Deck 10: Stockholders Apos Equity

Question 1

Since stock dividends are paid with shares of stock instead of cash, no reduction in Retained Earnings is recorded.

Answer 1

A stock dividend involves a company issuing additional shares of its own stock to existing shareholders, proportional to their current holdings. Unlike cash dividends, which are paid out from a company's earnings or retained earnings and result in a reduction of the company's cash balance and retained earnings, stock dividends do not involve the distribution of cash assets. Instead, they represent a reallocation of a portion of the company's retained earnings to common stock and additional paid-in capital (if applicable).When a stock dividend is declared and issued, the company transfers an amount from retained earnings to paid-in capital. This amount corresponds to the fair market value of the new shares issued. However, because this transaction is entirely within shareholders' equity, there is no impact on the total shareholders' equity or the company's assets. It's essentially a reshuffling of the equity accounts.
For example, if a company declares a 10% stock dividend, each shareholder receives an additional share for every ten shares they own. The value of these new shares is transferred from retained earnings to the common stock and additional paid-in capital accounts. The total equity of the company remains the same, but the composition of the equity changes.
In summary, stock dividends do not reduce retained earnings because they do not represent a payout of assets but rather a distribution of additional shares, which is reflected as a transfer within the shareholders' equity section of the balance sheet.

Question 2

When treasury stock is reissued at a price that is greater than their cost, the difference should be credited to the Treasury Stock account.

Answer 2

When treasury stock is reissued at a price greater than its cost, the difference should not be credited to the Treasury Stock account. Instead, the accounting treatment for such a transaction involves crediting a separate equity account, typically called "Additional Paid-In Capital from Treasury Stock" or a similar name, depending on the company's accounting policy or the applicable accounting standards.Here's how the transaction would be recorded in the company's books:
1. **Debit** the Treasury Stock account for the original cost of the shares being reissued. This reduces the Treasury Stock account, which is a contra equity account, by the amount the company initially paid to repurchase the shares.
2. **Credit** the Cash account for the total amount of cash received from the reissuance of the treasury shares. This reflects the inflow of cash into the company.
3. If the reissuance price is greater than the cost, **Credit** the difference to an equity account such as "Additional Paid-In Capital from Treasury Stock." This account reflects the excess amount over the original cost that shareholders paid to the company for the treasury shares.
Here's an example journal entry for the reissuance of treasury stock:
Assume a company reissues 1,000 shares of treasury stock that it originally purchased for $10 per share. The reissuance price is $12 per share.
- Debit Treasury Stock for $10,000 (1,000 shares * $10 original cost per share)
- Credit Cash for $12,000 (1,000 shares * $12 reissuance price per share)
- Credit Additional Paid-In Capital from Treasury Stock for $2,000 (the difference between the reissuance price and the original cost, which is $2 per share * 1,000 shares)
The journal entry would look like this:
```
Cash (Debit) $12,000
Treasury Stock (Credit) $10,000
Additional Paid-In Capital from Treasury Stock (Credit) $2,000
```
This accounting treatment ensures that the company's equity section accurately reflects the additional capital contributed by shareholders over and above the original cost of the treasury shares.

Question 3

Cumulative and participating dividend features are typically associated with preferred stock.

Answer 3

Cumulative and participating dividend features are indeed typically associated with preferred stock, which is a class of ownership in a corporation that has a higher claim on assets and earnings than common stock.Cumulative dividends refer to a feature of preferred stock that entitles shareholders to receive dividends in arrears before common shareholders can receive any dividends. If a company is unable to pay dividends in any given year, the dividends are accumulated and must be paid out to preferred shareholders before any dividends can be paid to common shareholders in the future. This feature protects the income rights of preferred shareholders, ensuring that they receive their expected dividends before any distribution to common shareholders, even if the company has had a temporary inability to pay.
Participating dividends, on the other hand, provide preferred shareholders with the potential to receive additional dividends beyond their fixed preferred dividend rate. After the preferred dividends have been paid, and if the company decides to pay additional dividends to common shareholders, participating preferred shareholders may be entitled to a share of these additional earnings. The specific terms of participation vary by company and by the issue of preferred stock, but typically, participating preferred shareholders might share in the excess profits along with common shareholders, often up to a certain limit or percentage.
Both cumulative and participating features make preferred stock a more attractive investment for those seeking more stable and potentially higher dividend income, with a preference in the distribution of corporate earnings and assets. However, it's important to note that preferred stock usually does not come with the same voting rights as common stock, meaning preferred shareholders typically do not have a say in the company's management decisions.

