

reduce paid-in capital in excess of par.

When a corporation repurchases its stock as treasury stock, the number of shares issued

remains the same

Shareholders' equity is classified under IFRS into two categories: share capital and _____.

reserves

A corporation's accumulated, undistributed net income or loss is referred as

retained earnings

A corporation's accumulated income that has not been distributed as dividends to shareholders is referred to as _____ earnings.

retained or reinvested

Distributions of stock to current shareholders of a corporation are called what type of distribution?

stock dividend

A distribution of 25% or more of the outstanding shares of stock may be treated as which of the following? (Select all that apply.)

stock split stock dividend

The term treasury stock refers to

stock that is repurchased and not retired.

Historically, par value was considered to be

the amount of net assets that were not available for distribution to shareholders.

When a property dividend is declared, a gain or loss is recognized for

the difference between the fair value and the book value of the assets distributed.

A 2-for-1 stock split increases the marketability of the stock because

the market price per share decreases.

In year 1, Clark purchased 1,000 shares of treasury stock for $10 per share. In year 2, Clark reissued 200 shares of treasury stock for $14 per share. The journal entry to record the transaction in year 2 will include a credit to

treasury

A quasi-reorganization allows a firm that is undergoing financial difficulties to

write-down inflated assets and reduce an accumulated deficit

Which of the following describe the ways in which companies may record stock splits effected in the form of dividends? (Select all that apply.)

-Reduce the paid-in capital in excess of par account. -Capitalize retained earnings.

Match each date with its corresponding activities.

Declaration date = Date that the corporate board of directors announces a dividend Record date = Date that a determination is made as to recipients of a dividend Ex-dividend date = Date before which investors must purchase stock in order to receive a dividend Payment Date = Date that corporate assets are transferred to shareholders

When a corporation distributes assets of the company to its investors, it is referred to as a(n)

dividend

If a corporation issues its shares of stock for a noncash asset, at what amount should the transaction be recorded?

the fair value of the stock

A reverse stock split requires

no journal entry

Historically, par value indicated (select all that apply)

-the real value of shares -the amount of net assets that were not available for distribution to shareholders. -the issue price of all shares

When a company repurchases its own shares of stock, what are the two acceptable accounting choices for the transaction?

-The shares can be formally retired. -The shares can be called treasury shares.

Shareholders' equity consists of which of the following items? (Select all that apply.)

-amounts invested by shareholders -amounts earned by the corporation

The purposes of a quasi reorganization are to (Select all that apply.)

-write down inflated assets. -reduce the deficit in retained earnings.

In year 1, Boise purchased 10,000 shares of treasury stock for $5 per share. In year 3, Boise reissued 1,000 shares of treasury stock for $8 per share. The journal entry to record the transaction in year 3 will include (Select all that apply.)

-credit treasury stock for $5,000. -credit to paid-in capital from treasury stock for $3,000.

A company originally issues par value common stock at an amount above par. Subsequently, the company reacquires the shares for more than the issue price and immediately retires the shares. The company has no previous transactions for stock repurchases. Which of the following accounts would be reduced for the repurchase and retirement of the shares? (Select all that apply.)

-paid-in capital in excess of par -retained earnings -common stock

On March 1, Fresh Corp. declared a dividend of $3,000. The record date is March 20, and the payment date is April 1. What is the journal entry required on March 20?

No entry is required.

Formally retiring shares has what effect on total shareholders' equity?

decrease

A liquidating dividend means that

dividends exceed retained earnings.

When a company repurchases its stock and immediately retires the stock, which of the following occurs?

The equity accounts are reduced for the amount in which the shares were originally sold.

Which account is a stockholders' equity account?

additional paid in capital

When stock splits or stock dividends result in fractional shares, companies issue _____ payments along with the additional shares to compensate for the fractions.

cash

______ include(s) all changes in equity during a period except those resulting from investments by owners and distributions to owners.

comprehensive income

The right of a shareholder to exchange his preferred stock for another class of stock is referred to as a right of _____ , whereas the right of the preferred shareholder to have her stock repurchased by the corporation for cash is referred to as a _____ privilege.

conversion ; redemption

When stock splits or stock dividends result in fractional shares, the situation is handled by

issuing cash payments for the fractional shares.

