Exam 13: Accounting for Corporations

In recent years,Redbird Corporation,a small manufacturer of jet skis for the leisure industry,has followed the practice of issuing a 10 percent stock dividend annually.Although the company's net income has been almost $4 million in each of the past three years,retained earnings have declined from about $10 million to about $6 million.What is the probable motivation for management's decision to issue an annual 10 percent stock dividend? What is the most likely explanation for the decrease in retained earnings? Given your explanation,would stockholders' equity also decrease by a like amount?

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Question 1

Correct Answer:

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Redbird's management probably has several reasons for issuing a stock dividend.An important one is undoubtedly the desire to give stockholders some evidence of the company's success without using cash.This approach conserves cash for the company's growing operations.It is also likely that management wants to communicate that the earnings represented by the stock dividend are now part of the permanent capital of the company.When the stock dividend is issued,an amount is transferred from retained earnings to contributed capital.This explains why retained earnings have decreased by $4 million during a period in which the company has earned $12 million.Stockholders' equity during this period would have increased.Management may also want to reduce the market price of the stock by increasing the number of shares outstanding through these nontaxable distributions to stockholders.

When the dividends yield is relatively low,investors must expect some of their return to come from increases in the price of the shares.

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Question 2

Correct Answer:

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True

When the date of declaration and the payment date occur in the same period,the amount of dividends shown on the statement of stockholders' equity and on the statement of cash flows will be equal.

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Question 3

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True

Once an owner of convertible preferred stock has converted to common,he or she cannot convert back to preferred.

(True/False)

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Question 4

A statement of stockholders' equity can take the place of a statement of retained earnings.

(True/False)

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Question 5

Use the following information to answer the question below. When Langston Corporation was formed on January 1,20x5,the corporate charter provided for 100,000 shares of $10 par value common stock.The following transactions were among those engaged in by the corporation during its first month of operation: 1)The corporation issued 400 shares of stock to its lawyer in full payment of the $10,000 bill for assisting the company in drawing up its articles of incorporation and filing the proper papers with the state agency. 2)The company issued 16,000 shares of stock at a price of $50 per share. 3)The company issued 14,000 shares of stock in exchange for equipment that had a fair market value of $320,000. -The entry to record transaction 3 is:

(Multiple Choice)

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Question 6

Which of the following would not affect the balance of the Retained Earnings account?

(Multiple Choice)

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Question 7

Which of the following is a correct statement relating to the concept of mutual agency and the corporate form of business?

(Multiple Choice)

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Question 8

Dividends in arrears pertain only to cumulative preferred stock.

(True/False)

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Question 9

Use the following information to answer the question below. The following transactions involving Cactus Wren Corporation occurred during the year: Apr. 1 $\quad$ Purchased 2,000 shares of its own preferred stock for $20, the current market price. This is the first transaction involving its own stock engaged in by the company. May 3 $\quad$ Sold 400 of the shares purchased on April 1 for $25 per share. June 5 $\quad$ Retired 600 of the shares purchased on April 1. The original issue price was $10. The par value of the stock is $5. -The entry to record the April 1 transaction is :

(Multiple Choice)

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Question 10

Which of the following is involved in assisting a corporation with its initial public offering (IPO)?

(Multiple Choice)

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Question 11

Describe at least three reasons why a corporation would want to buy back its own stock.

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Question 12

The date on a statement of stockholders' equity is for a specific point in time.

(True/False)

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Question 13

A company purchases 600 shares of its $100 par value common stock at $110 per share.It then reissues 100 shares at $114 per share.The entry upon reissue of the stock is

(Multiple Choice)

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Question 14

When treasury stock is sold at a price below its cost,the entry to record the sale has the effect of reducing total stockholders' equity.

(True/False)

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Question 15

When no-par common stock has a stated value,the stated value of the shares issued normally is considered the legal capital of the corporation.

(True/False)

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Question 16

If a corporation has issued common stock at various prices that exceed par value,legal capital will be made up of the

(Multiple Choice)

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Question 17

On May 1,20x5,Ironwood Corporation had 200,000 shares of $10 par value common stock outstanding with a market value of $16 per share.On May 2,20x5,Ironwood announced a 4-for-1 stock split.After the split,the par value of the stock

(Multiple Choice)

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Question 18

Which of the following statements is not true about a 2-for-1 stock split?

(Multiple Choice)

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Question 19

A company purchases 800 shares of its $50 par value common stock at $55 per share.It then reissues 120 shares at $58 per share.The entry upon reissue of the stock is :

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Question 20

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Exam 13: Accounting for Corporations

When the dividends yield is relatively low,investors must expect some of their return to come from increases in the price of the shares.

When the date of declaration and the payment date occur in the same period,the amount of dividends shown on the statement of stockholders' equity and on the statement of cash flows will be equal.

Once an owner of convertible preferred stock has converted to common,he or she cannot convert back to preferred.

A statement of stockholders' equity can take the place of a statement of retained earnings.

Which of the following would not affect the balance of the Retained Earnings account?

Which of the following is a correct statement relating to the concept of mutual agency and the corporate form of business?

Dividends in arrears pertain only to cumulative preferred stock.

Which of the following is involved in assisting a corporation with its initial public offering (IPO)?

Describe at least three reasons why a corporation would want to buy back its own stock.

The date on a statement of stockholders' equity is for a specific point in time.

A company purchases 600 shares of its $100 par value common stock at $110 per share.It then reissues 100 shares at $114 per share.The entry upon reissue of the stock is

When treasury stock is sold at a price below its cost,the entry to record the sale has the effect of reducing total stockholders' equity.

When no-par common stock has a stated value,the stated value of the shares issued normally is considered the legal capital of the corporation.

If a corporation has issued common stock at various prices that exceed par value,legal capital will be made up of the

On May 1,20x5,Ironwood Corporation had 200,000 shares of $10 par value common stock outstanding with a market value of $16 per share.On May 2,20x5,Ironwood announced a 4-for-1 stock split.After the split,the par value of the stock

Which of the following statements is not true about a 2-for-1 stock split?

A company purchases 800 shares of its $50 par value common stock at $55 per share.It then reissues 120 shares at $58 per share.The entry upon reissue of the stock is :

Accounting Principles and the Financial Statements

Analyzing and Recording Business Transactions

Adjusting the Accounts

Completing the Accounting Cycle

Foundations of Financial Reporting and the Classified Balance Sheet

Accounting for Merchandising Operations

Inventories

Cash and Internal Control

Receivables

Long -Term Assets

Current Liabilities and Fair Value Accounting

Accounting for Partnerships

Long Term Liabilities

The Statement of Cash Flows

Financial Statement Analysis

Managerial Accounting and Cost Concepts

Costing Systems: Job Order Costing

Costing Systems Process Costing

Value-Based Systems: Activity-Based Costing and Lean Accounting

Cost-Volume-Profit Analysis

The Budgeting Process

Flexible Budgets and Performance Analysis

Standard Costing and Variance Analysis

Short-Run Decision Analysis and Capital Budgeting

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