Question 4

The residual claim entitles a common stockholder to a proportionate share of a liquidating payout before preferred stockholders are paid.

Question 5

If a new business does not have access to the major capital markets, it may depend upon venture capital for its initial equity capital.

Question 6

The preemptive right entitles a common stockholder to a proportionate share of any dividend payouts.

Question 7

Treasury stock is reported as a reduction of stockholders' equity.

Question 8

When true no-par stock is sold for cash, the amount credited to the stock account is the par value times the number of shares sold.

Question 9

A corporate charter is sometimes called the articles of incorporation.

Question 10

A corporation may become chartered by applying to the federal government.

Question 11

Treasury stock is stock that has been issued but is no longer outstanding.

Question 12

Private corporations typically issue their stock to management and employees rather than the general public.

Question 13

All treasury stock is outstanding.

Question 14

All authorized stock is issued.

Question 15

When treasury stock is reissued at a price that is less than their cost, the difference should be credited to retained earnings.

Question 16

The stockholders' equity section of the balance sheet shows all changes in stockholders' equity for the period.

Question 17

Shares outstanding may be less than shares issued.

Question 18

The par value of stock is reduced when stock dividends are issued.

Question 19

Accumulated other comprehensive income is NOT considered to be a source of stockholders' equity.

Question 20

Comprehensive income represents the increase in net assets resulting from all transactions occurring during the accounting period except transactions with owners.

Question 21

When a corporation declares a dividend, a liability must be recorded.

Question 22

If preferred stock is participating, then the preferred shareholders have the right to share in excess dividends above their stated dividend.

Question 23

The stated value is the price at which employees can exercise stock options.

Question 24

Capitalization of retained earnings occurs when a corporation's stock is split.

Question 25

A stock option is the same as a stock warrant.

Question 26

Liquidating dividends must be charged against the capital stock accounts because the corporation's retained earnings are appropriated for future business expansion.

Question 27

Large corporations are profitable enough to maintain their own stockholder lists and arrange for the issuance of their stock certificates to stockholders rather than having to retain an independent stock transfer agent to do those things.

Question 28

No formal journal entry is required to record a stock split.

Question 29

Par value is adjusted annually to reflect the current market value of the stock.

Question 30

Stated capital is the amount of capital that, under law, cannot be returned to the corporation's owners except upon liquidation.

Question 31

Restricted earnings are usually disclosed in the footnotes to the financial statements, but may sometimes be disclosed in a reserve account in the equity section of the balance sheet.

Question 32

Preferred stockholders typically do not have the right to vote at stockholders meetings.

Question 33

If preferred stock is convertible, then the preferred shareholders have the option to trade voting privileges for the dividend payment preference.

Question 34

When a company issues no-par stock with no stated value, there is no need for an account titled "paid-in capital in excess of par."

Question 35

Both stock dividends and stock splits increase the number of a corporation's outstanding shares without altering the proportionate ownership of the corporation.

Question 36

Dividends in arrears are associated with the cumulative preferred stock only.

Question 37

Dividend-related dates follow this chronological order: declaration date, record date, and payment date.

Question 38

A corporation may extend a tender offer when it desires to acquire treasury stock.

Question 39

A stock split has the effect of reducing the par value per share and the number of shares outstanding.

Question 40

A call provision sets forth provisions for a corporation to redeem its preferred stock at a fixed price on or after a specified date.

Question 41

To compute the return on common equity ratio, the numerator includes ____________________ minus preferred dividends, and the denominator is the average common stockholders' equity.

Question 42

The corporation's retained earnings is computed by adding the beginning balance and net income, then subtracting the current year ____________________.

Question 43

When computing the total payout ratio, common stock dividends plus common stock repurchases are included in the numerator.

Question 44

An arbitrary monetary amount that has a stated value on each share of stock and establishes a minimum price for the stock when issued is the ____________________.

Question 45

____________________ is the name of the account credited when a corporation issues common stock for a price greater than par.

Question 46

The number of shares issued minus the number of shares of treasury stock is ____________________ shares.

Question 47

Issued stock that is repurchased by the corporation but not retired is ____________________.

Question 48

When computing the dividend yield, net income is divided by the common stock price.

Question 49

The corporation's accumulated net income that has not been paid out as dividends is ____________________.

Question 50

When computing the dividend payout ratio, net income is divided by the common stock dividends.

Question 51

In general, retained earnings represents accumulated earnings of the corporation less dividends paid.

Question 52

When computing earnings per share, the numerator includes net income minus any dividends paid to common stockholders.

Question 53

The number of shares sold to stockholders are ____________________ shares.

