Deck 11: Shareholders Equity

Question 1

Common shares have stated liquidation value just like preferred shares.

Answer 1

False

Question 2

A stock split does not decrease retained earnings.

Answer 2

True

Question 3

A corporation's charter establishes the market value of the company's shares.

Answer 3

False

Question 4

Shareholders can vote on the appointment of external auditors.

Question 5

Preferred shares are not included in shareholders' equity.

Question 6

Stock splits do not require a journal entry.

Question 7

Dividends in arrears do not appear on the balance sheet or require a journal entry.

Question 8

Dividends in arrears do not have to be disclosed to shareholders.

Question 9

Under IFRS changes in capital accounts are disclosed in the notes to the financial statements.

Question 10

A 3 for 2 share split is the same as fifty percent share dividend.

Question 11

When a company repurchases its shares or pays a dividend,it raises shareholders' equity.

Question 12

A sole proprietorship is an unincorporated business owned by one person.

Question 13

Stock dividends immediately increase the total value of the shareholders' investment.

Question 14

Some companies do not pay dividends even when the company is profitable.

Question 15

A partnership is any business owned by two or more people.

Question 16

Outstanding shares include all shares issued by a corporation which would include treasury stocks held by the issuing corporation.

Question 17

Earnings per share (EPS)is generally reported in the balance sheet under shareholders' equity.

Question 18

The EPS ratio is important because it signals the ability of the company to pay future dividends,which investors factor into the stock price.

Question 19

When a company records a stock repurchase,it is tracking a shareholder's sale of shares to another investor.

Question 20

When a company issues and sells shares at a price higher than the original issue price,the difference is considered contributed surplus.

Question 21

All else being equal,a company concerned with incomes taxes would prefer equity financing to debt,given the associated tax benefits.

Question 22

A stock dividend,by itself,provides no economic value.

Question 23

At the beginning of each accounting period,the capital account starts with a zero balance.

Question 24

Equity financing never has to be repaid.

Question 25

Dividends Declared is a temporary account that summarizes dividends declared during the year and then is closed to retained earnings at year-end.

Question 26

A relatively low P/E ratio illustrates a correctly priced stock and typically indicates strong future performance.

Question 27

Contributed Capital reports the amount of capital the company received from investors' contributions,in exchange for the company's shares.

Question 28

Earnings per share (EPS)is the best way to compare the performance of different companies.

Question 29

Shareholders of a corporation directly elect:

A)the president of the corporation.
B)the board of directors.
C)the treasurer of the corporation.
D)all of the employees of the corporation.

Question 30

Current earnings can predict future dividends and share prices.

Question 31

The rights of common shareholders to receive a proportionate share of assets on liquidation is pre-emptive rights

Question 32

Treasury shares are more common in Canada,than they are in the United States.

Question 33

In sole proprietorship the owner and the business are separate entities.

Question 34

For a business to be considered a corporation,it must:

A)be owned by an extremely large number of people.
B)be organized as a separate legal entity.
C)sell publicly traded shares.
D)all of the answers are acceptable.

Question 35

All other things equal,the higher the Return on Equity ratio the better the financial performance of the company.

Question 36

Accounting rules suggest that companies disclose any restrictions on retained earnings in their financial statement notes.

Question 37

A common loan covenant involves limiting the ability of the borrower to pay dividends.

Question 38

Accumulated Other Comprehensive Loss reports unrealized gains and losses,which are permanent changes in the value of certain assets and liabilities the company holds.

Question 39

The owner's salary is frequently the largest expense of a sole proprietorship.

Question 40

A major advantage of debt financing is that interest expense is tax deductible.

Question 41

Blue Star Films issues 200,000 no-par value shares for $60 per share in 2018.Three years later,it repurchases 30,000 of these shares for $80 per share.Blue Star records the repurchase in which of the following ways?

A)Debit Common Shares for $600,000 million and cash for $1.8 million and credit Contributed capital for $2.4 million.
B)Debit Common Shares for $1.8 million and retained earnings for $600,000 and credit Cash for $2.4 million.
C)Debit Common Shares for $1.8 million and contributed surplus for $600,000 and credit cash for $2.4 million.
D)Debit Cash for $2.4 million,credit Common shares for $1.8 million and credit retained earnings for $600,000.

Question 42

Which of the following statements would explain why a company may want to repurchase its shares?

