Deck 21: Corporations: Earnings, Taxes, Distributions, and the Retained Earnings Statement

Question 1

Cash dividends reduce both the retained earnings and the stockholders' equity in the corporation.

Answer 1

True

Question 2

At year-end, an adjusting entry is necessary to recognize the correct amount of income taxes the corporation must pay for the year.

Answer 2

True

Question 3

Dividends on different classes of capital stock should be accounted for separately.

Answer 3

True

Question 4

A credit balance in Income Summary represents net loss; a debit balance represents a net income.

Question 5

Income taxes for a corporation are normally reported as a separate expense item on the income statement.

Question 6

Upon the date of declaration of a dividend, the corporation has incurred a liability for the dividend.

Question 7

Corporate earnings that are not distributed to the stockholders are retained by the corporation to help finance the growth of the business.

Question 8

A board of directors may declare a dividend higher than the balance of the retained earnings account, as long as the cash balance is adequate to pay the dividends.

Question 9

Corporations are subject to specific corporate tax rates different from those for individuals.

Question 10

Most corporations must estimate their annual income taxes and make quarterly tax payments.

Question 11

If a 10% stock dividend is declared, an amount equal to the par value of the shares to be distributed should be charged to the retained earnings account.

Question 12

In corporate accounting, a distinction is made between paid-in or invested capital and capital resulting from retained earnings.

Question 13

The two major sources of capital for every type of business are capital that results from the investment of cash or other property by the owner or owners and capital that results from the receipt of dividends.

Question 14

The balance of the income summary account of a corporation is transferred to the capital stock account.

Question 15

No dividend can be paid unless so declared by the board of directors.

Question 16

One thing that the sole proprietorship and the corporate form of organization have in common is that neither must pay income taxes.

Question 17

A corporation generally keeps and reinvests a portion of its net income instead of distributing it to its stockholders.

Question 18

When a dividend is declared, Stock Dividends is debited and Cash is credited.

Question 19

The names of stockholders entitled to receive dividends are determined on the date of payment.

Question 20

An entry is required both on the date of declaration and the date of payment.

Question 21

An adjusting entry is not required if the estimated payments made throughout the year are more than the actual taxes due.

Question 22

Unappropriated Retained Earnings will decrease because of net losses, declarations of cash or stock dividends, and appropriations.

Question 23

A stock split requires no formal journal entry and may be recognized simply by a memorandum notation in the general journal and in the appropriate capital stock accounts.

Question 24

A stock dividend will reduce the amount in the retained earnings section of stockholders' equity, while increasing the amount in the paid-in capital section.

Question 25

The ending balance of the retained earnings account on the statement of retained earnings is the same amount that appears in the stockholders' equity section of the balance sheet.

Question 26

A statement of retained earnings is used to explain the change in the amount of retained earnings between two successive balance sheet dates.

Question 27

Stock Dividends Distributable is reported as an addition to common stock in the stockholders' equity section of the balance sheet.

Question 28

Generally, a stock dividend is declared to improve the marketability of the shares by reducing the market price per share, increasing the number of shares outstanding, and making it possible to have a wider ownership of the stock.

Question 29

Appropriation of retained earnings has been used primarily to limit the availability of retained earnings for paying stockholders' dividends.

Question 30

A stock dividend may be distributed even if the company is short of cash.

Question 31

For a stock dividend of less than 20 to 25% of the outstanding shares, Stock Dividends is debited for the par value of the stock to be distributed.

Question 32

Three dates are involved in the declaration and payment of dividends-the date of declaration, the date of record, and the date of payment.

Question 33

If the corporation has a net loss for the period, the closing entry will include a debit to Income Summary and a credit to Retained Earnings.

Question 34

An exchange of one share of an old issue of stock for a multiple number of shares of a new issue of stock with a reduced par or stated value is known as a stock split.

Question 35

A proportionate distribution of shares of a corporation's own stock to its stockholders is called a property dividend.

Question 36

If a balance sheet is prepared between the date of declaration and date of payment, dividends payable accounts are reported as current liabilities.

Question 37

Corporations can legally declare cash dividends only if the retained earnings balance is sufficient to cover the dividends.

Question 38

Stock dividends typically are stated as a percentage of common stock outstanding.

Question 39

Even if there are both appropriated and unappropriated retained earnings, the balances are combined when preparing the statement of retained earnings.

Question 40

When an appropriation of retained earnings is made, total retained earnings is decreased.

Question 41

The balance of the income summary account of a corporation is transferred to which of the following accounts?

A) Capital Stock
B) Cash
C) Premium on Sale of Capital Stock
D) Retained Earnings

Question 42

The board of directors declared a $2 per share cash dividend on common stock and the corporation had 5,000 shares authorized and 4,000 shares outstanding. The entry required to record the declaration of dividends would be

A) a debit to Cash and a credit to Common Dividends Payable.
B) a debit to Common Dividends Payable and a credit to Cash.
C) a debit to Retained Earnings and a credit to Common Dividends Payable.
D) a debit to Cash Dividends and a credit to Common Dividends Payable.

