Deck 11: Reporting and Interpreting Stockholders Equity

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

State laws often restrict dividends to the amount of retained earnings.

Answer 3

True

Question 4

The corporate form of business limits the legal liability of its owners.

Question 5

Preferred stock is generally classified as stockholders' equity.

Question 6

A 100 percent stock dividend is the same as a 2-1 stock split.

Question 7

Treasury stock is an asset account.

Question 8

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

Question 9

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

Question 10

Dividends in arrears does not apply to stock which does not have a cumulative dividend preference.

Question 11

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

Question 12

Earnings per share is calculated for common stock (shares) outstanding.

Question 13

When a company reissues shares of its treasury stock, it must report a gain or a loss on the sale.

Question 14

Treasury stock is a corporation's own stock that has been issued and subsequently repurchased by the corporation.

Question 15

Dividends in arrears are reported as liabilities on the balance sheet.

Question 16

The balance in Retained Earnings represents the amount of capital contributed by owners in exchange for stock plus the amount of net income earned.

Question 17

The liability for dividends is recorded on the date of record.

Question 18

One reason why a company may choose a stock split over a stock dividend is that the stock split does not reduce retained earnings.

Question 19

A corporation does not have a legal obligation to pay dividends.

Question 20

The market value of stock is the par value of the stock.

Question 21

How many of the following statements regarding earnings per share (EPS) is (are) true?
The EPS ratio is important because it signals the ability of the company to pay future dividends, which investors factor into the stock price.
Earnings per share is generally reported in the balance sheet under stockholders' equity.
Earnings per share is the best way to compare the performance of different companies.
EPS, in its basic form, is calculated by dividing net income by the average number of all shares issued.

A) One
B) Two
C) Three
D) Four

Question 22

If a company's preferred stock is 7%, $1 par value, then the dividend on the stock is $.07 per share.

Question 23

Issuing stock to obtain financing is called equity financing.

Question 24

Which of the following statements regarding treasury stock is true?

A) When a company reissues treasury stock for more than it originally paid for the stock, it does not report a gain.
B) When a company purchases treasury stock or pays a dividend, it increases total stockholders' equity.
C) Treasury stock is reported as an asset on the balance sheet.
D) Treasury stock is reported as issued and outstanding stock.

Question 25

Which of the following statements regarding business forms is true?

A) A sole proprietorship is an unincorporated business owned by one person.
B) All partnerships are owned by two people.
C) A corporation is not a legal entity.
D) An LLC (limited liabilitycompany) has the same tax treatment as a corporation.

Question 26

Which of the following statements regarding a stock split is true?

A) A stock split decreases retained earnings.
B) Stock splits do not require a journal entry.
C) Stock splits are the same as stock dividends.
D) Stock splits increase the par value per share.

Question 27

Which of the following statements regarding repurchased stock is true?

A) It is generally less costly for a company to give employees repurchased shares than to issue new shares.
B) When a company records a stock repurchase, it is tracking a stockholder's sale of stock to another investor.
C) Treasury stock is reported on the balance sheet as an asset.
D) Treasury stock is repurchased stock that has been authorized but is not issued.

Question 28

The price-earnings ratio reveals information about the stock market's expectations for a company' future growth in earnings.

Question 29

The authorized number of shares of stock is the total number of shares of stock issued and outstanding.

Question 30

Unpaid dividends on cumulative preferred stock are called dividends in arrears.

Question 31

Which of the following statements regarding dividends is true?

A) Some companies do not pay dividends even when the company is profitable.
B) Stock dividends immediately increase the total value of the stockholders' investment.
C) Cash dividends and stock dividends both decrease total stockholders' equity.
D) A corporation has a legal obligation to pay dividends each year.

Question 32

Special rights often granted to preferred stockholders include a preference for receiving dividends and for the distribution of assets if the corporation is liquidated.

Question 33

The right of current stockholders to purchase additional shares of newly issued stock in order to maintain the same percentage ownership is called:

A) liquidation.
B) preemptive rights.
C) cumulative preference.
D) voting rights.

Question 34

The incorporation of companies in the U.S. is controlled by:

A) state governments.
B) local governments.
C) the federal government.
D) the courts.

Question 35

For a business to be considered a corporation:

A) its stock must be sold in extremely large amounts.
B) it must be organized as a separate legal entity.
C) it must issue both common and preferred stock.
D) it must pay dividends.

Question 36

A stock split increases total stockholders' equity.

Question 37

The income of a corporation is subject to taxation.

Question 38

Which of the following statements regarding issued and outstanding stock is true?

A) Outstanding stock includes all stock issued by a corporation.
B) Issued stock equals the sum of outstanding stock and treasury stock.
C) Issued stock is equal to authorized stock.
D) Outstanding stock includes stock in the hands of investors, as well as treasury stock in the hands of the corporation.

Question 39

A stock dividend decreases the market price of the company's stock.

Question 40

Which of the following statements regarding dividends in arrears is true?

A) Dividends in arrears do not appear on the balance sheet or require a journal entry.
B) Dividends in arrears are not disclosed to stockholders.
C) Dividends in arrears applies to common stock.
D) Dividends in arrears are legal liabilities.

