Financial Accounting Chapter 11

When a stockholder sells its shares to another person for more than its original cost, the corporation:

does not make a journal entry

Which type of investment would pay little or no dividends?

Growth Investment

Issuing 1,000 shares of 5%, $100 par value, cumulative preferred stock for $110 in cash per share affects the accounting equation by:

Increasing total Assets increasing total Stockholders' Equity increasing Additional PIC - shares are sold at a Premium, increasing Additional PIC. If shares were sold at face value, only Stockholders' Equity would increase

At the end of its first year of operations, Alder Co. had 150,000 shares of preferred stock, 5% cumulative, $100 par value. It also has 1,000,000 shares of common stock $0.01 par value. (The share information represents the numbers of shares issued and outstanding for both types of stock.) If sufficient dividends are declared, what is the per share dividend that will be paid on the preferred stock?

$5.00 per share. Dividends per share on preferred stock = Par value × Annual dividend rate = $100 × 0.05 = $5 per share (if declared)

Which of the following are reasons a company would repurchase its own stock:

1. To give the the impression the stock is worth buying. 2. To reduce the number of outstanding shares. 3. To buy another company using stock. 4. To have shares of stock to issue when stock options are exercised.

AnuU, Inc. sold 100,000 shares of the 1,000,000 shared it is allowed to sell. AnuU repurchased 10,000 of these shares. The number of shares issued equals:

100,000 90,000 shares are outstanding

A corporate charter specifies that the company may issue up to 20 million shares of stock. The company sells 12 million shares to investors and later buys back 3 million shares. The current number of shares of treasury stock after these transactions have been accounted for is:

3 million shares

Transactions between a company and its stockholders affect the company's ______ accounts only.

Balance Sheet

When does a corporation record an increase in Dividends Payable?

On the Declaration Date

Diva, Inc. declared and paid $10,000 of dividends. Dividends of $10,000 may be found on the :

Statement of Retained Earnings

Cumulative preferred stock is entitled to receive current dividends plus "dividends in ______ "

arrears

When a company reissues shares at a higher price than the cost to previously purchase the treasury stock, it records a ______

credit to Additional PIC

A corporation ______ have a legal obligation to pay dividends.

does not

Investors who acquire preferred stock:

have preference to dividends have preference over common stockholders

Retained Earnings of $100,000 represent a corporation's cumulative earnings _____ and is shown on the _______

kept; Balance Sheet and Statement of Retained Earnings

Advantages of the corporate form include all of the following except:

legal liability of its owners is unlimited

A major advantage of the corporate form of ownership is ______ legal liability

limited

Retained Earnings represents cumulative _______ by the business.

net income kept profits retained

Nova, Inc. is considering declaring a $100,000 cash dividend. Nova has a cash balance of $20,000 and retained earnings balance of $100,000. Nova should :

not declare a cash dividend because it does not have enough cash.

A common stock's _______ value is typically set at a low amount and has little meaning today other than being used to by some states to assess fees.

par value

Atomic, Inc. had 100,000 shares authorized, and 10,000 shares issued and outstanding of its $2 par value common stock. At Dec 31, Common Stock equaled $20,000 and total stockholders' equity equaled $100,000 prior to a 2-for-1 stock split. As a result of a 2-for-1 stock split, _______

par value equals $1 the number of shares outstanding equals $20,000 the Common Stock equals $20,000

A share of stock that has a dividend rate specified on it must be :

preferred stock

Features of common stock usually include all of the following except:

primary claim to the company's assets in case of liquidation

A stock dividend:

provides no economic value for current stockholders

The reacquisition of preferred stock it typically referred to as a _____ because the stocks are formally retired.

redemption

Corporations can raise large amounts of money because:

shares of stock can be purchased in small amounts, so even small investors can participate

The creation and oversight of all corporations are regulated by:

state laws

Dilution Solutions, Inc. repurchased 500 shares of its $2 par value common stock for $10,000. The journal entry to record this transaction includes a _______

Debit to Treasury Stock $10,000 Credit to Cash $10,000

Hopkins, Inc. has 1,000 shares of common stock and 1,000 shares of preferred stock outstanding. The preferred stock has a cumulative dividend preference. Both classes of stock have a par value of $10. The preferred stock has a dividend rate of 6 percent. Hopkins failed to pay a dividend during the prior year. During the current year, the board of directors declares dividends totaling $2,000. Accordingly, the company will distribute dividends in the amount of:

$1,200 to the preferred shareholders and $800 to the common shareholders.

Issuing 1,000 shares of 5%, $100 par value, cumulative preferred stock for $100 cash per share affects the accounting equation by:

Increasing total assets Increasing total stockholders' equity

Under IFRS, if the company issuing preferred stock is contractually obligated to pay dividends or to redeem the shares at a future date, then the preferred stock is classified as:

a liability

The journal entry to record the payment of a previously declared dividend includes a ______

debit to Dividends Payable credit to Cash

Which form of financing has a tax advantage?

debt financing

Which of the following is an advantage of debt financing?

interest is tax deductible

Dilution Solutions, Inc. repurchased 500 shares of its $2 par value common stock for $10,000. The effect of this transaction on the accounting equation, using the cost method, includes a ______

$10,000 increase in Treasury Stock $10,000 decrease in Cash

X-Co issued 1,000 shares of its 5%, $100 par value, cumulative preferred stock for $100 cash per share. The journal entry to record this event includes a ______________.

