Deck 8: Accounting for and Presentation of Stockholders Equity

Question 1

Another term frequently used to describe stockholders' equity is:

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

Answer 1

A

Question 2

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.

Answer 2

A

Question 3

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.

Answer 3

C

Question 4

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 5

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 6

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 7

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 8

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.

Question 9

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.

Question 10

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 11

In most states, par value of issued shares represents:

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

Question 12

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 13

Factors that usually affect retained earnings directly include:

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

Question 14

The dollar amount of the 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 15

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 16

The annual per share dividend requirement of a 6%, $80 par value preferred stock that was issued for $85 is:

A) $4.80.
B) $5.10.
C) $6.00.
D) $8.00.

Question 17

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.

Question 18

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 19

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 20

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

A) Common stock.
B) Capital stock.
C) Retained earnings.
D) Accumulated depreciation.
E) Paid-in-capital in excess of par.

Question 21

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 300 shares of $90 par value preferred stock in exchange for land that had an appraised value of $32,000.
(2.) Issued 17,500 shares of $20 par value common stock for $24 per share.
(3.) Purchased 3,800 shares of common stock for the treasury at $20 per share.
(4.) Sold 2,500 shares of treasury stock purchased in transaction #3 for $22 per share.
(5.) Declared a cash dividend of $2.80 per share on the common 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.

Question 22

The 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 23

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 24

Braco has 40,000 shares of $100 par value common stock outstanding, and 10,000 shares in the treasury. The number of additional shares that would be issued in a 5% stock dividend is:

A) 500.
B) 1,000.
C) 2,000.
D) 2,500.

Question 25

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

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

Question 26

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 27

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 1,200 shares of $60 par value preferred stock in exchange for land and an existing building that had appraised values of $35,000 and $50,000, respectively.
(2.) Issued 30,000 shares of $10 par value common stock for $24 per share.
(3.) Purchased 1,000 shares of common stock for the treasury at $25 per share.
(4.) Sold 600 shares of the treasury stock purchased in transaction #3 for $30 per share.
(5.) Declared a cash dividend of $1.40 per share on the common stock outstanding, to be paid early next year.
(6.) Split the common stock 2-for-1.

Question 28

The balance sheet caption for common stock is: (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 29

Calculate the cash dividends required to be paid for each of the following preferred stock issuances:
(a.) The semiannual dividend on 11.5% cumulative preferred, $100 par value; 12,000 shares authorized, issued, and outstanding.
(b.) The total dividends owed to preferred shareholders on $1.50 annual cumulative preferred, 200,000 shares authorized, 170,000 shares issued, and 162,700 shares outstanding. The company did not pay dividends during the prior two years or during the current year.
(c.) The quarterly dividend on 9.5% cumulative preferred, $70 stated value, $72 liquidating value, 40,000 shares authorized, 30,000 shares issued and outstanding. No dividends in arrears.

Question 30

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) extraordinary gains or losses during the year.
D) the effect of a stock split during the year.

Question 31

Spike Jones owns 56 shares of the Robust Corporation's stock. Robust announces a 3-for-2 stock split. How many shares will Fred have after this split?

A) 178 shares.
B) 112 shares.
C) 84 shares.
D) 56 shares.

Question 32

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 33

The balance sheet caption for common stock is:
Common stock, $10 par value, 7,000,000 shares authorized, 5,700,000 shares issued, 5,500,000 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 34

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 35

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; 600,000 shares authorized, 470,000 shares issued, 28,000 shares held as treasury stock.
(b.) 10%, $50 par value preferred; 200,000 shares authorized, 124,000 shares issued and outstanding.
(c.) 13% cumulative preferred, $40 stated value, $42 liquidating value; 140,000 shares authorized, 92,000 shares issued, 88,000 shares outstanding.

Question 36

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.