Deck 12: Shareholders Equity

Question 1

Which of the following is considered to be an important economic consequence of incentive compensation plans using stock options?

A) dilution of ownership interests.
B) the current ratio is affected.
C) the effects on the financial statements are costly to quantify.
D) the effect on cash flows

Answer 1

A

Question 2

Which one of the following represents the economic effects of declaring and issuing a stock dividend?

A) Has no effect on total assets or total shareholders' equity
B) Decreases the debt/equity ratio
C) Decreases total shareholders' equity
D) Increases the current ratio

Answer 2

A

Question 3

A corporation issued common stock instead of debt to finance the purchase of non-depreciable property. Which statement is true?

A) Ownership by existing shareholders will be diluted.
B) The company's debt/equity ratio will be higher.
C) Income tax expense will be lower because expenses increase.
D) Net income will be lower.

Answer 3

A

Question 4

If a corporation uses retention of earnings to finance the purchase of property instead of issuing equity securities, then

A) it will have a higher debt/equity ratio.
B) it will pay more dividends.
C) leverage is being used.
D) a company's earnings per share will decrease.

Question 5

On which date would you make no journal entry?

A) Date of declaration of cash dividend
B) Date of record of cash dividend
C) Date of payment of cash dividend
D) Date of declaring a stock dividend

Question 6

Information related to Lamar Co. for the years ending December 31, 2010 and 2009 follows: Dividends declared for 2010 totaled $20,000. How much was generated through operations?

A) $30,000
B) $50,000
C) $10,000
D) $70,000

Question 7

Which one of the following transactions cause a decrease to retained earnings?

A) Selling treasury stock
B) Incurring net income for the period
C) Declaring a stock dividend
D) Paying a cash dividend that was previously declared

Question 8

If preferred stock, which can be exchanged for long-term debt in three years, is classified as an equity financial instrument instead of a liability, then

A) the current ratio declines.
B) earnings per share is less than if the preferred stock was reported as debt.
C) fixed assets and net worth increase.
D) the debt/equity ratio is less than if the preferred stock was reported as debt.

Question 9

Which one of the following is an effect when a company buys back it own shares of stock?

A) Leverage is affected.
B) It will pay more dividends.
C) It will have a higher debt/equity ratio.
D) Fixed assets will decrease.

Question 10

Which one of the following serves to differentiate debt from equity?

A) Interest on debt may be deferred, but dividends are a legal liability and must be paid every year.
B) Interest on debt is tax deductible while dividends to equity investors are not.
C) Debt has a maturity date which is much shorter than the maturity period of equity.
D) Debt holders are appointed while the board of directors elects equity holders.

Question 11

Which one of the following represents the economic effects of issuing a 2-for-1 stock split?

A) No effect on par value per share or retained earnings
B) Decrease par value per share, and no effect on retained earnings
C) No effect on par value per share, and decrease retained earnings
D) Increase par value per share and retained earnings

Question 12

Cash dividends are paid based on the number of shares which are

A) authorized.
B) issued.
C) outstanding.
D) outstanding minus the number of treasury shares.

Question 13

What is the effect of a corporation appropriating retained earnings for the cost of treasury stock purchased?

A) Contributed capital is overstated.
B) A portion of retained earnings is restricted from the payment of dividends.
C) Owner's equity is reduced by the amount of the appropriation.
D) Income is overstated.

Question 14

Baker Company has 200,000 shares of common stock outstanding. The company declares a stock dividend of 58,000 shares. According to GAAP, this dividend should be treated as:

A) a small stock dividend.
B) a prior period adjustment.
C) a large stock dividend.
D) a purchase of treasury stock.

Question 15

On January 1, 2010, Garner Corp. had 10,000 shares of $1 par value common stock issued and outstanding. The stock was selling at $10 per share. During 2010, Garner declared and issued a 10% stock dividend. The stock dividend causes

A) total shareholders' equity to increase by $1,000.
B) net income to decrease by $1,000.
C) earnings per share to decrease by $10,000.
D) no change in total shareholders' equity

Question 16

If a corporation issues debt instead of common stock to finance the purchase of property, then the corporation has

A) a disadvantage of higher tax payments because dividends are a bigger deduction than interest.
B) no ability to avoid interest payments from the debt issuance under any circumstances.
C) required dividend payments that are usually double-taxed.
D) a higher earnings per share.

