Deck 11: Reporting and Analyzing Stockholders Equity

Question 1

Stockholders' equity represents the current market value of a company.

Answer 1

False

Question 2

Companies must report 'gains and losses' on transactions relating to purchases and sales of their own stock as nonoperating amounts on the income statement.

Answer 2

False

Question 3

Earned capital includes the positive or negative effects of accumulated other comprehensive income.

Answer 3

True

Question 4

There are never any income statement effects recognized when a purchase or sale of stock or payment of dividends occurs.

Question 5

One reason a company may repurchase stock is because it wants to send a signal to the market that its shares are overvalued.

Question 6

A company's profit declines when dividends are paid because a company must recognize an expense for the amount of the dividend.

Question 7

All conversion options for convertible securities are reported on the balance sheet.

Question 8

If French's loses its dominance in the mustard market and eventually goes "belly up", its preferred shareholders carry senior positions as claimants in bankruptcy over the common shareholders.

Question 9

When a company issues its stock, the equity increase is equal to the number of shares sold multiplied by the market price of the stock on the issue date.

Question 10

A re-issuance of treasury stock has the potential to yield a gain or loss on the income statement.

Question 11

Cash dividends reduce both cash and retained earnings by the amount of the dividends paid.

Question 12

Net income is generally viewed as a more inclusive measure of performance than comprehensive income.

Question 13

IFRS allows the repurchase of a company's own stock to be reported as a decrease to the common equity amounts in stockholders' equity.

Question 14

The conversion feature of stock has a value even if it not detachable for sale under IFRS.

Question 15

Which best describes par value for stock?

A) An arbitrary amount set by the company for each share of stock
B) The value at which stock shares were issued
C) The current market value of the stock
D) The amount expected to be paid out as a dividend on a share of stock

Question 16

For small stock dividends, by what amount are retained earnings reduced?

A) Par value of the dividend
B) Book value of the dividend
C) Par value of the stock
D) Market value of the dividend

Question 17

What is the net book value of the company that is available to common shareholders called?

A) Additional paid-in capital
B) Total contributed capital
C) Book value per share
D) Comprehensive income

Question 18

If a company issues 1,000 shares of $4 par value common stock at a market price of $120 per share, which of the following is the correct balance sheet entry?

A) Increase cash by $120,000 and increase earned capital by $120,000
B) Increase revenues by $120,000
C) Increase cash by $120,000 and increase contributed capital by $120,000
D) Increase common stock and cash by $4,000

Question 19

Which is not an item that should be included in the computation of 'other comprehensive income'?

A) Interest expense
B) Foreign currency translation adjustment
C) Unrealized gains (losses)
D) Adjustments to pension plans

Question 20

In October, 2016, Sirius Corporation distributed profits to its preferred shareholders before its common shareholders. What is the name of the preference that allows this?

A) Dividend preference
B) Treasury preference
C) Liquidation preference
D) Profits preference

Question 21

During May, 2016, Backyard Corporation announced a 4-for-1 stock split. This brought the number of shares outstanding from 25,792,000 shares to _____ shares, and its $1.20 par value to _____ per share.

A) 6,448,000; $4.80
B) 6,448,000; $0.30
C) 103,168,000; $0.30
D) 103,168,000; $4.80

Question 22

Assume Company X has been paying out consistent dividends over the past 40 years. This fiscal year, the company reports a sharp decline in the dividend it plans to pay out. The most likely reaction of the market will be:

A) Company X's stock price will decrease
B) Company X's stock price will increase initially and then decline
C) Company X's stock price will remain constant
D) None of the above

Question 23

If a company feels that its shares are undervalued and it wants to send a signal to the market, the company may:

A) Issue more stock (as allowed under its charter)
B) Decrease regular cash dividends in an attempt to increase share price
C) Repurchase shares
D) Do nothing and wait - the market will realize the undervaluation

Question 24

Sarina Company plans to issue a large stock dividend. In accounting for this transaction, what effects occur to the contributed capital section of stockholders' equity?

A) Common stock increases by the total market value of the dividend.
B) Common stock increases by the number of dividend shares × par value per share, and retained earnings decreases for the same amount.
C) Common stock increases by the number of dividend shares × par value per share, and retained earnings increases for the balance.
D) Retained earnings increases by the number of dividend shares × par value per share, and additional paid-in capital increases for the balance.

Question 25

Harvey Company has 30,000 shares of $150 par value, 8% cumulative preferred stock and 160,000 shares of $60 par value common stock. Harvey declares and pays cash dividends amounting to $640,000.
If no arrearage on the preferred stock exits, how much in total dividends is paid to each class of stock?

A)
B)
C)
D)

Question 26

As a preferred stockholder, you are entitled to numerous preferences and privileges over common stockholders. If you are a preferred stockholder of a company that has fallen on economic hardship and is likely to go bankrupt, which preference or privilege of preferred stock is going to be most useful to you?

