Deck 8: Accounting for and Presentation of Stockholders Equity

Question 1

The declaration of a cash dividend by the directors results in:

A)a decrease in cash and a decrease in retained earnings.
B)a decrease in retained earnings and an increase in current liabilities.
C)a decrease in net income and a decrease in cash.
D)a decrease in net income and an increase in current liabilities.

Answer 1

B

Question 2

Factors that usually affect retained earnings directly include:

A)net income or net loss, and dividends.
B)restructuring charges and losses from discontinued operations.
C)stock dividends and gains or losses from the sale of treasury stock.
D)net income or net loss, and the issuance of stock at an amount in excess of par value.

Answer 2

A

Question 3

A stock dividend is similar to a cash dividend in that:

A)the stockholder's equity in the firm's net assets is reduced by each.
B)the stockholder's cash is increased by each.
C)the stockholder's equity in the firm's net assets is increased by each.
D)retained earnings and the amount of potential future dividends is reduced by each.

Answer 3

D

Question 4

Which of the following is one of the two generally practiced methods for electing corporate directors?

A)Democratic voting
B)Representative voting
C)Cumulative voting
D)Census voting

Question 5

The annual per share dividend requirement of a 6%, $100 par value preferred stock that was issued for $105 is:

A)$6.00
B)$6.38
C)$7.50
D)$10.00

Question 6

The dollar amount reported as common stock on the balance sheet of a corporation that has common stock with a par value is the number of shares:

A)issued, multiplied by the amount received per share.
B)outstanding, multiplied by the amount received per share.
C)issued, multiplied by the par value per share.
D)outstanding, multiplied by the par value per share.

Question 7

Which of the terms is not used to identify owners' equity or stockholders' equity?

A)Partner's capital
B)Proprietor's capital
C)Paid-in-capital and retained earnings
D)Additional-paid-in-retained earnings

Question 8

Additional paid-in capital is most likely to appear on the balance sheet of a corporation that:

A)has par value stock.
B)has no-par value stock.
C)has issued stock at different dates.
D)has issued stock dividends.

Question 9

Which of the following is not a stockholders' equity account?

A)Common stock
B)Retained earnings
C)Accumulated depreciation
D)Additional paid-in capital

Question 10

Which of the following is not usually a right or attribute of preferred stock?

A)Having a claim to dividends in excess of the annual dividend requirement if dividends on common stock exceed dividends on preferred stock.
B)Having a priority claim to dividends relative to the common stock's claim to dividends.
C)Having a priority claim in liquidation relative to the common stock's claim in liquidation.
D)Having a claim to dividends that is cumulative over time if the annual dividend requirement is not satisfied.

Question 11

Another term frequently used to describe stockholders' equity is:

A)net assets.
B)gross assets.
C)paid-in capital.
D)capital stock.

Question 12

Preferred stock is used much less than long-term debt in the capital structure of most industrial and merchandising companies principally because:

A)the preferred stock dividend requirement is a fixed claim against income, but interest on long-term debt is not a fixed amount.
B)preferred stock has a fixed liquidation or redemption value, but long-term debt does not have a fixed maturity value.
C)preferred stock may be convertible to common stock, but long-term debt cannot be convertible.
D)for income tax purposes, dividends paid on preferred stock are not deductible, but interest on long-term debt is deductible.

Question 13

The number of shares of a class of stock that are outstanding is:

A)the number of shares authorized minus the number of shares issued.
B)the number of shares authorized minus the number of shares held as treasury stock.
C)the number of shares issued minus the number of shares held as treasury stock.
D)the number of shares issued minus the number of shares owned by directors.

Question 14

When common stock has a par value:

A)the liability of the stockholders is limited to the par value.
B)there will probably be additional paid-in capital on the balance sheet.
C)the market value of the stock will be higher than if there is no par value.
D)the paid-in capital will equal the par value of the number of shares issued.

Question 15

In comparison to the stockholders' equity section of a corporation's balance sheet, owners' equity of a proprietorship or partnership:

A)normally does not make a distinction between invested capital and retained earnings.
B)normally uses "Capital" accounts for each individual owner, rather than a "Retained Earnings" account for all of the stockholders.
C)normally uses a "Drawings" account for each individual owner, rather than a "Dividends" account for all of the stockholders.
D)All of these answers are correct.