Question 17

Which one of the following is a characteristic of equity as opposed to debt?

A) Voting rights are typically attached.
B) There is a fixed maturity date.
C) There is a legal contract.
D) There is a fixed payment schedule.

Question 18

Which one of the following is a result of a company issuing common stock instead of debt to finance the purchase of property?

A) Leverage will be more effective.
B) The company will probably experience cash flow problems.
C) It will have a lower debt/equity ratio.
D) It will report a lower net income.

Question 19

Which one of the following is a valid reason for a stock split?

A) To increase ownership percentages of individual shareholders
B) To adjust the market price of the shares to a level where more individuals can afford to invest in the stock
C) To increase reported net income during subsequent accounting periods
D) To increase the book value per share of common stock

Question 20

A corporation generated assets by issuing equity securities and through profitable operations. Which effects likely occurred?

A) Common stock and retained earnings increased.
B) Common stock increased and retained earnings stayed the same.
C) Retained earnings increased, and there was no effect on common stock.
D) Liabilities and common stock increased.

Question 21

Treasury stock is

A) an asset representing a corporate investment in itself.
B) highly-valued stock owned by a corporation.
C) illegal for U.S. corporations.
D) a decrease of shareholders' equity.

Question 22

Which one of the following would most likely require a restriction of retained earnings?

A) The sale of a plant asset
B) A sale of treasury stock
C) A declaration of cash dividends
D) An appropriation declared by the Board of Directors

Question 23

A company declared cash dividends in 2009, and paid the dividends in 2010. The payment in 2010

A) decreases the debt/equity ratio.
B) increases the number of shares of stock outstanding.
C) decreases shareholders' equity.
D) decreases net income.

Question 24

The payment of previously declared cash dividends

A) increases the debt/equity ratio.
B) increases current liabilities.
C) increases earnings per share.
D) decreases total liabilities.

Question 25

Dividends are not paid on

A) noncumulative preferred stock.
B) nonparticipating preferred stock.
C) treasury common stock.
D) outstanding common shares.

Question 26

Which one of the following events increases the debt/equity ratio?

A) Purchase of treasury stock
B) Sale of treasury stock for more than its cost
C) Sale of treasury stock for less than its cost
D) Payment of cash dividends that were previously declared

Question 27

Which one of the following events increases the debt/equity ratio?

A) Purchase of inventory on account
B) Sale of treasury stock for less than its cost
C) The payment of cash dividends that were previously recorded
D) Recognition of net income for the year

Question 28

Which one of the following is 'debt' with the appearance of 'equity'?

A) Long-term debt with a rate of interest that depends upon the current prime rate of interest
B) Long-term debt that can be converted into common stock
C) Notes payable in ten years
D) Convertible bonds

Question 29

Simon Corp's $1 par value, common stock was selling for $20 per share. Simon Corp's owners' equity accounts were as follows: How many shares of common stock are outstanding?

A) 30,000
B) 600,000
C) 800,000
D) Not enough information to determine.

Question 30

If preferred stock is cumulative, then

A) preferred dividends are a percentage of corporate profits.
B) dividends in arrears must be paid before common shareholders receive dividends.
C) dividends are a percentage of the market value of the preferred stock.
D) payment of dividends is legally guaranteed to shareholders each year.

Question 31

Preferred stock is preferred by investors as compared to common stock because

A) it pays higher dividends than common.
B) it has advantages of special rights to dividends and/or asset claims during liquidation.
C) preferred stock pays dividends and common stock pays interest.
D) dividends are expected to grow exponentially.

Question 32

If a company sells its treasury stock for more than it cost and records a gain on the income statement, then

A) income and shareholders' equity are overstated.
B) only income is overstated.
C) only shareholders' equity is overstated.
D) the income statement and balance sheet are properly stated.

