Cake 15

Front 1

What are the basic rights of stockholders

Back 1

to share proportionately: (1) in profits, (2) in management (the right to vote for directors), (3) in corporate assets upon liquidation, and (4) in any new issues of stock of the same class (preemptive right).

Front 2

Why is preemptive right important

Back 2

protects existing share holders from dilution of the ownership share in the event the corporation issues new shares.

Front 3

What is the difference between common and preferred stock

Back 3

Preferred stock commonly has preference to dividends in the form of a fixed dividend rate and a preference over common stock to remaining corporate assets in the event of liquidation. Preferred stock usually does not give the holder the right to share in the management of the company. Common stock is the residual security possessing the greater risk of loss and the greater potential for gain; it is guaranteed neither dividends nor assets upon dissolution but it generally controls the anagement.

Front 4

What is the difference between paid in capital and retained earnings, why is it important

Back 4

The distinction between paid-in capital and retained earnings is important for both legal and economic points of view. Legally, dividends can be declared out of retained earnings in all states, but in many states dividends cannot be declared out of paid-in capital. Economically, management, stockholders, and others look to earnings for the continued existence and growthof the corporation.

Front 5

What is authorized capital stock

Back 5

—the total number of shares authorized by the state of incorporation for issuance.

Front 6

What is unissued capital stock

Back 6

the total number of shares authorized but not issued.

Front 7

What is issued capital stock

Back 7

the total number of shares issued (distributed to stockholders).

Front 8

What is outstanding capital stock

Back 8

the total number of shares issued and still in the hands of stockholders (issued less treasury stock).

Front 9

What is treasury stock

Back 9

shares of stock issued and repurchased by the issuing corporation but not retired.

Front 10

What is par value, and why is it important?

Back 10

Par value is an arbitrary, fixed per share amount assigned to a stock by the incorporators of the company and recognized by the state of incorporation as the amount that must be paid in for each share if the stock is to be fully paid when issued. It establishes the maximum responsibility of a stockholder in the event of insolvency or other involuntary dissolution.

Front 11

How do you account for the issuance for cash of no-par value common stock at a price in excess of the stated value of the common stock

Back 11

1. Cash is debited for the proceeds from the issuance of the common stock.
2. Common Stock is credited for the stated value of the common stock.
3. Additional Paid-in Capital is credited for the excess of the proceeds from the issuance of the common stock over its stated value.

Front 12

What is the proportinal method for allocating the proceeds of lump sum sales of capital stock

Back 12

The proportional method is used to allocate the lump sum received on sales of two or more classes of securities when the fair market value or other sound basis for determining relative value is available for each class of security.

Front 13

What is the incremental method of allocating the proceeds of lump sum sales of capital stock

Back 13

The value of the securities is used for those classes that are known and the remainder is allocated to the class for which the value is not known.

Front 14

What are the different bases for stock valuation when assets other than cash are received for issued shares of stock

Back 14

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 either their fair market value or the fair market value of the stock issued, whichever is more clearly determinable. If neither is readily determinable, the
value to be assigned is generally established by the board of directors.

Front 15

Explain how underwriting costs and accounting and legal fees associated with the issuance of stock should be recorded

Back 15

The direct costs of issuing stock, such as underwriting costs, accounting and legal fees, printing costs, and taxes, should be reported as a reduction of the amounts paid in. Issue costs are therefore debited to Additional Paid-in Capital because they are unrelated to corporate operations.

Front 16

For what reasons might a corporation purchase its own stock

Back 16

(1) to provide tax-efficient distributions of excess cash to shareholders, (2) to increase earnings per share and return on equity, (3) to provide stock for employee stock compensation contracts, (4) to thwart takeover attempts or reduce the number of stockholders, (5) to make a market in the company’s stock, and (6) to contract the operations of the business.

Front 17

Why shouldn't treasury stock be classified as an asset

Back 17

Treasury stock should not be classified as an asset since a corporation cannot own itself.

Front 18

How should the gain or loss on sale of treasury stock be treated

Back 18

The “gain” or “loss” on sale of treasury stock should not be treated as additions to or deductions from income. If treasury stock is carried in the accounts at cost, these so-called gains or losses arise when the treasury stock is sold. These “gains” or “losses” should be considered as additions to or reductions of paid-in capital. In some instances, the “loss” should be charged to Retained Earnings. “Gains” or “losses” arising from treasury stock transactions are not included as a component of net income since dealings in treasury stock represent capital transactions.

