Deck 10: Shareholders Equity

Question 1

Common shareholders, due to their increased risk have first rights upon the organizations liquidation.

Answer 1

False

Question 2

A corporation is a separate legal entity that exists apart from its owners.

Answer 2

True

Question 3

The number of shares currently in the hands of shareholders is the same as the number of shares:

A) issued
B) authorized
C) outstanding
D) proposed by the board of directors

Answer 3

C

Question 4

All of the following are advantages of the corporate form of business except:

A) limited liability of shareholders
B) continuous life
C) no mutual agency
D) corporate taxation

Question 5

Under the Canada Business Corporation Act corporations can issue an unlimited number of shares.

Question 6

All of the following are basic rights of a shareholder except:

A) the right to vote
B) the right to receive a proportionate share of any assets remaining before the corporation pays its liabilities in the event of liquidation
C) the right to maintain one's proportionate ownership in the corporation
D) the right to receive a proportionate part of any dividend

Question 7

The ultimate control of the corporation rests with the:

A) federal and provincial governments
B) chief executive officer
C) shareholders
D) employees

Question 8

Contributed capital as shown on a corporate balance sheet includes the share accounts and any contributed surplus as well as retained earnings.

Question 9

The board of directors elects the chairperson of a corporation.

Question 10

Preferred shares are a hybrid between common shares and long-term debt.

Question 11

Share capital is:

A) the amount of shareholders' equity that the corporation has earned through profitable operations
B) the amount of shareholders' equity that the shareholders have contributed to the corporation
C) the amount of shareholder's equity that the shareholders have contributed to the corporation less the amount of shareholders' equity that the corporation has given back to the shareholders (dividends)
D) the amount of shareholders' equity that the shareholders have contributed to the corporation plus the amount of shareholders' equity that the corporation has earned through profitable operations

Question 12

Which of the following is a disadvantage of the corporate form of business organization?

A) mutual agency
B) unlimited liability
C) difficulty in transferring ownership
D) governmental regulation at both the federal and provincial levels

Question 13

One unique advantage given to preferred shareholders over common shareholders is the right to vote.

Question 14

Share capital is also known as:

A) contributed capital
B) retained earnings
C) total shareholders' equity
D) common shareholders' equity

Question 15

The term outstanding shares refers to the maximum number of shares a corporation is allowed to distribute to shareholders.

Question 16

In a corporation, the two basic sources of shareholders' equity are:

A) share capital and operating capital
B) share capital and retained earnings
C) donated capital and share capital
D) donated capital and retained earnings

Question 17

If a corporation issues only one class of shares, it must be:

A) par value
B) preferred
C) common
D) common or preferred

Question 18

Which of the following is not a characteristic that distinguishes corporations from proprietorships and partnerships?

A) Corporations are separate legal entities apart from the owners.
B) Corporate earnings are subject to double taxation.
C) Corporations have mutual agency.
D) Corporations have continuous lives regardless of changes in ownership.

Question 19

Which of the following types of business organizations terminates when its ownership structure changes?

A) partnerships and proprietorships
B) partnerships and corporations
C) proprietorships and corporations
D) only corporations

Question 20

All of the following are basic rights of a shareholder except:

A) the right to sell the shares
B) the right to vote
C) the right to collect dividends
D) the right to declare dividends

Question 21

What type of shares would an investor purchase if he or she were primarily interested in a safe investment?

Question 22

What type of shares would an investor purchase if he or she were primarily interested in steady dividends?

Question 23

When shares are issued, their stated value is set by the board of directors.

Question 24

What type of shares would an investor purchase if he or she were primarily interested in increasing dividends?

Question 25

List several characteristics of a corporation. Indicate, wherever appropriate, if the characteristic is an advantage or a disadvantage of the corporate form of business.

Question 26

Explain the fundamental difference between retained earnings and share capital.

Question 27

When shares are issued in exchange for a piece of equipment, the transaction is valued at the fair value of the equipment received.

Question 28

The entry to record the sale of 100 shares for $2,500 would include a debit to Share Capital of $2,500.

Question 29

Suppose 100 common shares are issued for $12.50 per share. The entry to record this issuance includes a:

A) credit to Retained Earnings for $1,250
B) credit to Common shares for $1,250
C) credit to Contributed Surplus for $250
D) debit to Preferred Shares for $1,000

Question 30

Name several accounts that would appear in the shareholders' equity section of a balance sheet.