Question 33

Dividends in arrears

A) are preferred dividends that have been declared but not paid.
B) must be legally paid in the future.
C) are dividends that have not been declared on cumulative preferred stock.
D) are reported as a liability on the balance sheet until paid.

Question 34

If preferred stock is specified as 8% preferred stock, then preferred

A) dividends are a percentage of the par value of the preferred stock.
B) shareholders vote in the election of the members of the board of directors.
C) dividends are a percentage of corporate profits.
D) dividends in arrears must be paid before common shareholders receive dividends.

Question 35

What effect will the acquisition of treasury stock have on shareholders' equity?

A) No effect
B) Increase
C) Depends on whether it cost more or less than the par value of the stock
D) Decrease

Question 36

The declaration of cash dividends

A) increases total expenses.
B) decreases current liabilities.
C) decreases earnings per share.
D) increases the debt/equity ratio.

Question 37

On January 1, 2010, Susann, Inc. declared a 15% stock dividend on its common stock when the market value of the common stock was $20 per share. Shareholders' equity before the stock dividend was declared consisted of: What happened to retained earnings as a result of the stock dividend declaration?

A) $6,000 decrease
B) $7,500 decrease
C) $15,000 decrease
D) No change

Question 38

Which one of the following events decreases the current ratio?

A) A decrease in the number of common shares outstanding
B) Sale of treasury stock for more than its cost
C) Sale of treasury stock for less than its cost
D) Purchase of treasury stock

Question 39

Dividends in arrears on cumulative preferred stock

A) increase liabilities.
B) decrease retained earnings.
C) have no effect on the balance sheet but are disclosed in the footnotes.
D) increase the debt/equity ratio.

Question 40

If preferred stock is participating, then

A) preferred dividends are a percentage of corporate profits.
B) preferred shareholders vote in the election of the members of the board of directors.
C) preferred shareholders share in the remaining amount of dividend with common shareholders.
D) dividends in arrears must be paid before common shareholders receive dividends.

Question 41

The shareholders' equity section of Jason Company as of December 31, 2010 follows:
On January 15, the company repurchased 1,500 shares of its own stock at $60 for treasury stock. On January 16, as part of a compensation package, the company reissued half of the treasury shares to executives who exercised stock options for $20 per share. On January 28, the company reissued the remainder of the treasury stock on the open market for $66 per share. Which of the following would be included in the journal entry recorded on January 16?
a. a debit to Cash for $15,000.
b. a debit to Treasury Stock for $45,000.
c. a credit to Additional Paid-In Capital for $45,000.
d. a credit to Additional Paid-In Capital for $15,000.

Question 42

The following information was taken from the statement of shareholders' equity of Carnival Industries:
The journal entry to record the issuance of preferred stock during 2010 would include:
a. a debit to Preferred Stock for $900.
b. a credit to Preferred Stock for $500.
c. a credit to Additional Paid in Capital for $500.
d. a credit to Cash for $500.

Question 43

The shareholders' equity section of Winters Company contained the following balances as of December 31, 2010:
On September 26,2011, Winters issued 200 shares of its 10 percent preferred stock at $23 per share. On December 2, the company declared a cash dividend of $1,050, which was paid on December 27. Winters did not declare or pay any dividends during 2010. If Winters uses a separate dividend account for each type of stock, which of the following would be included in the journal entry to record the declaration of the 10% Preferred stock dividend?
a. a credit to 10% Preferred Cash Dividend for $600.
b. a debit to Dividend Expense for $600.
c. a credit to Dividends Payable for $600.
d. a debit to Cash for $600.

Question 44

Chambers Corporation has total assets of $800,000 as of December 31, 2010 and total liabilities of $400,000. Contributed capital as of December 31, 2009 and December 31, 2010 is $150,000. Chambers Corporation incurred a $50,000 net loss for the year ended December 31, 2010. If Chambers declared and paid $80,000 in dividends in 2010, their retained earnings at the beginning of 2010 would have been.

A) $220,000.
B) $280,000
C) $380,000.
D) $440,000.

