Accounting Ch 11

Front 1

he stockholders of a corporation have unlimited liability.

Back 1

False;The liability of a stockholder is normally limited to their investment in the corporation.

Front 2

Which of these is not a major advantage of a corporation?

Back 2

Government regulations
orrect Government regulations is a disadvantage, not an advantage of a corporation

Front 3

Which one of the following is a major disadvantage of a corporation?

Back 3

Additional taxes
While often referred to as double taxation, the corporation pays income taxes on its profits, and then when distributed, the stockholders pay income taxes on the amounts received as dividends.

Front 4

Which of the following is not a characteristic of a corporation?

Back 4

Unlimited liability for stockholders
Unlimited liability for stockholders is not a characteristic of a corporation. Stockholders may normally lose only up to the cost of their investment

Front 5

Which of the following is a disadvantage of the corporate business form?

Back 5

Government regulation
Because a corporation is a separate legal entity and because of the government’s desire to protect stockholders, corporations are heavily regulated.

Front 6

Which of the following is not a stockholder’s right?

Back 6

The right to participate in management decisions
A stockholder does not have the right to participate in management decisions simply because he owns stock. A stockholder has the right to maintain the same percentage of ownership as additional stock is issued, vote in the election for the board of directors, and receive dividends appropriate to their percentage of ownership.

Front 7

Ernest, an individual, receives $100 from Vernon Corp. in dividends and is in the 28% tax bracket. Vernon Corp. already paid corporate taxes on the $100 at a 20% tax rate. How much in personal taxes will Ernest need to pay?

Back 7

$28
One of the disadvantages of a corporate structure is the corporation pays its own tax burden on net income and then the stockholders pay income tax on the dividends they receive. Ernest must pay an additional $28.

Front 8

The par value of corporate shares issued represents a corporation’s legal capital.

Back 8

True;his value must be maintained to ensure creditor’s claims against the corporation.

Front 9

Which of these statements is false?

Back 9

Legal capital is intended to protect stockholders.

True--

Ownership of common stock gives the owner a voting right.

The authorization of capital stock does not result in a formal accounting entry.

The stockholders’ equity section begins with paid-in capital amounts.

Front 10

If a corporation issues 1,000 shares of $3 par common stock for $7 a share, how much is the legal capital?

Back 10

$3,000
he legal capital is the par value per share ($3) times the number of shares issued (1,000) or $3,000. This will be equal to the total reported in the stock account.
Legal capital is amount of capital retained by business for the protection of creditors.

Front 11

Which of the following represents the amount per share of stock that must be retained in the business for the protection of corporate creditors?

Back 11

Legal capital
Legal capital is the amount per share that must be retained in the business for protection of the corporate creditors. Par value is an arbitrary amount listed in the corporate charter, and market value is the selling price of a share of stock on a given day. Stated value is a value assigned to no-par stock by the board of directors.

Front 12

Which of the following represents the maximum number of shares a corporation can issue?

Back 12

Authorized shares
Authorized represents the maximum number of shares allowed under the corporate charter.

Front 13

DT Inc. issued 3,000 shares of $5 par value common stock for $6 per share. Which of the following is one part of the journal entry to record the issuance?

Back 13

Credit to Common Stock for $15,000
he 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 × $6 = $18,000
Credit to Common stock = 3,000 × $5 = $15,000
Credit to Paid-in capital in excess of par value = 3,000 × ($6 - $5) = $3,000

Front 14

Wynola, Inc. issued 1,000 shares of common stock at $10 per share. If the stock has a par value of $4 per share, which of the following will be part of the journal entry to record the issuance?

Back 14

Credit to Common Stock for $4,000
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 = 1,000 × $10 = $10,000
Credit to Common stock = 1,000 × $4 = $4,000
Credit to Paid-in capital in excess of par value = 1,000 × ($10 - $4) = $6,000

Front 15

Harrison, Inc. issued 4,000 shares of common stock at $12 per share. If the stock has a par value of $0.50 per share, which of the following will be part of the journal entry to record the issuance?