Question 31

What effect does an investment of cash in a corporation have on the corporation's balance sheet?

A) It increases assets and decreases liabilities.
B) It increases assets and increases liabilities.
C) It increases assets and increases shareholders' equity.
D) It increases assets and decreases shareholders' equity.

Question 32

The issuance of preferred shares requires a:

A) debit to Retained Earnings
B) credit to Retained Earnings
C) debit to Share Capital, Preferred
D) credit to Share Capital, Preferred

Question 33

Assets received in exchange for the issuance of stock should be recorded at:

A) historical cost
B) historical cost less accumulated amortization taken to date
C) fair market value as determined by a good-faith estimate from independent appraisers
D) book value prior to the issuance

Question 34

Quo Corporation issues 100 common shares for $12 per share. This transaction will include a:

A) credit to Retained Earnings for $1,200
B) credit to Contributed Surplus for $1,200
C) debit to Common Shares for $1,200
D) credit to Common Shares for $1,200

Question 35

The president of the corporation can declare dividends.

Question 36

When 1,000 common shares are sold at $3.75 per share, Share Capital will:

A) increase $1,000
B) increase $2,750
C) increase $3,750
D) not be affected

Question 37

The issuance of common shares requires a:

A) credit to Retained Earnings
B) debit to Retained Earnings
C) credit to Common Shares
D) debit to Common Shares

Question 38

Blu corporation issued 1,000 common shares in exchange for a new commercial band saw. At the time of this transaction the shares were trading at $10 and the fair value of the saw was at $12,000. This transaction would be recorded at $10,000.

Question 39

Assets other than cash should be recorded at their current fair market values when received from the issuance of shares.

Question 40

The entry to record the issuance of 12,500 common shares at $2.50 per share includes a:

A) debit to Retained Earnings for $31,250
B) credit to Retained Earnings for $31,250
C) credit to Common Shares for $31,250
D) credit to Contributed Surplus for $31,250

Question 41

Eastern Pacific Corporation lost some of its accounting records in a fire on August 10, 2014. The following information has been salvaged from the rubble.
The preferred shares account has a balance of $251,900. The common shares were issued for an average price of $55 per share. There are 30,000 shares of common shares issued. The Retained Earnings account has a balance of $172,000 on August 10, 2014. The preferred shares were issued for an average price of $110.
Required:
a. Determine the number of preferred shares issued.
b. What is the balance in the Common Shares account
c. What is total share capital?
d. What is total shareholders' equity?

Question 42

Passed dividends on cumulative preferred shares:

A) are a liability until paid and may turn into a long-term liability with the passage of time
B) are lost forever by the preferred shareholders
C) must be paid by January 1 of the following year by law
D) are referred to as dividends in arrears

Question 43

JetNew issued 50,000 common shares on January 1, 2014 at $8 each. Preferred shares were issued on March 15, 2014 at $10 each with a dividend rate of $0.50. JetNew sold 20,000 of these shares. On November 15, in order to buy into the business, another shareholder offered up a building valued at $300,000 for 30,000 common shares. At the time of this transaction JetNew shares were trading at $9. Prepare the required journal entries.

Question 44

The following transactions took place in June for the Holista Corporation:
June 1 Issued 1,000 shares of $100 preferred shares.
Prepare journal entries for the above transactions.

Question 45

A company may repurchase their own shares for the following reasons except:

A) the company has issued all its authorized shares and needs the repurchased shares for distributions to employees under stock purchase plans
B) the company needs more financing
C) management wants to avoid a takeover by an outside party
D) the purchase may help support the share's current market price by decreasing the supply of shares available to the public

Question 46

Once a share is sold, it is consider issued.