Question 45

The shareholders' equity section of Winters Company contained the following balances as of December 31, 2010:
During 2011, Winters entered into the following transaction: On December 2, the company declared a cash dividend of $1,050, which was paid on December 27. Winters did not declare or pay any dividends during 2010. Based on this information, what amount of dividends should be declared and paid to shareholders' with common stock?
a. $350
b. $420
c. $570
d. $385

Question 46

The shareholders' equity section of the Jason Company as of December 31, 2010 is as follows:
On January 15, the company repurchased 1,500 shares of its own stock at $60 for treasury stock. On January 16, as part of a compensation package, the company reissued half of the treasury shares to executives who exercised stock options for $20 per share. On January 28, the company reissued the remainder of the treasury stock on the open market for $65 per share. Which of the following would be included in the journal entry recorded on January 28?
a. a credit to Treasury Stock for $48,750.
b. a credit to Additional Paid-In Capital, Treasury Stock for $48,750.
c. a debit to Cash for $45,000.
d. a credit to Additional Paid-In Capital, Treasury Stock for $3,750.

Question 47

Choice Corporation had 100,000 shares of commons stock outstanding on January 1, 1995. On January 1, 2010 Choice purchased 5,000 shares of its own common stock to fund a stock option plan for it's executives. On December 31, 2010 Choice announced a 3 to 1 stock split. Choice's net income for 2010 was $400,000. How much should Choice report as earnings per share for 2010?

A) $1.33.
B) $1.40.
C) $4.00
D) $4.21

Question 48

The shareholders' equity section of Winters Company contained the following balances as of December 31, 2010:
During 2011, Winters entered into the following transaction: On December 2, the company declared a cash dividend of $1,050, which was paid on December 27. Winters did not declare or pay any dividends during 2010. If Winters uses a separate dividend account for each type of stock, which of the following would be included in the journal entry to record the declaration of the 12% Preferred stock dividend?
a. a debit to 12% Preferred Cash Dividend for $180.
b. a debit to Dividend Expense for $180.
c. a debit to Dividends Payable for $180.
d. a debit to Cash for $180.

Question 49

An ordinary 20% stock dividend

A) causes no change in retained earnings.
B) decreases assets.
C) increases contributed capital.
D) is reported on the income statement.

Question 50

The shareholders' equity section of Winters Company contained the following balances as of December 31, 2010:
During 2011, Winters entered into the following transaction: On September 26, the company issued 200 shares of its 10 percent preferred stock at $23 per share. Which of the following would be included in the September 26 journal entry?
a. a debit to Preferred Stock for $3,000.
b. a credit to Cash for $4,600.
c. a debit to Cash for $3,000.
d. a credit to Additional Paid-In Capital, 10% Preferred Stock for $1,600.

Question 51

The shareholders' equity section of Jason Company as of December 31, 2010 follows:
On January 15, the company repurchased 1,500 shares of its own common stock at $60 to hold as treasury stock. Which of the following would be included in the journal entry recorded on January 15?
a. a credit to Retained Earnings for $90,000.
b. a debit to Cash for $90,000.
c. a debit to Treasury Stock for $90,000.
d. a debit to Common Stock for $90,000.

Question 52

If dividends paid are recorded as an expense, then

A) income and retained earnings are understated.
B) only income is understated.
C) only retained earnings is understated.
D) the income statement and balance sheet are correct.

Question 53

Garnett Corporation's balance sheet reflects total assets of $500,000 as of December 31, 2009 and total liabilities of $150,000. Garnett's balance sheet also reflects $50,000 of preferred stock outstanding on December 31, 2009. In the early 1990's, when Garnett was started up, Garnett issued 50,000 shares of no-par common stock, a one-time event that accounted for its entire contributed capital, other than the preferred stock. Garnett had repurchased 15,000 shares of its common stock in 2008 from a retiring shareholder, which is now treasury stock. As of December 31, 2009 the book value of each outstanding share of Garnett's common stock is:

A) $6.00
B) $8.57
C) $10.00
D) $14.29.