Back 15

Credit to Common Stock for $2,000
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 = 4,000 × $12 = $48,000
Credit to Common stock = 4,000 × $0.50 = $2,000
Credit to Paid-in capital in excess of par value = 4,000 × ($12 - $0.50) = $46,000

Front 16

Harrison, Inc. issued 600 shares of common stock at $10 per share. If the stock was no-par value stock, which of the following will be part of the journal entry to record the issuance?

Back 16

credit to Common Stock for $6,000
The journal entry will increase the cash account for the total issue price and increase the common stock account for the same amount.
Debit to Cash = 600 × $10 = $6,000
Credit to Common stock = 600 × $10 = $6,000

Front 17

the Streetaddress13th Street Grill issued 10,000 of $1 par value common stock for $5 per share. Which of the following will be part of the journal entry to record the issuance?

Back 17

A credit of $10,000 to Common Stock
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 = 10,000 × $5 = $50,000
Credit to Common stock = 10,000 × $1 = $10,000
Credit to Paid-in capital in excess of par value = 10,000 × ($5 - $1) = $40,000
Determine the amount which will be recorded as capital and the amount which will be recorded as excess over par.

Front 18

Dynatech issues 1,000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, which accounts are credited?

Back 18

Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000
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 = 1,000 × $12 = $12,000
Credit to Common stock = 1,000 × $10 = $10,000
Credit to Paid-in capital in excess of par value = 1,000 × ($12 - $10) = $2,000

Front 19

When treasury stock is purchased, the number of outstanding shares decreases.

Back 19

True;Treasury stock will reduce the number of shares outstanding. There is no effect on the number of shares issued.

Front 20

For what reason might a company acquire treasury stock?

Back 20

To reissue the shares to officers and employees under bonus and stock compensation plans
This is one of the reasons why treasury stock is purchased, but it’s not the only reason.

Front 21

hich one of the following decreases when a corporation purchases treasury stock?

Back 21

Outstanding shares
outstanding shares decreases when treasury stock is purchased.

Front 22

What method is normally used to account for treasury stock?

Back 22

Cost method
reasury stock is normally accounted for using the cost method.

Front 23

If 1,000 shares of $5 par common stock are reacquired by a corporation for $12 a share, by how much will total stockholders’ equity be reduced?

Back 23

$12,000
Stockholders’ equity is reduced by the cost of acquiring the treasury stock: 1,000 shares × $12 = $12,000.

Front 24

A corporation sold 1,000 shares of its $2.00 par value common stock for $10.00 per share and later repurchased 100 of those shares for $12.00 per share. Which of the following will be debited to record the repurchase of the 100 shares?

Back 24

Treasury Stock for $1,200
he journal entry will increase the treasury stock account (a contra stockholders’ equity account) and will decrease the cash account for the total cost to acquire.

Front 25

Which of the following increases when a corporation purchases treasury stock?

Back 25

Number of treasury shares
Treasury shares increase when treasury stock is purchased.

Front 26

A cumulative dividend feature means that preferred stockholders must be paid only current-year dividends before common stockholders receive dividends.

Back 26

false. A cumulative dividend feature means that preferred stockholders must be paid current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends.

Front 27

Dividends in arrears are reported as a current liability on the balance sheet.

Back 27

false;No liability is recorded for undeclared dividends in arrears because only declared dividends are a legal obligation.

Front 28

A corporation has cumulative preferred stock on which it pays dividends of $20,000 per year. The dividends are in arrears for two years. If the corporation plans to distribute $90,000 as dividends in the current year, how much will the common stockholders receive?

Back 28

$30,000
Preferred stockholders receive an allocation for each of the past two years and an allocation for the current year. The balance remaining goes to the common stockholders.