Question 47

Before a company can pay dividends to the common shareholders, the owners of cumulative preferred shares must receive:

A) the current year's dividend, but not dividends in arrears
B) all dividends in arrears plus the current year's dividend
C) dividends in arrears, but not the current year's dividends
D) neither the current year's dividends nor dividends in arrears

Question 48

The payment of a cash dividend previously recorded:

A) reduces shareholders' equity and reduces assets
B) increases liabilities and increases assets
C) reduces liabilities and reduces assets
D) increases shareholders' equity and reduces liabilities

Question 49

The entry to record the payment of a cash dividend previously declared includes a:

A) debit to Retained Earnings
B) credit to Retained Earnings
C) credit to Dividends Payable
D) debit to Dividends Payable

Question 50

On June 30, 2014, Sneeze Limited was authorized to issue 60,000 shares of $5 cumulative preferred shares and 250,000 shares of common shares. During its start-up phase, the company engaged in several transactions.
Prepare journal entries for the following transactions:

Question 51

The declaration of a cash dividend:

A) increases shareholders' equity and reduces liabilities
B) increases liabilities and increases shareholders' equity
C) increases liabilities and decreases shareholders' equity
D) reduces assets and increases liabilities

Question 52

Glow Corporation has 50,000 shares of preferred shares outstanding, with annual dividends paid at the rate of $1.50 per share. Glow also has 100,000 shares of common shares outstanding. If Glow declares a $250,000 dividend in 2013, each outstanding share of common shares would receive:

A) $1.17
B) $1.75
C) $1.50
D) $2.50

Question 53

Stock dividends:

A) are distributions of cash to the shareholders
B) reduce the total assets of the corporation
C) have no effect on total shareholders' equity
D) increase the total liabilities of the corporation, and decrease the total shareholders' equity

Question 54

Which statement below regarding a share repurchase is true?

A) A share repurchase grows a company's assets and equity.
B) The company repurchasing shares is not entitled to vote.
C) Repurchasing shares shrinks a company's assets and equity.
D) Repurchasing shares increases retained earnings.

Question 55

Before a company can pay dividends to the common shareholders, the owners of noncumulative preferred shares must receive:

A) the current year's dividend, but not dividends in arrears
B) all dividends in arrears plus the current year's dividend
C) dividends in arrears, but not the current year's dividends
D) neither the current year's dividends nor dividends in arrears

Question 56

A retirement of common shares:

A) decreases the number of common shares issued
B) reduces the balance in the common shares account
C) produces a gain or loss reported on the income statement
D) decreases the number of common shares issued and reduces the balance in the common shares account

Question 57

A cash dividend becomes a legal liability of the corporation on the:

A) date of payment
B) date of declaration
C) date of record
D) date of distribution

Question 58

When a cash dividend is declared:

A) the Cash account is debited.
B) the Cash account is credited.
C) the Retained Earnings account is debited.
D) the Retained Earnings account is credited.

Question 59

Describe the rights typically enjoyed by common shareholders.

Question 60

One reason a company will repurchase its own shares is to help avoid a takeover of the company by an outside party.

Question 61

Following is the shareholders' equity section of the balance sheet of the Optimum Corporation: Share capital:
Common shares, 100,000 shares authorized,
The common shares are currently selling for $15.50 per share.
The total shareholders' equity after the distribution of a $0.75 per share cash dividend is:

A) $326,500
B) $575,000
C) $627,500
D) $950,250

Question 62

A stock dividend will:

A) reduce total assets
B) have no effect on total assets
C) have no effect on total assets or total owners' equity
D) increase total owners' equity

Question 63

Prevage Corporation has 10,000 shares of $10 cumulative preferred shares outstanding and 50,000 common shares outstanding. As of the beginning of this fiscal year, there were 2 years' dividends in arrears on the preferred shares. The board of directors wants to give the common shareholders a $1.50 dividend per share at the end of this fiscal year. The total dividends to be declared by the Prevage Corporation are:

A) $105,000
B) $120,000
C) $175,000
D) $375,000

Question 64

Stock dividends result in a reduction in the balance of the contributed capital account.

Question 65

Following is the shareholders' equity section of the balance sheet of the Everslim Corporation: Share capital:
Common shares, 100,000 shares authorized,
The common shares are currently selling for $15.50 per share.
The number of common shares authorized and issued after the distribution of a 15% common stock dividend is:

A) 115,000 and 74,750
B) 115,000 and 65,000
C) 100,000 and 74,750
D) 100,000 and 65,000

Question 66

Following is the shareholders' equity section of the balance sheet of the Everslim Company: Share capital:
Preferred shares, 420,000 shares authorized,
Common shares, 100,000 shares authorized,
The preferred shares are currently selling for $102.25 per share and the common shares are currently selling for $11.50 per share.
The total share capital after the distribution of a $66,000 dividend is:

A) $400,000
B) $150,000
C) $550,000
D) $817,000

Question 67

A stock dividend is issued for the following reasons except:

A) to continue dividends but conserve cash
B) to reduce the per-share market price of the shares
C) to reduce total shareholders' equity
D) to increase the shares account and decrease Retained Earnings

Question 68

For a company that has only common shares outstanding, dividing total shareholders' equity by the number of shares outstanding determines the:

A) liquidation value per share
B) earnings per share
C) market value per share
D) book value per share

Question 69

When accounting for a stock dividend, Retained Earnings should be debited for:

A) par value times the number of shares to be issued
B) book value times the number of shares to be issued
C) current market value times the number of shares to be issued
D) liquidation value times the number of shares to be issued

Question 70

Which of the following statements regarding stock splits is incorrect?

A) A stock split increases total owners' equity.
B) A stock split involves a reduction in the share's issue value.
C) A stock split decreases the market price of the shares.
D) A stock split is an increase in the number of authorized, issued, and outstanding shares.

Question 71

Following is the shareholders' equity section of the balance sheet of the Everslim Corporation: Share capital:
Common shares, 100,000 shares authorized,
The common shares are currently selling for $15.50 per share.
The balance in the Common Shares account after the distribution of a $0.75 per share cash dividend is:

A) $575,000
B) $627,500
C) $650,000
D) $976,500

Question 72

Following is the shareholders' equity section of the balance sheet of the Everslim Corporation: Share capital:
Common shares, 100,000 shares authorized,
The common shares are currently selling for $15.50 per share.
The balance in the Common Shares account after the distribution of a 15% common stock dividend is:

A) $650,000
B) $747,500
C) $801,125
D) $1,150,125

Question 73

Health & Wellness Corporation has had 7,500 shares of $3.00 cumulative preferred shares outstanding as well as 28,000 common shares issued at $10 outstanding since it was incorporated. During the first, second, and third years of operations, $15,000, $18,000, and $50,000 in dividends, respectively, were paid. The dividends paid to the common shareholders of Health & Wellness Corporation in year three amounted to:

A) $0
B) $15,500
C) $27,500
D) cannot be determined from the given information

Question 74

JetNew has the follow share outstanding since their initial share offering:
30,000 shares of $2.00 cumulative preferred shares
60,000 common shares issued at $10 each
The board of directors has declared the following dividends:
What would the journal entry have looked like on the date of declaration for each year?

Question 75

During 2010-2014, IPO Corporation had the following issuances of shares outstanding for the entire period:
20,000 shares of $5.00 cumulative preferred shares
50,000 common shares issued at $10 each
Cash dividends declared by the board of directors during 2010-2014 were as follows:
Required: Compute the amount of total dividends and dividends per share payable to each class of shares for 2010-2014.

Question 76

Following is the shareholders' equity section of the balance sheet of the Optimum Corporation: Share capital:
Common shares, 100,000 shares authorized,
The common shares are currently selling for $15.50 per share.
The entry to record the declaration of a $0.75 per share cash dividend includes:

A) debit to Dividends Payable for $48,750
B) credit to Common shares for $48,750
C) debit to Retained Earnings for $48,750
D) debit to Retained Earnings for $75,000

Question 77

The entry to record the declaration of a cash dividend includes a credit to retained earnings.

Question 78

The market price of a share of Omega 3 Company common shares is $110. If Omega 3 Company declares and issues a 30% stock dividend, the market price will, in theory, adjust to approximately:

A) $33
B) $70
C) $85
D) $143

Question 79

JetNew has the follow share outstanding since their initial share offering:
50,000 shares of $2.00 cumulative preferred shares
50,000 common shares issued at $15 each
The board of directors has declared the following dividends:
Prepare a table indicating the split of the declared dividends between the common shareholders and the preferred shareholders for each year.

Question 80

Following is the shareholders' equity section of the balance sheet of the Everslim Company: Share capital:
Preferred shares, 420,000 shares authorized,
Common shares, 100,000 shares authorized,
The preferred shares are currently selling for $102.25 per share and the common shares are currently selling for $11.50 per share.
The entry to record the distribution of a $66,000 dividend includes a:

A) credit to Dividends Payable, Preferred for $6,000
B) credit to Dividends Payable, Preferred for $66,000
C) debit to Common Shares for $6,000
D) debit to Common Shares for $66,000