Question 16

In most states, par value of issued shares represents:

A)legal capital.
B)no par capital.
C)noncontrolling capital.
D)corporate capital.

Question 17

Which of the following is not a right or attribute of common stock ownership?

A)Electing directors
B)Liability limited to amount invested
C)Approving changes in corporate charter
D)Determining dividend policy

Question 18

If a common stock has no par value:

A)there is no way of determining the market value per share.
B)the stock must have a stated value.
C)there will not be any additional paid-in capital related to it.
D)the stockholders do not have a preemptive right.

Question 19

Retained earnings represents:

A)cash that is available for dividends.
B)the total net income of the firm since its beginning.
C)cumulative net income of the firm since its beginning that has not been distributed to its stockholders in the form of dividends.
D)net income plus gains (or minus losses)on treasury stock transactions.

Question 20

The term preemptive right pertains to which of the following?

A)The Board of Directors' rights in liquidation.
B)Present shareholders' right to purchase shares from any additional share issuances.
C)Present shareholders' right to purchase treasury shares when reissued.
D)Preferred stockholders' right to dividends.

Question 21

When a firm purchases its own shares as treasury stock:

A)total stockholders' equity is decreased.
B)total stockholders' equity is increased.
C)retained earnings is decreased.
D)paid-in capital is decreased.

Question 22

Assume that you own 1,500 shares of $10 par value common stock and the company has a 5-for-1 stock split when the market price per share is $30. How many shares of common stock will you own after the stock split?

A)1,500 shares, but they will be worth 5 times as much each.
B)300 shares.
C)7,500 shares.
D)1,500 shares but they will be worth 1/5 as much each.

Question 23

Springer Co.was incorporated on January 1, 2019, at which time 500,000 shares of $1 par value common stock were authorized, and 210,000 of these shares were issued for $9 per share.Net income for the year ended December 31, 2019, was $1,900,000.Springer Co.'s board of directors declared dividends of $1.40 per share of common stock on December 31, 2019, payable on January 27, 2020. The entry to record the issuance of common stock on January 1, 2019 is:

A) $$\begin{array} { | l | c | c | c | } \hline \text { Dr. } & \text { Cash } & 1,890,000 & \\\hline \mathrm { Cr } . & \text { Common Stock } & & 1,890,000 \\\hline\end{array}$$
B) $$\begin{array} { | l| l | r | r | } \hline \text { Dr. } & \text { Cash } & 1,890,000 & \\\hline \text { Cr. } & \text { Common Stock } & & 210,000 \\\hline \text { Cr. } & \text { Additional Paid-In Capital } & & 1,680,000 \\\hline\end{array}$$
C) $$\begin{array} { | r | l | c | c | } \hline \text { Dr. } & \text { Cash } & 1,900,000 & \\\hline \text { Cr. } & \text { Net Income } & & 1,900,000 \\\hline\end{array}$$
D) $$\begin{array} { | r | l | r | r | } \hline \text { Dr. } & \text { Cash } & 4,500,000 & \\\hline \text { Cr. } & \text { Common Stock } & & 500,000 \\\hline \text { Cr. } & \text { Additional Paid-In Capital } & & 4,000,000 \\\hline\end{array}$$

Question 24

When a company splits its common stock 3 for 1:

A)total paid-in capital increases by a factor of 3.
B)retained earnings is decreased by the market value of the shares issued.
C)the market value of the company's stock normally falls by two-thirds.
D)the stockholders are assured of receiving larger cash dividends.

Question 25

The dividend declaration date pertains to:

A)the date used to determine who receives dividends.
B)the date on which the board of directors declares it's going to liquidate the firm.
C)the date on which the board of directors declares a dividend.
D)the date a dividend is paid.

Question 26

"Accumulated other comprehensive income (loss)" includes each of the following items except:

A)cumulative foreign currency translation adjustments.
B)amounts received from the sale of additional common stock during the year.
C)unrealized gains or losses on available-for-sale investments.
D)gains on certain derivative instruments.