Fantastic Gold Inc. declares and distributes to its shareholders 1 gram of gold in lieu of a cash dividend. Fantastic Gold is distributing a(n)

property dividend.

Which of the following dividends has no effect on total owners' equity?

stock dividend

Which of the following describe the ways in which companies may record stock splits effected in the form of dividends? (Select all that apply.)

-Capitalize retained earnings. -Reduce the paid-in capital in excess of par account.

In year 1, Sofia Corp. issued 1,000 shares of $1 par value common stock for $10 per share. In year 4, Sofia repurchased and immediately retired 100 shares of the stock at $6 per share. Which of the following entries would be included in the journal entry to retire the shares? (Select all that apply.)

-Debit common stock $100. -Credit paid-in capital—share repurchase $400. -Debit paid-in capital in excess of par $900.

On March 1, Fresh Corp. declared a dividend of $3,000. The record date is March 20, and the payment date is April 1. The journal entry required on April 1, will include which of the following entries? (Select all that apply.)

-Debit dividends payable $3,000. -Credit cash $3,000.

In year 1, Rim Corporation purchases 1,000 shares of treasury stock for $10 per share. In year 2, Rim reissues 100 shares of the treasury stock for $12 per share. In year 3, Rim reissues 500 shares of its treasury stock for $9 per share. The journal entry to record the reissuance of treasury stock in year 3 will include which of the following entries?

-Debit paid-in capital—share repurchase $200. -Credit treasury stock $5,000 -Debit retained earnings $300. -Debit cash $4,500 Reason: In year 2, the company will debit cash for $1,200 and credit treasury stock for $1,000 and paid-in capital-share repurchase for $200. In year 3, the company must debit the share repurchase account for $200 and the balance of $300 is debited to retained earnings.

On March 1, Fresh Corp. declared a dividend of $3,000. The record date is March 20, and the payment date is April 1. The journal entry required on March 1, will include which of the following entries? (Select all that apply.)

-Debit retained earnings $3,000. -Credit dividends payable $3,000.

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? (Select all that apply.)

-Debit retained earnings $45,000. -Credit additional paid-in capital $40,000. -Credit common stock $5,000.

Which of the following are characteristics of treasury stock? (Select all that apply.)

-It does not receive a dividend. -It has no voting rights. -It is stock that is repurchased by the company.

Which of the following accounts are classified as shareholders' equity?

-Preferred stock -Additional paid-in capital -Net unrealized holding gains on investments

If a company has preferred stock outstanding, a variation of calculating return on shareholders' equity can be made by making which adjustments to the ratio? (Select all that apply.)

-Subtract preferred dividends from net income. -Use average common shareholders' equity in the denominator.

Royce has 100,000 shares of $10 par issued and outstanding. Royce declares a 2-for-1 stock split in the form of a stock dividend. Which of the following are true? (Select all that apply)

-The par value will not change. -The number of shares outstanding increases.

When a corporation issues shares of common stock for an amount above par, which of the following entries occur? (Select all that apply.)

-credit to additional paid-in capital -credit to common stock

Preferred stockholders usually have preference over common stockholders with respect to which items? (Select all that apply.)

-dividends -distribution of assets in liquidation

Disadvantages of the corporate form of business are (Select all that apply.)

-double taxation. -government regulation.

Which of the following items are included in other comprehensive income? (Select all that apply.)

-gains and losses from amendments to postretirement programs -net holding gains and losses on certain types of investments -deferred gains and losses on derivatives

A restriction of retained earnings (select all that apply)

-indicates management's intention to withhold assets for a specified purpose. -communicates the portion of retained earnings not available for dividends.