Preferred dividends in arrears for two years ($20,000 × 2)
$40,000
Preferred for current year
20,000
Total dividends to preferred stockholders
$60,000
Total dividends available
(90,000)
Dividends available to common stockholders
$30,000
First calculate the total preferred dividends owed; then, compare this amount to total amount available for dividends.

Front 29

Which one of the following statements is incorrect?

Back 29

Dividends may be paid on common stock while dividends are in arrears on preferred stock.
Dividends may not be paid on common stock if preferred dividends are in arrears.

true--
Dividends in arrears on preferred are not considered a liability.

When preferred stock is noncumulative, any dividend passed in a year is lost forever.

Dividends cannot be paid on common stock while any dividend on preferred stock is in arrears

Front 30

Which one of the following is not a right of preferred stockholders?

Back 30

Priority voting rights
Preferred stockholders usually have no voting rights.

Front 31

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

Back 31

Cumulative dividends

All of the answer choices are correct

Preference to assets in the event of liquidation

Dividend preference
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.

Front 32

M-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2014. No dividends were declared in 2012 or 2013. If M-Bot wants to pay $375,000 of dividends in 2014, how much will common stockholders receive?

Back 32

$135,000
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 × 8% × $100 = $80,000

Preferred dividends in arrears for two years ($80,000 × 2)
$160,000
Preferred for current year
80,000
Total dividends to preferred stockholders
$240,000
Total dividends available
(375,000)
Dividends available to common stockholders
$135,000
Common stockholders can only receive dividends after current year and dividends in arrears to preferred stockholders have been paid.

Front 33

How are dividends in arrears reported in the financial statements?

Back 33

In a footnote
Dividends in arrears are not a liability until the board of directors declares the dividends, nor are they an expense. They are disclosed in a footnote.

Front 34

No journal entry is required on the dividend record date

Back 34

True;here is a memo entry documenting the action.

Front 35

When stock dividends are declared and issued, total stockholders’ equity increases.

Back 35

false;hen stock dividends are declared and issued, total stockholders’ equity remains the same.

Front 36

On which date are entries for cash dividends required

Back 36

Declaration date and the payment date
Entries for cash dividends are required on the declaration date and the payment date, but not on the record date.

Front 37

Which statement about stock dividends is true?

Back 37

A stock dividend has no effect on total stockholders’ equity.
A stock dividend moves amounts from retained earnings to paid-in capital and does not affect the total stockholders’ equity amount. Total stockholders’ equity stays the same as a result of stock dividends.

Front 38

Raptor Inc. has retained earnings of $500,000 and total stockholders’ equity of $2,000,000. It has 100,000 shares of $8 par value common stock outstanding, which is currently selling for $30 per share. What will occur is Raptor declares a 10% stock dividend on its common stock?

Back 38

retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000.
A 10% stock dividend will increase the number of shares issued by 10,000 (100,000 × 10%). At a market price of $30 per share, total paid-in capital will increase by $300,000 (10,000 shares × $30/share) and retained earnings will decrease by that same amount.
First determine number of shares to be issued as stock dividend; then, determine value of shares and accounts impacted by issuance of stock.

Front 39

Which of the following will increase the paid-in capital section of the balance sheet?

Back 39

Stock dividend
A stock dividend causes retained earnings to decrease and total paid-in capital to increase.

Front 40

Dehesa, Inc. has 8,000 shares of 5%, $50 par, cumulative preferred stock and 50,000 shares of $3 par common stock outstanding. No dividends were declared last year, However, the board of directors just declared a $50,000 dividend this year to be paid in 10 days. What amount of the total dividend will be paid to common stockholders?

Back 40

$10,000
Before the common stockholders receive any dividends, preferred dividends should first be distributed for the dividends in arrears in the prior year and the current year.
Total dividend = 8,000 × 5% × $50 = $20,000/year

Preferred dividends in arrears for one year $20,000
Preferred for current year
20,000
Total dividends to preferred stockholders
40,000
Total dividends available
(50,000)
Dividends available to common stockholders
$10,000
First, determine current year’s and dividends in arrears for preferred stockholders; then, by comparison to cash available for dividends, determine what is available to common stockholders.