Question 27

In consolidated financial statements:

A)the parent's and subsidiary's financial statements are reported on a separate basis.
B)the parent's and subsidiary's financial statements are reported on a combined basis.
C)financial statements are reported on an industry-wide basis.
D)none of these answers are correct.

Question 28

Fred Sanford owns 112 shares of the Grady Corporation's stock.Grady announces a 3-for-2 stock split.How many shares will Fred have after this split?

A)356 shares
B)224 shares
C)168 shares
D)112 shares

Question 29

The noncurrent liability, Noncontrolling Interest, arises if:

A)a firm owns less than 50% of another entity.
B)a firm owns more than 50%, but less than 100%, of another entity.
C)a firm owns 100% of another entity.
D)noncontrolling Interest is accounted for as an equity item.

Question 30

"Accumulated other comprehensive income (loss)":

A)is a component of net income and reported on the income statement.
B)is a component of stockholders' equity and reported on the balance sheet.
C)includes a component that adjusts for the effects of treasury stock transactions.
D)is another name for the cumulative foreign currency translation adjustment.

Question 31

Springer Co.was incorporated on January 1, 2019, at which time 500,000 shares of $1 par value common stock were authorized, and 210,000 of these shares were issued for $9 per share.Net income for the year ended December 31, 2019, was $1,900,000.Springer Co.'s board of directors declared dividends of $1.40 per share of common stock on December 31, 2019, payable on January 27, 2020. The entry to record the payment of dividends on January 27, 2020 is:

A) $$\begin{array} { | r | c | c | c | } \hline \text { Dr. } & \text { Retained Earnings } & 294,000 & \\\hline \text { Cr. } & \text { Dividends Payable } & & 294,000 \\\hline\end{array}$$
B) $$\begin{array} { | r | l | c | c | } \hline \text { Dr. } & \text { Cash } & 294,000 & \\\hline \text { Cr. } & \text { Dividends Payable } & & 294,000 \\\hline\end{array}$$
C) $$\begin{array} { | r | l| c | c | } \hline \text { Dr. } & \text { Retained Earnings } & 294,000 & \\\hline \text { Cr. } & \text { Cash } & & 294,000 \\\hline\end{array}$$
D) $$\begin{array} { | r | l | c | c | } \hline \text { Dr. } & \text { Dividends Payable } & 294,000 & \\\hline \text { Cr. } & \text { Cash } & & 294,000 \\\hline\end{array}$$

Question 32

Springer Co.was incorporated on January 1, 2019, at which time 500,000 shares of $1 par value common stock were authorized, and 210,000 of these shares were issued for $9 per share.Net income for the year ended December 31, 2019, was $1,900,000.Springer Co.'s board of directors declared dividends of $1.40 per share of common stock on December 31, 2019, payable on January 27, 2020. The entry to record the declaration of dividends on December 31, 2019 is:

A) $$\begin{array} { | r | l | c | c | } \hline \text { Dr. } & \text { Retained Earnings } & 294,000 & \\\hline \text { Cr. } & \text { Dividends Payable } & & 294,000 \\\hline\end{array}$$
B) $$\begin{array} { | r | l | c | c | } \hline \text { Dr. } & \text { Cash } & 294,000 & \\\hline \text { Cr. } & \text { Dividends Payable } & & 294,000 \\\hline\end{array}$$
C) $$\begin{array} { | r | l | c | c | } \hline \text { Dr. } & \text { Retained Earnings } & 294,000 & \\\hline \text { Cr. } & \text { Cash } & & 294,000 \\\hline\end{array}$$
D) $$\begin{array} { | r | l | c | c | } \hline \text { Dr. } & \text { Dividends Payable } & 294,000 & \\\hline \text { Cr. } & \text { Cash } & & 294,000 \\\hline\end{array}$$

Question 33

The principal reason for a company having a common stock split is to:

A)increase the total cash dividends paid to stockholders.
B)capitalize retained earnings.
C)decrease total stockholders' equity.
D)decrease the market value per share of common stock.