Front 19

Should dividends on treasury stock be treated as income

Back 19

Dividends on treasury stock should never be included as income, but should be credited directly to retained earnings, against which they were incorrectly charged. Since treasury stock cannot be considered an asset, dividends on treasury stock are not properly included in net income.

Front 20

What is meant by the term participating preferred stock

Back 20

If the security is partially participating, it means that in addition to the specified fixed dividend the security may participate with the common stock in dividends up to a certain stated rate or amount.

Front 21

What is a nonparticipating preferred stock

Back 21

Nonparticipating means the security holder is entitled to no more than the specified fixed dividend

Front 22

What is a fully participating preferred stock

Back 22

A fully participating security shares pro rata with the common stock dividends declared without limitation

Front 23

What is a cumulative stock?

Back 23

Cumulative means dividends not paid in any year must be made up in a later year before any profits can be distributed to common stockholders. Any dividends not paid on cumulative preferred stock constitute a dividend in arrears. A dividend in arrears is not a liability until the board of directors declares a dividend.

Front 24

Is a dividend in arrears considered a liability?

Back 24

A dividend in arrears is not a liability until the board of directors declares a dividend.

Front 25

Where in the financial statements is preferred stock generally reported

Back 25

Preferred stock is generally reported at par value as the first item in the stockholders’ equity section of a company’s balance sheet. Any excess over par value is reported as part of additional paid-in capital.

Front 26

What are the possible sources of additional paid in capital

Back 26

(1) premiums on stock issued, (2) sale of treasury stock above cost, (3) recapitalizations or revisions in the capital structure, (4) assessments on stockholders, (5) conversion of convertible bonds or preferred stock, and (6) declaration of a small stock dividend.

Front 27

How should common stock be classified in the stockholder's equity section?

Back 27

Paid-in capital—capital stock

Front 28

How should retained earnings be classified in the stockholder's equity section?

Back 28

Retained earnings

Front 29

How should Paid in capital in excess of par be classified in the stockholder's equity section?

Back 29

Paid-in capital—additional paid-in capital

Front 30

How should Treasury Stock be classified in the stockholder's equity section?

Back 30

Deducted from total paid-in capital and
retained earnings

Front 31

How should Paid in capital from Treasury stock be classified in the stockholder's equity section

Back 31

Paid-in capital—additional paid-in capital

Front 32

How should Paid in capital in excess of stated value be classified in the stockholder's equity section

Back 32

Paid-in capital—additional paid-in capital

Front 33

How should preferred stock be classified in the stockholders equity section

Back 33

Paid-in capital—capital stock

Front 34

The dividend policy of a company is influenced by

Back 34

(1) the availability of cash, (2) the stability of earnings, (3) current earnings, (4) prospective earnings, (5) the existence or absence of contractual restrictions on working capital or retained earnings, and (6) a retained earnings balance.

Front 35

What are teh principal considerations of a board of directors in making decisions involving dividend declarations

Back 35

In declaring a dividend, the board of directors must consider the condition of the corporation such that a dividend is (1) legally permissible and (2) economically sound.

Front 36

The considerations of the board of directors in considering the legality of a dividend is

Back 36

1. Retained earnings, unless legally encumbered in some manner, is usually the correct basis for dividend distribution.
2. Revaluation capital is seldom the correct basis for dividends (except possibly stock dividends).
3. In some states, additional paid-in capital may be used for dividends, although such dividends may be limited to preferred stock.
4. Deficits in retained earnings and debits in paid-in capital accounts must be restored before payment of any dividends.
5. Dividends in some states may not reduce retained earnings below the cost of treasury stock held.

Front 37

The considerations of a board of directors in considering the economic soundess of dividends are

Back 37

(1) the availability (liquidity) of assets for distribution; (2) agreements with creditors; (3) the effect of a dividend on investor perceptions (e.g. maintaining an expected “pay-out ratio”); and (4) the size of the dividend with respect to the possibility of paying dividends in future bad years. In addition, the ability to expand or replace existing facilities should be considered.

Front 38

Are dividends paid out of retained earnings

Back 38

Dividends, at least cash dividends, are paid out of working capital. A balance must exist in retained earnings to permit a legal distribution of profits, but having a balance in retained earnings does not ensure the ability to pay a dividend if the cash situation does not permit it.

Front 39

a cash dividend is

Back 39

a distribution in cash

Front 40

a property division is

Back 40

a distribution in assets
other than cash.