Front 41

Ramona, Inc. has 2,000 shares of 5%, $100 par, cumulative preferred stock and 80,000 shares of $4 par common stock outstanding. Last year the board of directors declared and paid an $8,000 dividend. This year the dividend declared and paid was $15,000. What amount of this dividend will be paid to the preferred stockholders?

Back 41

$12,000
Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the prior year and the current year.
Total dividend = 2,000 × 5% × $100 = $10,000

Preferred dividends in arrears for prior years ($10,000 - $8,000)
$2,000
Preferred dividends for current year 10,000
Total dividends to preferred stockholders
$12,000
To determine dividend payment to preferred shareholders, calculate dividends in arrears, if any and add to current year’s dividends.

Front 42

Vista, Inc. has 300,000 shares of common stock outstanding. A 30% stock dividend was declared and issued. How many shares are outstanding after the stock dividend?

Back 42

390,000
The number of outstanding shares is multiplied by the percentage of the stock dividend to get the total new shares to be issued. The new shares plus the original shares outstanding are then added together:
300,000 + (300,000 × 30%) = 390,000 shares
To determine the number of dividend shares, apply the stock dividend percentage to the number of outstanding shares.

Front 43

A corporation is authorized to sell 1,000,000 shares of common stock. Today there are 400,000 shares outstanding, and the board of directors declares a 10% stock dividend. How many shares will be issued as a stock dividend?

Back 43

40,000
This number of outstanding shares is multiplied by the percentage of the stock dividend to get the total new shares to be issued. 400,000 shares outstanding × 10% = 40,000 new shares to be issued
Dividends shares are issued based on the number of shares outstanding.

Front 44

Dehesa, Inc. has 8,000 shares of 5%, $15 par, cumulative preferred stock and 50,000 shares of $3 par common stock outstanding. No dividends were declared last year. However, the board of directors just declared a $34,000 dividend this year. What amount of the total dividend will be paid to common stockholders?

Back 44

$22,000
Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the year in arrears and the current year.
Total dividend = 8,000 × 5% × $15 = $6,000

Preferred dividends in arrears for prior year $6,000
Preferred dividends for current year 6,000
Total dividends to preferred stockholders
12,000
Total dividends available (34,000)
Dividends available to common stockholders $22,000

Common stockholders receive dividends only after preferred stockholders have been paid all dividends in arrears plus current dividends.

Front 45

If a corporation has incurred a net loss, which account will it affect?

Back 45

Debited to Retained Earnings in a closing entry
A net loss reduces Retained Earnings with a debit entry. It is never closed to a paid-in capital account.

Front 46

Which one of the following is not true concerning a retained earnings restriction?

Back 46

It is reported as a loss on the income statement.
Retained earnings restrictions do not affect the income statement.

Front 47

Which of the following does not affect retained earnings?

Back 47

Additional investment by stockholders
Additional investments by stockholders have no impact on retained earnings.

Front 48

Which one of the following is not part of ‘capital stock’ in the balance sheet?

Back 48

Paid-in capital in excess of par value-common stock

The capital stock section of the balance sheet consists of preferred and common stock. Any stock accounts that are in excess of the par or stated value are included in the additional paid-in capital section.

Front 49

How is common stock listed in the stockholders’ equity section of the balance sheet?

Back 49

As part of paid-in capital
Paid-in capital includes all stock accounts and additional paid-in capital accounts.

Front 50

In the stockholders’ equity section of the balance sheet, from what is the cost of treasury stock deducted?

Back 50

Total paid-in capital and retained earnings
Treasury stock is deducted from total paid-in capital and retained earnings to arrive at total stockholders’ equity.

Front 51

A corporation 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?

Back 51

$545,000
Retained earnings - treasury stock + paid-in capital in excess of par value + common stock = total stockholders’ equity:
$300,000 - $10,000 + $55,000 + $200,000 = $545,000
Total Stockholders’ Equity consists of two sections: Paid in Capital and Retained Earnings.