Question 54

Smith Corporation's balance sheet reflects total assets of $3 million as of December 31, 2010 and total liabilities of $1.8 million. Smith has 100,000 shares of common stock outstanding. The market value of the stock is $9 per share. Smith's market to book ratio is:

A) 0.75.
B) 7.50.
C) 12.00.
D) 13.33.

Question 55

The shareholders' equity section of Manning Company as of December 31, 2010 follows:
The company declares a 12 percent stock dividend on the outstanding shares. The market price of the stock is $90. The journal entry to record the stock dividend would include:
a. a credit to Additional Paid-In Capital, Common Stock for $100,800.
b. a debit to Common Stock for $7,200.
c. a credit to Stock Dividend for $108,000.
d. a debit to Additional Paid-In Capital, Common Stock for $108,000.

Question 56

All of the following statements are true regarding the appropriations of retained earnings except:

A) Appropriations of retained earnings restrict retained earnings from future dividend payments.
B) Appropriations of retained earnings involve the restriction of cash.
C) Appropriations of retained earnings must be decided upon by the board of directors.
D) Appropriations of retained earnings do not change the amount of total stockholders' equity.

Question 57

The shareholders' equity section of Manning Company as of December 31, 2010 follows:
The company declares and distributes a 3 percent stock dividend on the outstanding shares. The market price of the stock is $85 per share. The journal entry to record the stock dividend would include:
a. a debit to Additional Paid-In Capital, Common Stock for $25,500.
b. a credit to Common Stock for $1,800.
c. a credit to Stock Dividend for $25,500.
d. a debit to Additional Paid-In Capital, Common Stock for $23,700.

Question 58

Cavendish Corporation's balance sheet reflects total assets of $250 million as of November 30, 2010 and total liabilities of $200 million. Cavendish issues $100 million of preferred stock, receiving $100 million in cash. After issuing the preferred stock Cavendish's debt to equity ratio is:

A) 0.67.
B) 1.33.
C) .4.00
D) 6.00

Question 59

Dividends payable is recorded at the date of

A) issue.
B) record.
C) declaration.
D) payment.

Question 60

The shareholders' equity section of Winters Company contained the following balances as of December 31, 2010:
During 2011, Winters entered into the following transaction: On May 13, the company repurchased 55 shares of its common stock in the open market at $25 per share. Which of the following would be included in the journal entry for May 13?
a. a debit to Cash for $1,375.
b. a credit to Common Stock for $1,375.
c. a debit to Common Stock for $1,375.
d. a debit to Treasury Stock for $1,375.

Question 61

Immediately before Cavecreek Corporation purchased 4,000 shares of its own common stock for $25 a share, it had total liabilities of $200,000 and total shareholders' equity of $520,000. Calculate Cavecreek's debt/equity ratio immediately subsequent to the purchase of the treasury stock.

Question 62

The shareholders' equity section of Samuels Company were reported on the balance sheets for December 31:
Based on this information, how many shares of common stock were issued in 2010 and what was the average issue price?
a. 21,000 shares and $7.82 per share
b. 30,000 share and $6.00 per share
c. 85,000 shares and $9.73 per share
d. 24,000 shares and $7.50 per share

Question 63

The following information from St. Paul Supply, Inc.is provided for 2010 and 2009:
Additional information:
No preferred dividends were declared during 2009. The market price of the common stock was $25 at December 31, 2010. Calculate the book value per share of common stock at December 31, 2010.

Question 64

A 10% stock dividend was declared and distributed to shareholders of 60,000 outstanding shares of Meadville Company's $10 par value common stock; at that time the common stock's market price was $32. Prepare the journal entry required by the stock dividend.

Question 65

Canton Corporation shareholders' equity section of its balance sheet as of December 31, 2009 is as follows:
The following events occurred during 2010:
$\bullet$ March 3 - 5,000 shares of authorized and unissued common stock were sold for $22 per share.
$\bullet$ March 16 - Declared a cash dividend of $3 per share payable May 15 to holders of record on May 5.
A. At March 31, 2010, how many more shares of stock can be issued?
B. At March 31, 2010, how many shares are issued and outstanding?