Front 41

a liquidating dividend is

Back 41

Any dividend not based on retained earnings

Front 42

A stock dividend is

Back 42

the issuance of additional shares of the corporation’s stock in a nonreciprocal exchange involving existing stockholders with no change in the par or stated value.

Front 43

What is the accounting entry for stock dividends

Back 43

A stock dividend results in the transfer from retained earnings to paid-in capital of an amount equal to the market value of each share (if the dividend is less than 20-25%) or the par value of each share (if the dividend is greater than 20-25%).

Front 44

WHat is the accounting entry for stock split

Back 44

No formal journal entries are required for a stock split, but a notation in the ledger accounts would be appropriate to show that the par value of the shares has changed.

Front 45

For what reason might a company restrict a portion of its retained earnings

Back 45

Retained earnings are restricted because of legal or contractual restrictions, or the necessity to protect the working capital position.

Front 46

How are restrictions of retained earnings reported

Back 46

Restrictions are best disclosed in a note to the financial statements. This allows a more complete explanation of the restriction.

Front 47

The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.

Back 47

c

Front 48

The pre-emptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.

Back 48

b

Front 49

The pre-emptive right enables a stockholder to
a. share proportionately in any new issues of stock of the same class.
b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. receive the same amount of dividends on a percentage basis as the preferred
stockholders.

Back 49

a

Front 50

Total stockholders' equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.

Back 50

c

Front 51

A primary source of stockholders' equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.

Back 51

d

Front 52

Stockholders' equity is generally classified into two major categories:
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.

Back 52

d

Front 53

The accounting problem in a lump sum issuance is the allocation of proceeds between the
classes of securities. An acceptable method of allocation is the
a. pro forma method.
b. proportional method.
c. incremental method.
d. either the proportional method or the incremental method.

Back 53

d

Front 54

When a corporation issues its capital stock in payment for services, the least appropriate
basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.

Back 54

b

Front 55

Direct costs incurred to sell stock such as underwriting costs should be accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset.
a. 1
b. 2
c. 3
d. 1 or 3

Back 55

a

Front 56

When treasury stock is purchased for more than the par value of the stock and the cost
method is used to account for treasury stock, what account(s) should be debited?
a. Treasury stock for the par value and paid-in capital in excess of par for the excess of
the purchase price over the par value.
b. Paid-in capital in excess of par for the purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained earnings for the excess of the purchase
price over the par value.

Back 56

c

Front 57

“Gains" on sales of treasury stock (using the cost method) should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.

Back 57

a

Front 58

Wilson Corp. purchased its own par value stock on January 1, 2004 for $20,000 and
debited the treasury stock account for the purchase price. The stock was subsequently
sold for $12,000. The $8,000 difference between the cost and sales price should be
recorded as a deduction from
a. additional paid-in capital to the extent that previous net "gains" from sales of the same
class of stock are included therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as to whether or not there have been previous
net "gains" from sales of the same class of stock included therein.
c. retained earnings.
d. net income.

Back 58

a

Front 59

How should a "gain" from the sale of treasury stock be reflected when using the cost
method of recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an extraordinary item shown on the income statement.

Back 59

b

Front 60

Which of the following best describes a possible result of treasury stock transactions by a
corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.

Back 60

c

Front 61

Which of the following features of preferred stock make the security more like debt than
an equity instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative

Back 61

c

Front 62

The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to the par value of the preferred stock.
b. requires that dividends not paid in any year must be made up in a later year before
dividends are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is equal to the par
value of common stock at which time it can be converted into common stock.
d. enables a preferred stockholder to accumulate dividends until they equal the par value
of the stock and receive the stock in place of the cash dividends.

Back 62

b

Front 63

A "secret reserve" will be created if
a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders' equity is overstated.

Back 63

b

Front 64

At the date of the financial statements, common stock shares issued would exceed
common stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.

Back 64

c

Front 65

An entry is not made on the
a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.

Back 65

b

Front 66

An entry is made on all of these dates.
20. Cash dividends are paid on the basis of the number of shares
a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.

Back 66

c

Front 67

Which of the following statements about property dividends is not true?
a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carrying value (book
value) of the nonmonetary assets transferred.
d. All of these statements are true.

Back 67

c

Front 68

Farmer Corporation owns 4,000,000 shares of stock in Baha Corporation. On December
31, 2003, Farmer distributed these shares of stock as a dividend to its stockholders. This
is an example of a
a. property dividend.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.