Front 52

A corporation 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?

Back 52

$845,000
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
Total Stockholders’ Equity consists of two sections: Paid in Capital and Retained Earnings.

Front 53

Consider the following data for a corporation:

Net income $800,000
Preferred stock dividends $50,000
Market price per share of stock $25
Average common stockholders’ equity $4,000,000
Cash dividends declared on common stock $20,000

What is the payout ratio?

Back 53

2.5%
The payout ratio is cash dividends declared to common stockholders divided by net income: $20,000/$800,000 = 2.5%

Front 54

Consider the following data for a corporation:

Net income $800,000
Preferred stock dividends $50,000
Market price per share of stock $25
Average common stockholders’ equity $4,000,000
Cash dividends declared on common stock $20,000

What is the return on common stockholders’ equity?

Back 54

18.75%
Net income less preferred stock dividends divided by the average common stockholders’ equity equals return on common stockholders’ equity. ($800,000 - $50,000)/$4,000,000 = 18.75%.
This ratio measures profitability from the common stockholders’ point of view.

Front 55

Jaylo Inc. had net income of $500,000, net sales of $10,000,000 and paid cash dividends of $200,000 to the common stockholders. How much is Jaylo’s payout ratio?

Back 55

40%
The payout ratio is computed by dividing total cash dividends declared to common stockholders by net income: $200,000/$500,000 = 40%
Payout ratio indicates portion of net income that is paid out for dividends to common stockholders.

Front 56

Which of the following does not increase the return on common stockholders’ equity?

Back 56

an increase in the company’s stock price
An increase in the company’s stock price has no effect on the return on common stockholders’ equity
To determine the impact of each item, recall the formula for calculating return on common stockholders’ equity.

Front 57

Roger is nearing retirement and would like to invest in a stock that will provide a good steady income flow. Which of the following is an important feature that Roger should require for the stock he selects?

Back 57

High dividend payout

Front 58

Rynadune Inc. reported net income of $186,000 during 2014 and paid dividends of $26,000 on common stock. It also paid dividends on its 10,000 shares of 6%, $100 par value, noncumulative preferred stock. Common stockholders’ equity was $1,200,000 on January 1, 2014, and $1,600,000 on December 31, 2014. How much is the company’s return on common stockholders’ equity for 2014?

Back 58

9.0%
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 × $100/share × 6%)] ÷ [($1,200,000 + $1,600,000) ÷ 2] = 9%.

Recall the formula for calculating return on stockholders’ equity.

Front 59

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

Back 59

The purchase of treasury stock
The purchase of treasury stock reduces the number of shares outstanding, which is the denominator of EPS. With a smaller denominator, earnings per share is larger.

To determine the impact of each item on earnings per share, recall the formula for calculating earnings per share.

Front 60

When a stock dividend is declared, which of the following accounts is debited?

Back 60

Stock Dividends
When a stock dividend is declared, there will be a debit to Stock Dividends and a credit to both Common Stock Dividends Distributable and Paid-in Capital in Excess of Par Value.
Recall the journal entry that would be recorded on the date of declaration.

Front 61

Weeds Inc. has a balance of $10,000,000 in retained earnings and declares a 5% stock dividend on its 1,000,000 shares of $5 par value common stock. The current market value of the stock is $25 per share. What is the entry to record this transaction at the declaration date?

Back 61

Stock Dividends 1,250,000
Common Stock Dividends Distributable 250,000
Paid-in Capital in Excess of Par Value 1,000,000

The number of shares to be issued is the stock dividend percentage times the number of shares outstanding. The number of shares to be issued is multiplied by the market price of the stock and debited to Retained Earnings. Common Stock Dividends Distributable is credited for the number of shares times the par value of the stock.
Paid-in Capital in Excess of Par Value is credited for the balance.
First, determine the value of stock dividends; then, recall the journal entry recorded on date of declaration.