A)To demonstrate to investors that it believes its own shares are worth purchasing.
B)To obtain shares to reissue to employees as part of an employee stock option plan.
C)To obtain shares that can be reissued as payment for purchase of another company.
D)All of the answers are acceptable.

Question 43

A company has 20,000 shares of Preferred Shares outstanding paying 0.30 cents dividend per share.It also has 110,000 shares of common stock outstanding.If the company decides to pay a total of $35,000 in dividends.The preferred stock is cumulative with two years' dividends in arrears.What is the amount of dividend preferred stockholders will receive?

A)$6,000
B)$12,000
C)$18,000
D)$24,000 preferred stock dividend: $0.30 * 20,000 = $6,000 Dividend in arrears: 3 * $6,000 = $18,000.

Question 44

Shareholders' equity does not include which of the following:

A)the present value of future dividends to be paid.
B)the total issued value of common shares.
C)retained earnings.
D)Contributed surplus.

Question 45

A company has 20,000 shares of Preferred Shares outstanding paying 0.30 cents dividend per share.It also has 110,000 shares of common stock outstanding.If the company decides to pay a total of $35,000 in dividends,the preferred stock is cumulative with two years' dividends in arrears.What is the amount of dividend common stockholders will receive?

A)$17,000
B)$23,000
C)$29,000
D)Nothing

Question 46

Typically,all other things equal,a profitable company that pays relatively high dividends:

A)is an attractive investment for those seeking growth.
B)will reinvest less profit which can lead to smaller growth potential.
C)will experience more growth in stock price over time.
D)all of the answers are acceptable.

Question 47

A company sells 1 million shares of stock with no par value for $15 a share.In recording the transaction,it would:

A)debit Cash for $20,000 and credit Common Shares for $20,000.
B)debit Cash for $15 million and credit Common Shares for $15 million.
C)debit Cash for $15 million,credit Common Shares for $20,000 and credit Contributed surplus for $14,980,000.
D)debit Cash for $20,000,debit Capital Receivable for $14,980,000,credit Common Shares for $20,000 and credit Contributed surplus for $14,980,000.

Question 48

Typically,all other things equal,a profitable company that pays little or no dividends:

A)is a bad investment.
B)will reinvest profits which can lead to greater growth potential.
C)will experience relatively stable stock prices over time.
D)all of the answers are acceptable.

Question 49

A corporate charter specifies that the company may sell up to 20 million shares of stock.The company sells 12 million shares to investors and later buys back 3 million shares.Of the 3 million shares bought back,the company cancels 2 million and holds 1 million.The number of authorized shares after these transactions are:

A)12 million shares.
B)20 million shares.
C)9 million shares.
D)18 million shares.

Question 50

When a company sells shares to the public for the first time,the sale is called a(n):

A)IPO or initial public offering.
B)FTI or first time issue.
C)SNI or seasoned new issue.
D)ISO or initial stock offering.

Question 51

The incorporation of companies in the Canada is controlled by:

A)the courts.
B)the Provincial government and the courts.
C)the Federal government and the courts.
D)the Provincial and Federal governments.

Question 52

Which of the following statements about stock dividends is true?

A)Stock dividends are reported on the income statement.
B)Stock dividends are reported on the statement of shareholders' equity.
C)Stock dividends increase total shareholders' equity.
D)Stock dividends decrease total shareholders' equity.

Question 53

Holders of common shares receive certain benefits,such as a residual claim,which:

A)is the right of shareholders to be paid back their investment before anyone else if the company ceases operation.
B)is the right to oversee management of the company.
C)is the right to share in any remaining assets after creditors have been paid off if the company is liquidated.
D)is the continuing right to receive a share of profits as dividends.

Question 54

Which of the following affects total shareholders' equity?

A)Stock split
B)Stock dividend
C)Cash dividend
D)Liabilities

Question 55

Which of the following statements about dividends is not true?

A)Dividends represent a sharing of corporate profits with owners.
B)Both stock dividends and cash dividends reduce retained earnings.
C)Cash dividends paid to shareholders reduce net income.
D)Dividends are declared at the discretion of the board of directors.

Question 56

A corporate charter specifies that the company may sell up to 20 million shares of stock.The company sells 12 million shares to investors and later buys back 3 million shares.Of the 3 million shares bought back,the company cancels 2 million and holds 1 million.The number of issued shares after these transactions are:

A)12 million shares.
B)9 million shares.
C)10 million shares.
D)18 million shares.