Question 54

When stockholders receive a distribution of additional shares of stock, and there is a corresponding capitalization of retained earnings, a stock ____________________ has occurred.

Question 55

The corporate _________________ is the legal document that authorizes the creation of a corporation.

Question 56

____________________ represents the owners' claims against the assets of a corporation after deducting all liabilities.

Question 57

When stockholders exchange their shares of stock for additional shares, and there is a corresponding reduction in the par value of the stock, a stock ____________________ has occurred.

Question 58

The ____________________ ratio is computed by subtracting the dividend payout ratio from the total payout ratio.

Question 59

____________________ shares are the maximum number of shares a corporation may issue in accordance with its corporate charter.

Question 60

The ____________________ ratio is computed by dividing common stock dividends by net income.

Question 61

The _______________ dividend preference is a preferred stock feature that provides for the current stated dividends plus a share of dividends available for distribution to other classes of stockholders.

Question 62

A corporation has 5,000 shares of $5 par, 6% cumulative preferred stock outstanding and 25,000 shares of $2 par common stock outstanding. No dividends have been paid for the past 2 years. If the company wishes to distribute $2 per share to the common stockholders this year, what is the total amount of dividends that must be paid?
a.$4,500
b.$50,000
c.$51,500
d.$54,500

Question 63

A ____________________ is a correction of retained earnings resulting from a previous error that affected net income.

Question 64

The __________________ dividend preference is a preferred stock feature that provides for the current stated dividends plus dividends in arrears before any dividends are paid to the common stockholders.

Question 65

The designated price for which employees may exercise stock options is called the ____________________ price.

Question 66

The stockholders' equity section of a balance sheet at December 31 is provided below: How many shares of stock are issued?
a.18,000
b.19,800
c.20,000
d.20,200

Question 67

Which of the following statements is true with regard to equity capital?

A)The number of shares actually in the hands of stockholders are called outstanding shares.
B)It is unusual for corporations to have more than one class of stock outstanding at any point in time.
C)Preferred stock represents the shares of stock that have been permanently retired.
D)Outstanding shares represent the maximum number of shares that can be issued by a corporation.

Question 68

The _________________ preference is a preferred stock feature that provides for the current stated dividends to be paid to preferred stockholders before they are paid to common stockholders.

Question 69

Par value represents the
a.arbitrary amount that establishes a minimum price for the stock when it is first issued.
b.current market price of the stock.
c.amount for which any treasury shares have been acquired by the corporation.
d.amount for which treasury shares may be reissued.

Question 70

Total stockholders' equity includes $50,000 of common stock with a stated value of $0.50, and 5,000 shares of treasury stock with a total cost of $25,000. How many total shares are outstanding?

A)95,000
B)100,000
C)105,000
D)150,000

Question 71

On January 1, 2019, a company issued 10,000 shares of 10%, $10 par value cumulative preferred stock. No dividends were declared in 2019 or 2020. In 2021, the company declared a dividend of $200,000. How much of the 2021 dividend should be paid to common stockholders?

A)$170,000
B)$190,000
C)$197,000
D)$200,000

Question 72

If the stated cash dividend on cumulative preferred stock has been unpaid for a period of one year or more, it is referred to as a dividend ____________________.

Question 73

The ____________________ date is the date on which a corporation announces that it will pay a dividend.

Question 74

The ____________________ right provides that common stockholders may keep the same percentage of ownership if new stock is issued.

Question 75

Treasury shares represent the

A)number of previously issued shares that have been repurchased by the corporation.
B)number of shares that the corporation has sold.
C)number of shares that are currently held by stockholders.
D)maximum number of shares that can be sold by the corporation.

Question 76

Issued shares represent the

A)number of previously issued shares that have been repurchased by the corporation.
B)number of shares that the corporation has sold.
C)number of shares that are currently held by stockholders.
D)maximum number of shares that can be sold by the corporation.

Question 77

Authorized stock represents the
a.number of previously issued shares that have been repurchased by the corporation.
b.number of shares that the corporation has sold.
c.number of shares that are currently held by stockholders.
d.maximum number of shares that can be issued for each class of stock.

Question 78

Outstanding shares represent the

A)number of previously issued shares that have been repurchased by the corporation.
B)number of shares that the corporation has sold.
C)number of shares that are currently held by stockholders.
D)maximum number of shares that can be sold by the corporation.

Question 79

Which of the following is one of the elements of stockholders' equity?

A)net income
B)dividends payable
C)retained earnings
D)loss on the sale of equipment

Question 80

When a corporation is in the process of being dissolved, any additional dividends are referred to as ____________________ dividends.