Question 43

Estimated quarterly income tax payments are due on each of the following dates EXCEPT

A) March 15.
B) April 15.
C) June 15.
D) September 15.

Question 44

An exchange of one share of an old issue of stock for a multiple number of shares of a new issue of stock with reduced par or stated value is known as a

A) property dividend.
B) stock dividend.
C) stock split.
D) liquidating dividend.

Question 45

A retained earnings appropriation is a restriction of retained earnings by

A) the board of directors.
B) stockholders.
C) senior management.
D) accountants.

Question 46

Most corporations must estimate their annual income taxes and make

A) annual payments.
B) semiannual payments.
C) monthly payments.
D) quarterly payments.

Question 47

Typically, the only credit to the retained earnings account for a corporation is

A) the initial investment of all owners.
B) net income of the period.
C) net loss of the period.
D) any withdrawal by the owners.

Question 48

An entry to appropriate a portion of retained earnings to finance a future plant expansion would include a credit to

A) Unappropriated Retained Earnings.
B) Appropriated Retained Earnings.
C) Cash.
D) Paid-In Capital in Excess of Par.

Question 49

Which of the following would not be shown on the statement of retained earnings?

A) declaration of a cash dividend
B) declaration of a stock dividend
C) an appropriation for plant expansion
D) the purchase of treasury stock

Question 50

The owner of 100 shares of stock of a corporation with 2,000 shares of stock outstanding has a 5% interest in the total stockholders' equity. If a 20% stock dividend is declared and distributed, that stockholder would own which of the following number of shares?

A) 20
B) 100
C) 105
D) 120

Question 51

A dividend is declared by the

A) board of directors.
B) stockholders.
C) president of the corporation.
D) CFO of the corporation.

Question 52

The journal entry made on the date of declaration of a cash dividend to common stockholders includes

A) a debit to Cash Dividends and a credit to Common Dividends Payable.
B) a debit to Cash Dividends and a credit to Cash.
C) a debit to Common Dividends Payable and a credit to Cash Dividends.
D) a debit to Cash and a credit to Common Dividends Payable.

Question 53

If a corporation issues additional shares of its own stock to the stockholders on a proportional ownership basis, these are known as a

A) liquidating dividend.
B) dividend payable.
C) cash dividend.
D) stock dividend.

Question 54

All of the following statements concerning Retained Earnings are true EXCEPT

A) declaring cash dividends will decrease Retained Earnings.
B) distributing stock dividends will decrease Retained Earnings.
C) appropriating retained earnings will have no effect on total stockholders' equity.
D) declaring a stock split will have no effect on Retained Earnings.

Question 55

After making four quarterly estimated payments of $3,500, a corporation's actual income tax liability for the year is $17,200. The year-end adjusting entry would require

A) a debit to Income Tax Payable for $3,200.
B) a debit to Cash for $3,200.
C) a credit to Cash for $3,200.
D) a debit to Income Tax Expense for $3,200.

Question 56

When a dividend is paid in cash, it is known as a

A) liquidating dividend.
B) dividend payable.
C) cash dividend.
D) property dividend.

Question 57

A corporation may issue a stock dividend for which of the following reasons?

A) It may be short of cash and unable to pay a cash dividend.
B) It may want to increase the marketability of its stock by raising the price per share.
C) It may have a large debit balance in Retained Earnings and the directors may want to transfer part of this balance to the common stock account.
D) It may want to increase the stockholders' ownership in the corporation.

Question 58

Capital resulting from the retention of earnings should be entered in an account with an appropriate title such as

A) Retained Earnings.
B) Appropriated Retained Earnings.
C) Earnings Retained in the Business.
D) Capital Stock.

Question 59

The board of directors declared a $2 per share cash dividend on common stock and the corporation had 5,000 shares authorized and 4,000 shares outstanding and make a journal entry. The journal entry for the dividend payment would be

A) a debit to Cash Dividends for $8,000 and a credit to Common Dividends Payable for $8,000.
B) a debit to Cash Dividends for $10,000 and a credit to Common Dividends Payable for $10,000.
C) a debit to Cash Dividends Payable for $8,000 and a credit to Cash for $8,000.
D) a debit to Cash Dividends Payable for $10,000 and a credit to Cash for $10,000.

Question 60

In a corporation, the capital resulting from the retention of earnings is entered in the

A) cash account.
B) retained earnings account.
C) paid-in capital account.
D) income summary account.

Question 61

When a stock dividend is distributed, the account to be debited would be

A) Retained Earnings.
B) Stock Dividends Distributable.
C) Paid-In Capital in Excess of Par.
D) Capital Stock.