Question 57

Centrador issues 200,000 no-par value shares for $150 per share in 2018.Three years later,it repurchases 30,000 of these shares for $80 per share.Centrator records the repurchase in which of the following ways?

A)Debit Common Shares for $2.4 million,debit cash for $2.1 million and credit Contributed capital for $4.5 million.
B)Debit Common Shares for $4.5 million and credit Cash for $2.4 million and contributed surplus for $2.1 million.
C)Debit common shares for $4.5,debit contributed surplus for $2.4 and credit cash for $2.1 million.
D)Debit Cash for $4.5 million,credit Common shares for $2.4 million and credit Contributed Surplus for $2.1 million.

Question 58

Shareholders' equity is:

A)the amount the company received for all shares when issued plus the amount of retained earnings and the amount of contributed surplus minus treasury shares.
B)the amount the company received for all shares authorized plus the amount of retained earnings and treasury shares.
C)the par value the company received for all shares issued plus the amount of retained earnings and contributed surplus minus treasury shares.
D)the amount the company received for all shares when issued minus the amount of retained earnings and treasury shares.

Question 59

Which of the following is the first chance given to existing shareholders to buy newly issued shares before they are offered to others?

A)Residual claim
B)Pre-emptive rights
C)Voting rights
D)Stock dividend rights

Question 60

A corporate charter specifies that the company may sell up to 20 million shares of stock.The company sells 12 million shares to investors and later buys back 3 million shares.Of the 3 million bought back,the company cancels 2 million and holds 1 million.The current number of outstanding shares after these transactions have been accounted for is:

A)8 million shares.
B)20 million shares.
C)10 million shares.
D)9 million shares.

Question 61

If a corporation declares and distributes a 10% stock dividend on its common shares,the account debited is:

A)Dividends Payable.
B)Common Stock.
C)Share Capital.
D)Retained Earnings.

Question 62

The declaration date for a dividend is the date on which the company:

A)debits Dividends Declared and credits Dividends Payable for the amount of the dividend.
B)debits Dividend Expense and credits Cash for the dividend amount.
C)debits Dividends Payable and credits Cash for the dividend amount.
D)establishes who will receive the dividend payment.

Question 63

Stock splits and stock dividends have the following effects on retained earnings:

A)Stock splits increase retained earnings,while stock dividends have no impact.
B)Stock dividends decrease retained earnings,while stock splits have no impact.
C)Stock splits and stock dividends both lead to a decrease in retained earnings
D)Stock splits and stock dividends have no impact on retained earnings.

Question 64

On February 16,a company declares a 34' dividend to be paid on April 5 to shareholders of record on March 9.There are 2 million shares of common shares outstanding and 100,000 shares of treasury shares.What accounting entries does the company record on $\bold{\text{February 16}}$ ?

A)A debit to Dividends Payable and a credit to Cash,each for $646,000.
B)A debit to Dividends Declared and a credit to Dividends Payable,each for $646,000.
C)A debit to Dividends Payable and a credit to Cash,each for $680,000.
D)A debit to Dividends Declared and a credit to Dividends Payable,each for $714,000.

Question 65

A company issues 1 million shares of preferred shares with a price of $26 per share.The issuance should be recorded as:

A)a debit to Cash of $26 million and a credit to Preferred Shares of $26 million.
B)a debit to preferred shares of $26 million and a credit to cash of $26 million.
C)a debit to Cash of $24 million,a debit to Treasury Shares of $2 million,and a credit to Preferred Shares of $26 million.
D)a debit to Cash of $26 million,a credit to Preferred Shares of $2 million,and a credit to Additional Paid-in Capital of $24 million.

Question 66

Preferred shares differ from common shares in that preferred shares:

A)have more voting power and,as such,greater control over the management of the company.
B)because preferred shareholders are paid dividends before common shareholders.
C)receive a tax-free dividend.
D)all of the answers are acceptable.

Question 67

A cumulative dividend preference means that:

A)preferred shareholders are paid dividends before common shareholders are paid dividends for the current year only.
B)unpaid dividends to preferred shareholders accumulate and must be paid before common shareholders receive dividends.
C)preferred shareholders are paid their full fixed dividend rate each period as long as the company is in operation.
D)unpaid cash dividends to preferred shareholders must be replaced with stock dividends during the current period.

Question 68

Which of the following are the two financial requirements that the board of directors must consider when declaring a cash dividend? i)the retained earnings account has a positive balance greater than the dividend.
Ii)the cash account has a balance greater than the amount of the dividend declared.
Iii)the company's earnings have shown growth for the last two quarters.
Iv)the shareholders have approved the declaration of the cash dividend.