Question 34

Grimes & Dotson Ltd.did not pay dividends on its 4.5%, $100 par value cumulative preferred stock during 2018 or 2019.Since 2016, 70,000 shares of this stock have been outstanding.Grimes & Dotson Ltd.has been profitable in 2020 and is considering a cash dividend on its common stock that would be payable in December 2020.The amount of dividends that would have to be paid on the preferred stock before a cash dividend could be paid to the common stockholders is:

A)$210,000.
B)$315,000.
C)$945,000.
D)$1,575,000.

Question 35

"Noncontrolling interest":

A)is a component of the parent company's net income and reported on the income statement.
B)is a component of stockholders' equity attributable to the parent company and reported on the balance sheet.
C)is the portion of equity in a subsidiary not attributable, directly or indirectly, to the parent company, and reported on the balance sheet within equity, but separate from the parent company's equity.
D)is not reported within the parent company's consolidated financial statements, but instead reported within the minority stockholders' financial statements.

Question 36

If a firm sells treasury stock for more than its cost:

A)a gain is recognized in the income statement.
B)retained earnings is increased.
C)additional paid-in capital is increased.
D)total stockholders' equity does not change.

Question 37

Braco has 80,000 shares of $100 par value common stock outstanding, and 20,000 shares in the treasury.Braco is located in a state that allows dividends on treasury stock.The number of additional shares that would be issued in a 5% stock dividend is:

A)1,000
B)2,000
C)4,000
D)5,000

Question 38

The statement of changes in retained earnings for the year shows:

A)the retained earnings balance at the beginning of the year.
B)amounts received from the sale of additional common stock during the year.
C)gains or losses from discontinued operations during the year.
D)the effect of a stock split during the year.

Question 39

Balance sheet disclosures for preferred stock include all of the following except:

A)the number of shares issued.
B)the liquidating or redemption value.
C)the credit or market value.
D)the number of shares authorized.

Question 40

When a stock dividend is declared and issued:

A)total paid-in capital does not change.
B)total stockholders' equity does not change.
C)retained earnings is normally decreased by the par value of the shares issued in the dividend.
D)total paid-in capital is decreased by the market value of the shares issued in the dividend.

Question 41

On March 4, 2019, Orpheus Inc.purchased 2,100 shares of its own $10 par value common stock in the market for $32 per share.On August 19, 2019, the company sold 1,600 of these shares in the open market at a price of $36 per share. The entry to record the sale of the treasury stock on August 19, 2019 is:

A) $$\begin{array} { | r | l| c | c | } \hline \text { Dr. } & \text { Cash } & 51,200 & \\\hline \text { Cr. } & \text { Treasury Stock } & & 51,200 \\\hline\end{array}$$
B) $$\begin{array} { | r | l | r | r | } \hline \text { Dr. } & \text { Cash } & 57,600 & \\\hline \text { Cr. } & \text { Treasury Stock } & & 51,200 \\\hline \mathrm { Cr } . & \text { Retained Earnings } & & 6,400 \\\hline\end{array}$$
C) $\begin{array}{|l|l|r|r|}\hline \text { Dr. } & \text { Cash } & 57,600 & \\\hline \mathrm{Cr} . & \text { Treasury Stock } & & 51,200 \\\hline \mathrm{Cr} . & \text { Additional Paid-In Capital } & & 6,400 \\\hline\end{array}$

D) $$\begin{array} { | r | l | c | c | } \hline \text { Dr. } & \text { Cash } & 57,600 & \\\hline \text { Cr. } & \text { Treasury Stock } & & 57,600 \\\hline\end{array}$$

Question 42

Assume that you own 1,500 shares of $10 par value common stock and the company has a 5-for-1 stock split when the market price per share is $30. What will probably happen to the market price per share of the stock and the par value per share of the stock?

A)Market price per share will be about $6 per share, and par value will be $2 per share.
B)Market price per share will be about $6 per share, and par value will be $50 per share.
C)Market price per share will be about $150 per share, and par value will be $2 per share.
D)Market price per share will be about $150 per share, and par value will be $50 per share.