Back 68

a

Front 69

A dividend which is a return to stockholders of a portion of their original investments is a
a. liquidating dividend.
b. property dividend.
c. liability dividend.
d. participating dividend.

Back 69

a

Front 70

A mining company declared a liquidating dividend. The journal entry to record the
declaration must include a debit to
a. Retained Earnings.
b. a paid-in capital account.
c. Accumulated Depletion.
d. Accumulated Depreciation.

Back 70

b

Front 71

If management wishes to "capitalize" part of the earnings, it may issue a
a. cash dividend.
b. stock dividend.
c. property dividend.
d. liquidating dividend.

Back 71

b

Front 72

Which dividends do not reduce stockholders' equity?
a. Cash dividends
b. Stock dividends
c. Property dividends
d. Liquidating dividends

Back 72

b

Front 73

The declaration and issuance of a stock dividend larger than 25% of the shares previously
outstanding
a. increases common stock outstanding and increases total stockholders' equity.
b. decreases retained earnings but does not change total stockholders' equity.
c. may increase or decrease paid-in capital in excess of par but does not change total
stockholders' equity.
d. increases retained earnings and increases total stockholders' equity.

Back 73

b

Front 74

Pryor Corporation issued a 2-for-1 stock split of its common stock which had a par value
of $10 before and after the split. At what amount should retained earnings be capitalized
for the additional shares issued?
a. There should be no capitalization of retained earnings
b. Par value
c. Market value on the declaration date
d. Market value on the payment date

Back 74

b

Front 75

The issuer of a 5% common stock dividend to common stockholders preferably should
transfer from retained earnings to contributed capital an amount equal to the
a. market value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.

Back 75

a

Front 76

At the date of declaration of a small common stock dividend, the entry should not include
a. a credit to Common Stock Dividend Payable.
b. a credit to Paid-in Capital in Excess of Par.
c. a debit to Retained Earnings.
d. All of these are acceptable.

Back 76

a

Front 77

The balance in Common Stock Dividend Distributable should be reported as a(n)
a. deduction from common stock issued.
b. addition to capital stock.
c. current liability.
d. contra current asset.

Back 77

b

Front 78

A feature common to both stock splits and stock dividends is
a. a transfer to earned capital of a corporation.
b. that there is no effect on total stockholders' equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.

Back 78

b

Front 79

What effect does the issuance of a 2-for-1 stock split have on each of the following?
Par Value per Share Retained Earnings
a. No effect No effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease

Back 79

c

Front 80

Which one of the following disclosures should be made in the equity section of the
balance sheet, rather than in the notes to the financial statements?
a. Dividend preferences
b. Liquidation preferences
c. Call prices
d. Conversion or exercise prices

Back 80

b

Front 81

The rate of return on common stock equity is calculated by dividing
a. net income less preferred dividends by average common stockholders’ equity.
b. net income by average common stockholders’ equity.
c. net income less preferred dividends by ending common stockholders’ equity.
d. net income by ending common stockholders’ equity.

Back 81

a

Front 82

The payout ratio can be calculated by dividing
a. dividends per share by earnings per share.
b. cash dividends by net income less preferred dividends.
c. cash dividends by market price per share.
d. dividends per share by earnings per share and dividing cash dividends by net income
less preferred dividends.

Back 82

d

Front 83

Windsor Company has outstanding both common stock and nonparticipating, noncumulative
preferred stock. The liquidation value of the preferred is equal to its par value.
The book value per share of the common stock is unaffected by
a. the declaration of a stock dividend on preferred payable in preferred stock when the
market price of the preferred is equal to its par value.
b. the declaration of a stock dividend on common stock payable in common stock when
the market price of the common is equal to its par value.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2-for-1 split of the common stock.

Back 83

c

Front 84

Dividends are not paid on
a. noncumulative preferred stock.
b. nonparticipating preferred stock.
c. treasury common stock.
d. Dividends are paid on all of these.

Back 84

c

Front 85

Noncumulative preferred dividends in arrears
a. are not paid or disclosed.
b. must be paid before any other cash dividends can be distributed.
c. are disclosed as a liability until paid.
d. are paid to preferred stockholders

Back 85

a

Front 86

How should cumulative preferred dividends in arrears be shown in a corporation's
statement of financial position?
a. Note disclosure
b. Increase in stockholders' equity
c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within the year or
operating cycle, and increase in long-term liabilities for the balance

Back 86

a