Question 62

Santiago Corporation estimated at the beginning of 20-- that its income tax for the year would be $200,000. Calculate the estimated income tax per quarter and show one of the quarterly entries to pay the taxes. As of December 31, 20-- Santiago Corporation had an actual tax liability of $200,437. Calculate the income tax due and make the necessary adjusting entry.

Question 63

A resolution by the board of directors to set aside a part of the credit balance of the retained earnings account for a specific use is called

A) earnings retained in the business.
B) an appropriation.
C) a recapitalization.
D) a deficit.

Question 64

The owner of 100 shares of stock of a corporation with 2,000 shares of stock outstanding has a 5% interest in the total stockholders' equity. If a 20% stock dividend is declared and distributed a 5% interest in the total stockholders' equity prior to the stock dividend, would have which of the following interests in the equity after the stock dividend was distributed?

A) 5%
B) 6%
C) 20%
D) 25%

Question 65

To explain the change in the amount of retained earnings between successive balance sheet dates, it is customary to prepare a(n)

A) retained earnings statement.
B) balance sheet.
C) statement of stockholders' equity.
D) income statement.

Question 66

Prepare journal entries for each of the following transactions.
June 25
Declared a 7% stock dividend to common shareholders. The market value of the common stock is $14 per share. The par value is $13. There are 60,000 shares of common stock outstandinG.July 1
Issued stock dividend in settlement of dividend declared on June 25.
​

Question 67

The effect of a retained earnings appropriation is to

A) divide the retained earnings into two categories.
B) increase cash and other assets.
C) allow the corporation to use its assets for dividends.
D) increase the number of shares of stock available.

Question 68

All of the following statements concerning appropriation of retained earnings are true EXCEPT

A) the practice of appropriating retained earnings is unusual today.
B) stockholders generally expect all unappropriated retained earnings to be distributed in the form of dividends.
C) it is necessary to advise balance sheet readers that retained earnings is not totally available for dividends.
D) simply noting the restriction of retained earnings is not sufficient.

Question 69

Pippin Company has 70,000 shares of $14 par common stock outstanding. On July 1, the board of directors declared a two-for-one stock split. Prepare the memorandum entry in the general journal indicating the new par value and the total number of outstanding shares of common stock.

Question 70

Light Touch, Inc. has 110,000 shares of $8 par common stock outstanding. On July 1, the board of directors declared a two-for-one stock split. Prepare the memorandum entry in the general journal indicating the new par value and the total number of outstanding shares of common stock.

Question 71

Matrix Corporation estimated at the beginning of 20-- that its income tax for the year would be $140,000. Calculate the estimated income tax payment per quarter and show one of the quarterly entries to pay the taxes. As of December 31, 20--, Matrix Corporation had an actual tax liability of $143,200. Calculate the income tax due and make the necessary adjusting entry.

Question 72

When a stock dividend of less than 20−25% is declared and the market value exceeds the par or stated value of the shares, an amount equal to the market value of the shares to be distributed should be charged (debited) to which of the following accounts?

A) Stock Dividends
B) Stock Dividends Distributable
C) Paid-In Capital in Excess of Par
D) Capital Stock

Question 73

Prepare journal entries for each of the following transactions of Telecommunications, InC.Apr. 15
Declared a dividend of $1.43 per share on 11,000 shares of preferred stock outstandinG.May 19
Paid the dividend declared on April 15.
​

Question 74

When a stock dividend is distributed, the account to be credited would be

A) Stock Dividends.
B) Stock Dividends Distributable.
C) Paid-In Capital in Excess of Par.
D) Capital Stock.

Question 75

When a small stock dividend is declared and the market value exceeds the par or stated value of the shares, the excess of market value over par or stated value should be entered in which of the following accounts?

A) Stock Dividends.
B) Stock Dividends Distributable.
C) Paid-In Capital in Excess of Par.
D) Capital Stock.

Question 76

The purpose of a retained earnings appropriation is to inform readers of the balance sheet that

A) the appropriated amount is unavailable for dividends.
B) such an appropriation is required to pay corporate income taxes.
C) an appropriation is needed because the corporation expects a net loss for the year.
D) an appropriation is needed because the corporation is involved in a lawsuit.

Question 77

Record the following transaction for Godiva Corporation.
Sept. 1
Last year, Godiva's board of directors appropriated $840,000 for the purchase of a new branch office, over a three-year period. This year's appropriation for $280,000 was made on this datE.​

Question 78

On January 1, Martinez Corporation's retained earnings accounts had the following balances: ​
Required:
Prepare the retained earnings statement for the year ended December 31, 20--.

Question 79

The appropriated retained earnings can be returned to the unappropriated retained earnings account

A) at year end.
B) the first day of the new year (reversing entry).
C) when the directors decide to restrict its use.
D) when the appropriation has served its purpose.

Question 80

Prepare the journal entry for the following transaction.
Apr. 15
Last year, Titan Corporation's board of directors appropriated $150,000 for the purchase of a new storage facility over a three-year period. This year's appropriation for $50,000 was made on this datE.​