Corporations raise capital by

-issuing stock -issuing debt -operating at a profit

State laws regulate which of the following corporate activities? (Select all that apply.)

-nature of share authorization -repurchase of stock -issuance of stock

Which of the following items are included in other comprehensive income? (Select all that apply.)

-net holding gains and losses on certain types of investments -adjustments from foreign currency translations

Corporations raise equity capital by

-operating at a profit. -issuing stock

Formally retiring shares reduces these accounts to their pre-issuance condition:

-paid-in capital in excess of par -common stock

A stock split effected in the form of a large stock dividend (select all that apply)

-reduces paid in capital - excess of par. -has no effect on the par value of the stock.

Which of the following are sources of shareholders' equity? (Select all that apply.)

-retained earnings -paid-in capital

Under IFRS, shareholders' equity typically is classified under two categories referred to as:

-share capital -reserves

When a company issues its shares of stock for a noncash asset, which of the following may provide evidence of fair value of the transaction? (Select all that apply.)

-the amount of cash that would be paid to purchase the asset -the quoted market price for the shares -an independent appraisal of the value of the asset

Shares of stock previously sold by the corporation that are repurchased are called

treasury stock

When a company believes the market price of its stock is Blank______, it may attempt to support the price by Blank______ the supply of stock through stock repurchases.

undervalued; decreasing

A small stock dividend is usually less than Blank______% of the number of shares of stock outstanding.

25

Owners of _____ corporations have the limited liability of a corporation, but income and expenses are passed through the owners as in a partnership, avoiding double taxation.

S

Which of the following has limited liability for its owners, but passes income through to its investors and avoids double taxation?

S corporation

Who regulates the nature of shares that can be authorized, the issuance and repurchase of those shares, and the distributions to shareholders?

The state in which the corporation is incorporated

When a business incorporates, it must file its Blank______ with the state in which it incorporates.

articles of incorporation

A company has available-for-sale debt securities in its portfolio that have increased in value at year-end. How should the unrealized gain on the available-for-sale securities be reported on the statement of shareholders' equity? (Assume the fair value option is not elected.)

as an increase in comprehensive income

A corporation may repurchase its shares of stock because management

believes the market price of the stock is undervalued.

Under IFRS, the critical feature that distinguishes a liability is if the issuer can be required to deliver _____ or another financial instrument to the holder.

cash

Which of the following is subject to double taxation?

corporations

When common stock has a designated par value, and common stock is issued at an amount above par, which entry is recorded?

credit common stock for the par amount

The journal entry to record a stock split effected in the form of dividends may include which of the following? (Select all that apply.)

debit to retained earnings credit to common stock debit to paid-in-capital

The date on which a cash dividend becomes a liability to a corporation is the

declaration date.

The date on which the board of directors announces that a dividend will be paid is referred to as the

declaration date.

When a corporation repurchases its stock as treasury stock, the number of shares outstanding

decreases

When a corporation repurchases its stock as treasury stock, the number of shares authorized

does not change.

The earnings-price ratio is Blank______ divided by Blank______.

earnings per share; market price per share

A limitation of the return on shareholders' equity ratio is that

it uses book value of equity.

A limitation of the return on shareholders' equity ratio is that

it uses the book value of equity

The number of shares a specific corporation is authorized to issue is set forth in

its articles of incorporation

When the dividend exceeds the balance in retained earnings, the excess is referred to as a(n) _____ dividend.

liquidating or liquidation

Miles Corp. declares and distributes a 3-for-1 stock split effected in the form of a 200% stock dividend. Miles had 10,000 shares of $1 par value common stock valued at $8 per share before the stock split. If Miles does not capitalize retained earnings, the journal entry required to record the split would include a debit to

paid-in capital in excess of par $20,000.

Miles Corp. declares and distributes a 3-for-1 stock split effected in the form of a 200% stock dividend. Miles had 10,000 shares of $1 par value common stock valued at $8 per share before the stock split. If Miles wishes to capitalize retained earnings, the journal entry required to record the stock split would include a debit to

retained earnings $20,000.