Question 43

On March 22, 2019, Amelia, Inc., purchased 500 shares of its own common stock in the market for $21 per share.On May 19, 2019, the company sold 300 of these shares in the open market at a price of $24 per share.
Required:
Use the horizontal model (or write the entry)to show the effects on Amelia, Inc.'s financial statements of:
(a) The purchase of the treasury stock on March 22, 2019.
(b) The sale of the treasury stock on May 19,2019.

Question 44

Calculate the cash dividends required to be paid for each of the following preferred stock issuances:
$\begin{array}{l}\text { (a.) The semiannual dividend on } 11.5 \% \text { cumulative preferred, } \$ 100 \text { par value; } 6,000 \\\text { shares authorized, issued, and outstanding. } \\\text { (b.) The total dividends owed to preferred shareholders on } \$ 1.50 \text { annual cumulative } \\\text { preferred, } 100,000 \text { shares authorized, } 85,000 \text { shares issued, and } 81,350 \text { shares } \\\text { putstanding. The company did not pay dividends during the prior two years or } \\\text { during the current year. } \\\text { (c) The quarterly dividend on } 9.6 \% \text { cumulative preferred, } \$ 70 \text { stated value, } \$ 72 \\\text { liquidating value, } 20,000 \text { shares authorized, } 15,000 \text { shares issued and } \\\text { butstanding. No dividends in arrears. }\end{array}$

Question 45

On March 4, 2019, Orpheus Inc.purchased 2,100 shares of its own $10 par value common stock in the market for $32 per share.On August 19, 2019, the company sold 1,600 of these shares in the open market at a price of $36 per share. The entry to record the purchase of the treasury stock on March 4, 2019 is:

A) $$\begin{array} { | r | c | c | c | } \hline \text { Dr. } & \text { Treasury Stock } & 67,200 & \\\hline \text { Cr. } & \text { Cash } & & 67,200 \\\hline\end{array}$$
B) $$\begin{array} { | r | c | c | c | } \hline \text { Dr. } & \text { Common Stock } & 21,000 & \\\hline \text { Cr. } & \text { Cash } & & 21,000 \\\hline\end{array}$$
C) $$\begin{array} { | l | l | c | c | } \hline \text { Dr. } & \text { Common Stock } & 21,000 & \\\hline \text { Dr. } & \text { Treasury Stock } & 46,200 & \\\hline \text { Cr. } & \text { Cash } & & 67,200 \\\hline\end{array}$$
D) $$\begin{array} { | r | c | c | c | } \hline \text { Dr. } & \text { Treasury Stock } & 67,200 & \\\hline \text { Cr. } & \text { Retained Earnirgs } & & 67,200 \\\hline\end{array}$$

Question 46

Calculate the annual cash dividends required to be paid for each of the following preferred stock issuances:
(a.) $\$ 2.40$ cumulative preferred, no par value; 300,000 shares authorized, 235,000 shares issued, 14,000 shares held as treasury stock.
(b.) $10 \%, \$ 50$ par value preferred; 100,000 shares authorized, 62,000 shares issued and outstanding.
(c.) $13 \%$ cumulative preferred, $\$ 40$ stated value, $\$ 42$ liquidating value; 70,000 shares authorized, 46,000 shares issued, 44,000 shares outstanding.

Question 47

Using the column headings provided below, show the effect, if any, of the transaction on each financial statement category by indicating whether it is an addition (+)or subtraction (-)and by showing the amount in the appropriate column.For the treasury stock column, show the effects, if any, of the transaction on total stockholders' equity.Do not show items that affect net income in the retained earnings column.You should assume that the transactions occurred in the chronological sequence as indicated.
(1.) Issued 600 shares of $\$ 90$ par value preferred stock in excharne for land that had ari appraised value of $\$ 64,000$ .
(2.) Issued 35,000 shares of $20 par value common stock for $24 per share.
(3.) Purchased 7,600 shares of common stock for the treasury at $20 per share.
(4.) Sold 5,000 shares of treasury stock purchased in transaction #3 for $22 per share.
(5.) Declared a cash dividend of $\$ 2.80$ per share on the cornmon stock outstanding, to be paid early next year.
(6.) Declared and issued a $5 \%$ stock dividend on the common stock when the market price per share of common stock was $26. $$\begin{array} { | c | l | l | l | l | l | l | l | } \hline & \text { Cush } & \begin{array} { c } \text { Other } \\\text { Assets }\end{array} & \text { Liabilities } & \begin{array} { c } \text { Paid-in } \\\text { Capital }\end{array} & \begin{array} { c } \text { Retningd } \\\text { Earnings }\end{array} & \begin{array} { c } \text { Treasury } \\\text { Stock }\end{array} & \begin{array} { c } \text { Net } \\\text { Income }\end{array} \\\hline 1 . & & & & & & & \\\hline 2 . & & & & & & & \\\hline 3 . & & & & & & & \\\hline 4 . & & & & & & & \\\hline 5 . & & & & & & & \\\hline 6 . & & & & & & & \\\hline\end{array}$$