A) Dividend preference
B) Liquidation preference
C) Conversion privileges
D) Participation privilege

Question 27

Stone Company reported net income of $2,536 million in 2016. The weighted average number of common shares outstanding during 2016 was 554 million shares. Brook paid $80 million in dividends on preferred stock, which was convertible into 20 million shares of common stock.
How much is basic earnings per share amount for 2016?

A) $4.43
B) $4.27
C) $4.58
D) $4.42

Question 28

Stone Company reported net income of $2,536 million in 2016. The weighted average number of common shares outstanding during 2016 was 554 million shares. Brook paid $80 million in dividends on preferred stock, which was convertible into 20 million shares of common stock.
How much is the diluted earnings per share amount for 2016?

A) $4.43
B) $4.42
C) $4.27
D) $4.58

Question 29

Use the following information to answer questions below
On September 1, 2016, Utah Company's balance sheet indicates there are 1,600,000 shares of $60 par value common shares in the Common Stock account and $9,000,000 in the Additional Paid-in Capital account. There are 4,000,000 shares authorized. On September 2, Utah splits its stock 2 for 1.

-How many of Utah's shares of common stock are issued and outstanding immediately after the stock split?

A) 600,000
B) 2,400,000
C) 3,200,000
D) 8,000,000

Question 30

Use the following information to answer questions below
On September 1, 2016, Utah Company's balance sheet indicates there are 1,600,000 shares of $60 par value common shares in the Common Stock account and $9,000,000 in the Additional Paid-in Capital account. There are 4,000,000 shares authorized. On September 2, Utah splits its stock 2 for 1.

-What is the dollar balance of Utah's common stock account immediately after the stock split?

A) $ 72,000,000
B) $144,000,000
C) $ 36,000,000
D) $ 96,000,000

Question 31

Friendly Company has 20,000 shares of $160 par value, 5% cumulative preferred stock and 140,000 shares of $40 par value common stock. Friendly declares and pays cash dividends amounting to $451,200.
If no arrearage on the preferred stock exits, how much in dividends per share is paid to the common stockholders?

A) $1.50
B) $8.00
C) $2.08
D) $3.22

Question 32

During 2016, Cambridge Company had 20,000 shares of $20 par value common stock and 7,000 shares of 8%, $60 par value convertible preferred stock outstanding. Each share of preferred stock may be converted into three shares of common stock. Cambridge Company's 2016 net income was $1,300,000.
A. Compute basic earnings per share for 2016.
B. Compute diluted earnings per share for 2016.

Question 33

Clockworks Company began business on January 1 and immediately issued 600,000 shares of its $2 par value common stock for $16,000,000. At the end of the year it paid $600,000 in cash dividends. In midyear, the firm bought back some of its own shares. The company reports the following additional information at December 31:
A. How much is the Additional Paid-in Capital account at the end of the year?
B. Determine the retained earnings amount at the end of the year.
C. How many shares of stock are in the treasury at the end of the year?

Question 34

Use the following consolidated statement of stockholders' equity to show the summary transactions by preparing an entry in journal form with explanation for each item A through C.
A. Pay cash dividends (item 7)
B. Issue common stock (item 5)
C. Purchase treasury shares (item 3)

Question 35

Ember Company had the following transactions:
Year 1: Ember Company sells 20,000 shares of its no-par common stock for $30.
Year 2: Ember Company buys 2,000 shares of its no-par common stock for $24 per share.
Year 3: Ember Company declares and pays a dividend on its no-par common stock of $6 per share. The company's basic earnings per share were $16 in the third year.
Indicate the effect (increase, decrease, no effect) of each of these stock decisions for each year on the items listed below.

Question 36

Schulze has 600,000 shares of $2 par value common stock outstanding. The current market price of the stock is $150 per share. Schulze distributes a small stock dividend of 15% of the outstanding shares of common stock. Record the financial statement effects of the stock dividend in the financial statement template.

Question 37

Sea Bird Co. announces a large stock dividend of 45% of the 2.2 million outstanding shares of common stock. The current price per share is $15.50. Par value of the stock is $0.02 per share. Illustrate the financial effects of this large stock dividend in the balance sheet template.

Question 38

Use the following information to prepare the shareholders' equity section of the balance sheet for Parish Incorporated:
A. Common Stock-$0.30 par value: 60,000 shares authorized, 25,000 shares outstanding as of December 31, 2016
B. Retained Earnings, December 31, 2016-$68,000
C. Treasury Stock-Parish repurchased 3,000 shares at $50 per share
D. Total Shareholders' Equity as of December 31, 2016 is $540,000

Question 39

Callaway Trucking, based in Atlanta, GA, has 250,000 common shares outstanding with a $0.02 par value and $60 current market value. The treasury stock account is reported at $100,000 with an average cost of $5 per share.
How much is the total common stock reported on the balance sheet?