A company that repurchases its own securities accounts for the shares of stock as

retired shares or treasury shares.

If a company wishes to increase its stock price, it might declare a(n) _____ stock split.

reverse

When a company decreases its outstanding shares of stock by exchanging 1 share of stock for 10 shares, this is referred to as a(n)

reverse stock split.

A Blank______ stock dividend is less than 25% of the outstanding shares of stock.

small

Which type of dividend does not reduce the assets of the firm or create a liability?

stock dividend

A corporation is owned by its _____ .

stockholders, shareholders, or investors

The costs for legal, promotional, and accounting services to issue stock should be

subtracted from the proceeds of issuing stock.

True or false: The balance sheet should disclose the sources of changes in the stockholders' equity accounts.

False

How should cash dividends be reported on the statement of shareholders' equity?

as a reduction of retained earnings

Retained earnings is typically reported on the balance sheet

as a single amount

The ex-dividend date is usually 1 day

before the date of record.

True or false: The return on shareholders' equity ratio is calculated as net income divided by common stock.

False Reason: Return on shareholders' equity is net income divided by average total shareholders' equity.

When a corporation issues two securities for a single price, how is the issue price usually allocated?

The cash received is allocated based on the relative market value of each security.

If a corporation issues its shares of stock for a noncash asset, at what amount should the transaction be recorded?

The fair value of the stock

When a small stock dividend is declared and distributed,

earned capital is reclassified as invested capital.

When a small stock dividend is declared and distributed,

earned capital is reclassified as invested capital. Reason: Dividends paid to investors are never recorded on the income statement.

The earnings-price ratio is calculated as Blank______ divided by the market price per share.

earnings per share

The feature that shares of preferred stock may be exchanged for cash at the option of the corporation or the shareholders is referred to as what?

redeemable

When a small stock dividend is declared and distributed,

retained earnings is reduced by the market value of the shares issued

If more than one class of shares is authorized, what type of information must be specified? (Select all that apply)

-designation to distinguish each class -specific rights for each class

If preferred shares must be redeemed by a certain date, they should be classified as

debt

Amounts earned by the corporation on behalf of its shareholders are referred to as

retained earnings

Because the return on shareholders' equity is based on the book value of equity, analysts often supplement their understanding of the return to shareholders with the Blank______.

earnings-price ratio

Match the financial statement with respect to the reporting of stockholders' equity.

Balance Sheet- Reports amounts of shareholders' equity at end of reporting periods. Statement of stockholders' Equity- Reports sources of the changes in stockholders' equity accounts.

Match the preferred shareholder right with the correct description.

Conversion- Right to exchange preferred stock for common stock Redemption- Right to return preferred stock

In year 1, Goal Corp. purchases 1,000 shares of treasury stock for $10 per share. In year 2, Goal reissues 500 shares of the treasury stock for $13 per share. In year 3, Goal reissues 200 shares of its treasury stock for $8 per share. The journal entry to record the reissuance of treasury stock in year 3 will include which of the following entries?

Debit paid-in capital--treasury shares Reason:The shares were originally purchased for $10 per share. They were sold for $8 per share. Therefore the debit to paid-in capital is $400 (($10-$8) x 200 shares)

On April 1, 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 April 1?

Debit retained earnings $12,000 Reason: 40,000 shares issued and outstanding x $.30 per share

A distribution of 25% or more of the outstanding shares of stock is treated as which of the following?

Either a stock dividend or a stock split

True or false: A corporation is owned by debt and equity holders.

False Reason: A corporation is owned by its shareholders, who are equity holders.

True or false: Treasury stock represents investments in treasury securities of the U.S. government.

False Reason: Treasury stock represents shares of stock previously issued by the corporation that are repurchased by the corporation.

True or false: When investors purchase shares of stock from a corporation, it is recorded by the corporation as investments in securities.

False Reason: When investors purchase shares of stock in a corporation, the corporation records the transaction as paid-in capital.