Question 48

The balance sheet caption for common stock is:
Common stock, $10 par value, 14,000,000 shares authorized, 11,400,000 shares issued, 11,000,000 shares outstanding.
(a.)Calculate the dollar amount that will be presented opposite of this caption.
(b.)Calculate the total amount of a cash dividend of $1.00 per share.
(c.)What accounts for the difference between issued shares and outstanding shares?

Question 49

The balance sheet caption for common stock is:
Common stock, no par value, 15,000,000 shares authorized, 9,200,000 shares issued, 8,900,000 shares outstanding $1,104,000,000
(a.)Calculate the average price at which the shares were issued.
(b.)If these shares had been assigned a stated value of $10 each, show how the above caption would be different.
(c.)Calculate the total amount of cash that would be paid to stockholders if a cash dividend of $1.50 per share were declared.

Question 50

Assume that you own 1,700 shares of $10 par value common stock and the company has a 2-for-1 stock split when the market price per share is $52.
Required:
(a.)How many shares of common stock will you own after the stock split?
(b.)What will probably happen to the market price per share of the stock?
(c.)What will probably happen to the par value per share of the stock?

Question 51

Using the column headings provided below, show the effect, if any, of the transaction on each financial statement category by indicating whether it is an addition (+)or subtraction (-)and by showing the amount in the appropriate column.For the treasury stock column, show the effects, if any, of the transaction on total stockholders' equity.Do not show items that affect net income in the retained earnings column.You should assume that the transactions occurred in the chronological sequence as indicated.
$\begin{array}{l}\text { (1.) Issued } 2,400 \text { shares of } \$ 60 \text { par value preferred stock in exchange for land and } \\\text { an existing building that had appraised values of } \$ 70,000 \text { and } \$ 100,000 \text {, } \\\text { respectively. } \\\text { (2.) Issued } 15,000 \text { shares of } \$ 10 \text { par value common stock for } \$ 24 \text { per share. } \\\text { (3.) Purchased } 2,000 \text { shares of common stock for the treasury at } \$ 25 \text { per share } \\\text { (4.) Sold } 1,200 \text { shares of the treasury stock purchased in transaction } \# 3 \text { for } \$ 30 \text { per } \\\text { share. } \\\text { (5.) Declared a cash dividend of } \$ 1.40 \text { per share on the common stock outstanding, } \\\text { to be paid early next year }\\\text { (6.) Split the common stock } 2 \text {-for-1. }\end{array}$
$$\begin{array} { | c | l | l | l | l | l | l | l | } \hline & \text { Cash } & \begin{array} { c } \text { Other } \\\text { Assets }\end{array} & \text { Liabilities } & \begin{array} { c } \text { Paid-in } \\\text { Capital }\end{array} & \begin{array} { c } \text { Retningd } \\\text { Earnings }\end{array} & \begin{array} { c } \text { Treasury } \\\text { Stock }\end{array} & \begin{array} { c } \text { Net } \\\text { Income }\end{array} \\\hline 1 . & & & & & & & \\\hline 2 . & & & & & & & \\\hline 3 . & & & & & & & \\\hline 4 . & & & & & & & \\\hline 5 . & & & & & & & \\\hline 6 . & & & & & & & \\\hline\end{array}$$