A)i and iii
B)i and ii
C)ii and iv
D)ii and iii

Question 69

Which one of the following events would not require a journal entry on a corporation's books?

A)2 for 1 stock split
B)100% stock dividend
C)2% stock dividend
D)$1 per share cash dividend

Question 70

Which of the following statements accurately explains why the board of directors of a company that is facing financial difficulties might issue a 2-for-1 stock split rather than declare a 100% stock dividend?

A)A stock split would not reduce the market price per share,whereas a stock dividend would.
B)A stock split would reduce the market price per share,whereas a stock dividend would not.
C)A stock split would increase total shareholders' equity,whereas a stock dividend would not.
D)A stock split would not reduce retained earnings,whereas a stock dividend would.

Question 71

The payment date for a dividend is the date on which the company:

A)debits Dividends Declared and credits Dividends Payable for the amount of the dividend.
B)debits Dividend Expense and credits Cash for the dividend amount.
C)debits Dividends Payable and credits Cash for the dividend amount.
D)establishes who will receive the dividend payment.

Question 72

A current dividend preference means that:

A)preferred shareholders are paid dividends before common shareholders are paid dividends.
B)unpaid dividends to preferred shareholders accumulate and must be paid before common shareholders receive dividends.
C)preferred shareholders are paid their full fixed dividend rate each period as long as the company is in operation.
D)unpaid cash dividends to preferred shareholders must be replaced with stock dividends during the current period.

Question 73

The combined effect of the declaration and payment of a cash dividend on a company's financial statements is to:

A)decrease total liabilities and decrease shareholders' equity.
B)increase total expenses and increase total liabilities.
C)increase total assets and increase shareholders' equity.
D)decrease total assets and decrease shareholders' equity.

Question 74

Which of the following statements is true?

A)Stock splits and stock dividends both reduce the market value of a share but only stock splits reduce the book value per share of issued shares.
B)Stock splits reduce the book value of a share and stock dividends reduce the market value of a share.
C)Stock splits and stock dividends both reduce the market value of a share but only stock splits reduce the retained earnings.
D)Stock splits and stock dividends both reduce the market value of a share and the retained earnings.

Question 75

Fonthouse Corporation issues 10,000 shares of no-par preferred stock for cash at $60 per share. The journal entry to record the transaction will consist of a debit to Cash for $600,000 and a credit (or credits)to:

A)Preferred Shares for $600,000.
B)Preferred Shares for $500,000 and Additional Paid-In Capital for $100,000.
C)Preferred Shares for $500,000 and Retained Earnings for $100,000.
D)Investment in Fonthouse Shares for $600,000. This preferred stock has no-par value,so the entire amount received is credited to Preferred Stock.Debit Cash (10,000  $60)= $600,000 and Credit Preferred Shares 600,000.

Question 76

The effect of a stock dividend is to:

A)decrease total assets and shareholders' equity.
B)change the composition of shareholders' equity.
C)decrease total assets and total liabilities.
D)increase the market value per share of common shares.

Question 77

Fonthouse Corporation issues 10,000 shares of no-par preferred stock for cash at $60 per share. The effects of the transaction described will be reported on the balance sheet in the:

A)liabilities section.
B)retained earnings account.
C)preferred shares account.
D)common shares account.

Question 78

On February 16,a company declares a 34' dividend to be paid on April 5 to shareholders of record on March 9.There are 2 million shares of common shares outstanding and 100,000 shares of treasury shares.What accounting entries does the company make on April 5?

A)A debit to Dividends Payable and a credit to Cash for $714,000.
B)A debit to Dividends Declared and a credit to Dividends Payable for $680,000.
C)A debit to Dividends Payable and a credit to Cash for $646,000.
D)A debit to Dividends Declared and a credit to Dividends Payable for $646,000.

Question 79

The date of record for a dividend is the date on which the company:

A)debits Dividends Declared and credits Dividends Payable for the amount of the dividend.
B)debits Dividend Expense and credits Cash for the dividend amount.
C)debits Dividends Payable and credits Cash for the dividend amount.
D)establishes who will receive the dividend payment.

Question 80

A stock dividend:

A)is the same thing as a stock split.
B)will reduce shareholders' equity just like a cash dividend.
C)will not change any of the accounts within shareholders' equity.
D)will reduce retained earnings just like a cash dividend.