Question 66

Cullen Distribution Corporation's contributed capital section of its balance sheet follows:
During the last two years, Cullen Distribution Corporation did not declare any dividends to its shareholders. This year, Cullen declares and pays total dividends of $100,000. Calculate the dividends paid separately to preferred and common shareholders if the preferred stock is cumulative.

Question 67

On January 23, Oakley Co., for the first time in its short history, purchased 200 shares of its own common stock for $40 a share. On March 31, it sold 100 of those shares for $45 a share and properly recorded $500 as additional paid-in capital. On April 15, it sold the remaining 100 shares for $35 a share. Prepare the journal entry to record the April 15th transaction.

Question 68

Total dividends of $13,000 are declared when two years of dividends are in arrears on 1,000 shares of par $50, 10%, cumulative preferred stock. Calculate the dividends that were declared on common stock.

Question 69

An 8% stock dividend was declared and distributed on 3,000 shares of par $10 common stock when its market price was $32. Prepare the journal entry required by the stock dividend.

Question 70

If an investor owns 8% of a corporation prior to a 2-for-1 stock split, what percentage does the investor own after receiving 2 shares of $5 par value stock for each $10 par value share of stock?

Question 71

Total dividends of $40,000 are declared when one year of dividends is in arrears on 5,000 shares of $3 cumulative preferred stock. Calculate dividends on common stock.

Question 72

On January 23, Bennington Corporation, for the first time in its short history, purchased 200 shares of its own common stock for $40 a share. On March 31, it sold 100 of those shares for $45 a share. Prepare the journal entry recording the March 31st transaction.

Question 73

On January 23, Bayshore Corporation, for the first time in its short history, purchased 200 shares of its own common stock for $40 a share. On March 31, it sold 100 of those shares for $45 a share and properly recorded $500 as additional paid-in capital. On April 15, it sold the remaining 100 shares for $30 a share. Prepare the journal entry to record the April 15th transaction.

Question 74

Immediately before Zorro Corporation sold 4,000 shares of its own common stock for $30 a share, it had total liabilities of $200,000 and total shareholders' equity of $520,000. Determine Zorro's debt/equity ratio immediately subsequent to the stock issue.

Question 75

The board of directors desires to pay $40,000 of dividends to its common shareholders when two years of dividends are in arrears on 1,000 shares of $20 par, 10% cumulative preferred stock. How much total dividends must be declared?

Question 76

The shareholders' equity section of Maven Corporation's balance sheet as of December 31, 2008 is as follows:
The following events occurred during 2009:
$\bullet$ February 1 - 400 shares of authorized and unissued common stock were sold for $4 per share.
$\bullet$ June 16 - A 15% stock dividend was declared and issued. Market value per share is currently $18.
$\bullet$ October 11 - A three-for-one split was carried out. Market value was $21 per share.
$\bullet$ November 4 - A cash dividend of $4.20 per share was declared, payable January 12 to shareholders of record on November 30.
How many shares of common stock are outstanding at December 31, 2009? Determine the balance in the common stock account at December 31, 2009.

Question 77

On January 23, Borders Corporation purchased 1,000 shares of its own common stock for $30 a share. On March 31, it sold 600 of those shares for $42 a share. How much is the gain reported on the income statement resulting from the sale of treasury stock?

Question 78

The shareholders' equity section of Samuels Company were reported on the balance
sheets for December 31:
Based on this information, how many shares of preferred stock were issued in 2010 and what was the average issue price?
a. 4,000 shares and $112.50 per share
b. 160 shares and $88.75 per share
c. 800 shares and $250 per share
d. 1,600 shares and $112.50 per share

Question 79

Total dividends of $7,000 are declared when one year of dividends are in arrears on 1,000 shares of $8 cumulative preferred stock. How much of the $7,000 of dividends goes to the common shareholders?

Question 80

Immediately before Cayman Corporation issued 2,000 shares of its common stock for $15 a share, it had total liabilities of $150,000 and total shareholders' equity of $300,000. Cayman had 10,000 shares of common stock outstanding prior to the new issuance. Calculate Cayman's debt/equity ratio immediately after the new issuance.