Question 40

The August 1, 2016 balance sheet for Hospitality Company reported 24,000 shares of $40 par value common stock that were issued and outstanding:
On August 2, 2016, the company splits its stock 2-for-1.
A. How many shares of common stock are issued and outstanding immediately after the stock split?
B. What is the dollar balance of common stock immediately after the stock split?

Question 41

Runner Company initially has 60,000 shares outstanding of common stockon January 1, 2016. It has the following changes during 2016 in terms of shares.
Calculate the number of shares outstanding at the end of 2016 (round down if partial shares).

Question 42

On July 1, 2016, Oceanfront, Inc. issues 14,000 shares of $10 par value preferred stock at $100 cash per share and 30,000 shares of $2 par value common stock at $50 cash per share. Indicate the financial statement effects of these two issuances using the following template:

Question 43

Following is the stockholder's equity section of Magnificent Molding, Inc. at December 31, 2016:
A. Compute the number of shares that have been issued.
B. At what average issue price were the shares issued?
C. At what average cost were the treasury stock purchased?

Question 44

Colossal Combines has 20,000 shares of convertible preferred stock with a par value of $10. On December 1, the preferred stock was converted into 4,000 shares of common stock with a par value of $20.
A. Show the effect on the balance sheet and income statement using the following template.
B. What is the effect on income from the conversion?

Question 45

Amusement Corporation reports the following components of its comprehensive income in its 2016 consolidated statements of shareholders' equity ($ in millions):
Identify the primary sources of comprehensive income, and explain why comprehensive income is a more inclusive notion of company performance than net income alone.

Question 46

Stay Fit Company has $1,600 of convertible bonds with an unamortized premium of $120. The bonds are converted into 100 shares of $2 par value common stock.
A. What is the effect of this conversion on the balance sheet?
B. What is the effect of this conversion on the income statement?
C. What is one benefit and one cost of the conversion privilege of a security?

Question 47

Sea Star Company has preferred stock with a par value of $15 that is convertible into common stock at the ratio of 1 to 1. The common stock has a par value of $8. The following table presents the components of stockholders' equity for Sea Star Company:
A. How many shares of common stock were sold during the year and at what price?
B. How many shares of preferred stock were converted this year?
C. Why would a company offer a conversion privilege?
D. List two reasons a shareholder might exercise the conversion privilege.

Question 48

Following is the stockholders' equity section of the Amazing Air Lines (AAL) Corporation's 2016 Consolidated Balance Sheet ($ in millions):
A. In general, what is meant by "accumulated other comprehensive loss"?
B. AAL has 1.5 billion shares of common stock authorized, with 867,866,505 of these shares issued as of the end 2016. Why is there a difference between these two numbers?
C. How many common shares did AAL have outstanding at the end of 2016?
D. Verify that AAL's common stock balance as of December 31, 2016 is approximately $95,000.
E. Calculate the average cost at which AAL repurchased its 18,225,197 million shares of common stock.
F. AAL's repurchase of 18,225,197 million shares in 2016 represents approximately 2.1% of the shares that are issued at year end. Give several reasons for this given the current economic conditions.

Question 49

Paul Merema, a disciplined investor, prefers the stock of a company with a higher ratio of retained earnings against contributed capital, preferably above 2 in his opinion. He finds LMN Company acceptable because the equity breakdown at June 30, its year end, is as follows:
On July 1, the day after its year end, LMN announced it will declare a 22% stock dividend. The stock price on this date is $20 per share.
With which accounting treatment will Paul be more pleased-a large or a small stock dividend?

Question 50

The stockholders' equity section of the Music, Inc.'s 2016 balance sheet follows together with a portion of its statement of cash flows:
A. Calculate the net income of Music, Inc. in 2016 using the above information.
B. Calculate the average dollar per share received for common stock issued during 2016.
C. What is the dividend per share paid in 2016?

Question 51

Following are selected stock transactions and information for Williams Materials, Inc.
●Authorization for initial public offering of 200,000 shares of common stock with par value of $0.02 to be issued at $50 per share
●Authorization for 10,000 shares of preferred stock with par value of $160 and 10%.
●Issued shares equal outstanding at time of offering.

Question 52

Vast Horizons has 20,000 outstanding shares of common stock with par value of $1.50 per share and market price on January 1 of $30.
A. Show the financial statement effects of the two independent equity transactions in the template below.
1. January 15: 6% stock dividend paid to common shareholders with current market price at $30
2. June 15: 28% stock dividend paid to common shareholders with current market price at $80
B. How have these two transactions changed the overall valuation of the firm?

Question 53

Many companies buy back their outstanding stock on an annual basis. List several reasons a company might want to repurchase shares of its stock, as well as the financial statement effects of this action.

Question 54

Identify the benefits received from being a preferred stockholder compared to a common stock holder. Describe the nature of each privilege or preference of each.

Question 55

Describe the benefits for an individual investor in purchasing convertible preferred stock. What are the effects on the financial statements of conversion?