$100,000 debit to Cash $100,000 credit to Preferred Stock

Treasure This, inc. had total assets of $100,000, liabilities of $60,000 and stockholders' equity of $40,000 before repurchasing 1,000 shares of its $1 par value common stock for $5 each. After this repurchase, total assets equal ______, liabilities equal _______, and stockholders equity equals _______.

Assets: 95,000 Liabilities: 60,000 SH Equity: 35,000

The dividend payment date is when :

Cash is decreased Dividends Payable is decreased

Mapleleaf Industries declared a $0.80 per share cash dividend. The company has 200,000 shares authorized, 90,000 shares issued, and 84,000 shares of common stock outstanding. What is the journal entry to record the dividend declaration?

Debit Dividends $67,200 Credit Dividends Payable $67,200

Contributed Capital of $1,000,000 is found in the ______ section of the _______.

Stockholders' Equity ; Balance Sheet

Any difference between the cost of the treasury stock and the price when it is re-issued is recorded as a :

debit to Additional PIC when the re-issue price is below the cost

A stock ______, typically given to employees as part of their compensation that gives them the opportunity to buy the company's stock at a predetermined price, is recorded as an expense at the time it is granted.

Stock Option

Mega Corporation repurchased 1,000 shares of its $1 par value common stock for $8,000 and recorded the entry with a debit to _______

Treasury Stock 8,000 Cash 8,000

A cash divided differs from a 2-for-1 stock split in that a cash dividend _______

decreases current assets decreases Retained Earnings

Canton, Inc. issued 10,000 shares of $1 par value common stock at $10 per share. Mr. Smart, the bookkeeper, recorded this transaction with a $100,000 debit to Cash and a $100,000 credit to Common stock. As a result of this entry:

Cash 100,000 Common Stock 10,000 Additional PIC 90,000 - Common Stock will be overstated - Additional PIC will be understated - SH Equity remains the same because the above two even each other out.

A stock dividend _____

distributes additional shares of stock to existing stockholders on a pro rata basis causes Retained Earnings to decrease

A stock dividend :

distributes additional shares of stock to existing stockholders on a pro rata basis causes retained earnings to decrease

The date of record is the date on which the corporation :

finalizes its list of stockholders who will receive dividends.

Large stock dividends are recorded at _____ and small stock dividends are recorded at ______.

par value ; market value

Ownership structure can vary from one company to another, but the most basic form of corporation offers:

common stock

Prior to a $4,000 stock dividend, total stockholders' equity equaled $50,000. After the stock dividend, total stockholders' equity equals :

$50,000 -dividends are pulled from Retained Earnings, total Stockholders' Equity remains the same.

Columbia Clay, Inc. issues 2 million shares of preferred stock with a par value of $2 at its market price of $26 per share. The issuance should be recorded with a debit to Cash for:

$52 million, a credit to Preferred Stock for $4 million, and a credit to Additional Paid-in Capital for $48 million.

Daffy Duct inc. issued 10,000 shares of $1 par value common stock at $10 per share. The journal entry to record this transaction includes a ____________

Debit to Cash of $100,000 Credit to Common Stock of $10,000 Credit to Additional PIC of $90,000

Double Vision, Inc. had 10,000 shares issued and outstanding of its $1 par value common stock. At Dec 31, Common Stock equaled $10,000, Retained Earnings equaled $20,000, and Total Stockholders' Equity equaled $50,000 prior to a 2-for-1 stock split. As a result of a 2-for-1 stock split, ________

par value equals $0.50

Why might a company issue a stock dividend?

1. To lower the market price per share of stock. 2. To demonstrate commitment to stockholders while conserving cash during difficult times. 3. To signal an expectation of significant future earnings.

In its first year of business, Decks Cleared, Inc declared a $8,000 total dividend. How much of the $8,000 would go to common stockholders given the company has 1,000 shares of 5%, $100 par value preferred stock outstanding?

Preferred stock dividend = Div Rate x par value x #of shares. Preferred Stockholders: $5,000 Common Stockholders: $3,000

Treasury Stock represents _______

a contra-equity account the amount paid for stock reacquired and currently held in treasury

Stock, Inc. issued 100,000 shares of the 1,000,000 shares authorized. Stock has repurchased 10,000 of its shares. The number of shares authorized represents the:

maximum number of shares Stockit is allowed to issue.

Stockit, Inc. has 1,000 shares of 5%, $100 par value, cumulative preferred stock outstanding. In its first two years of business, Stockit did not declare a dividend. Stockit's balance sheets at the end of the first two years of business should include:

no Dividends Payable - dividends are not a liability unless the company declares them.