Question 41

GE buys back 300,000 shares of its stock from investors at $45 a share. Two years later it reissues this sto ck for $65 a share. The stock reissue would be recorded as:

A) a debit to Cash of $19.5 million and a credit to Treasury Stock of $19.5 million.
B) a debit to Cash of $13.5 million, a debit to Additional Paid-in Capital of $6 million, a credit to Treasury Stock of $13.5 million, and a credit to Stockholders' Equity of $6 million.
C) a debit to Cash of $19.5 million, a credit to Treasury Stock of $13.5 million, and a credit to Additional Paid-in Capital of $6 million
D) a debit to Cash of $13.5 million, and a debit to Stockholders' Equity of $6 million, a credit to Treasury Stock

Question 42

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

A) is the right of stockholders 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, should the company cease operations.
D) is the continuing right to receive a share of the company's profits in the form of dividends.

Question 43

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. 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 44

AMD buys back 300,000 shares of its stock from investors at $6.50 a share. Two years later, it reissues this stock for $6.00 a share. The stock reissue would be recorded as:

A) a debit to Cash of $1.8 million, a debit to Additional Paid-in Capital of $150,000, and a credit to Treasury Stock of $1.95 million.
B) a debit to Cash of $1.95 million, a credit to Treasury Stock of $1.8 million, and a credit to Additional Paid-in Capital of $150,000.
C) a debit to Cash of $1.95 million and a credit to Treasury Stock of $1.95 million.
D) a debit to Cash of $1.8 million and a credit to Treasury Stock of $1.8 million.

Question 45

A company sells 1 million shares of common stock with a par value of $0.02 for $15 a share. To record the transaction, the company would:

A) debit Cash for $20,000 and credit Common Stock for $20,000.
B) debit Cash for $15 million and credit Common Stock for $15 million.
C) debit Cash for $15 million, credit Common Stock for $20,000 and credit Additional Paid-in Capital for $14,980,000.
D) debit Cash for $20,000, debit Capital Receivable for $14,980,000, credit Common Stock for $20,000 and credit Additional Paid-in Capital for $14,980,000.

Question 46

Stockholders' equity is:

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

Question 47

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

A) is an attractive investment for those seeking a steady income, like retired people.
B) will reinvest more profit which can lead to smaller growth potential.
C) will experience more growth in stock price over time.
D) is a bad investment.

Question 48

IBM issues 200,000 shares of stock with a par value of $0.01 for $150 per share. Three years later, it repurchases these shares for $80 per share. IBM records the repurchase in which of the following ways?

A) Debit Common Stock for $2,000, debit Additional Paid-in Capital for $29,998,000 and credit Cash for $30 million.
B) Debit Treasury Stock for $16 million and credit Cash for $16 million.
C) Debit Common Stock for $2,000, debit Additional Paid-in Capital for $15,998,000 and credit Cash for $16 million.
D) Debit Stockholders' Equity for $30 million, credit Additional Paid-in Capital for $16 million and credit Cash for $16 million.

Question 49

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) will appeal to investors who desire distributions of profit.

Question 50

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 Stockholders' Equity.
C) Stock dividends increase total stockholders' equity.
D) Stock dividends decrease total stockholders' equity.

Question 51

Which of the following statements is NOT true of a corporation?

A) A corporation is taxed as a separate legal entity.
B) A corporation has easy transferability of ownership.
C) A corporation may have the ability to raise large amounts of capital.
D) A corporation's owners have unlimited liability.

Question 52

Treasury stock:

A) does not appear on the balance sheet.
B) is a contra-equity account.
C) is an asset account.
D) is recorded as additional paid-in capital.

Question 53

Which of the following statements would NOT explain why a company may want to repurchase its stock?

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

Question 54

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. The number of authorized shares after these transactions are accounted for is:

A) 12 million shares.
B) 20 million shares.
C) 9 million shares.
D) 17 million shares.

Question 55

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 Stock for $20,000.
B) debit Cash for $15 million and credit Common Stock for $15 million.
C) debit Cash for $15 million, credit Common Stock for $20,000 and credit Additional Paid-in Capital for $14,980,000.
D) debit Cash for $20,000, debit Capital Receivable for $14,980,000, credit Common Stock for $20,000 and credit Additional Paid-in Capital for $14,980,000.

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. The current number of shares of treasury stock after these transactions have been accounted for is:

A) 3 million shares.
B) 8 million shares.
C) 9 million shares.
D) 17 million shares.

Question 57

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 58

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 59

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

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

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. The number of issued shares after these
Transactions have been accounted for is:

A) 12 million shares.
B) 9 million shares.
C) 10 million shares.
D) 17 million shares.

Question 61

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

A) Option A
B) Option B
C) Option C
D) Option D

Question 62

A current dividend preference means that:

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

Question 63

The effect of a stock dividend is to:

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

Question 64

A company issues 100,000 shares of preferred stock for $40 a share. The stock has a fixed dividend rate of 5% and a par value of $3 per share. The company records the issuance with a:

A) debit of $4 million to Cash and a credit of $4 million to Preferred Stock.
B) debit of $300,000 to Cash and a credit of $300,000 to Preferred Stock.
C) debit of $4 million to Cash, a credit of $300,000 to Preferred Stock, and a credit of $3.7 million to Additional Paid-in Capital.
D) debit of $300,000 to Cash, a debit of $3.7 million to Long-term Investments, a credit of $300,000 to

Question 65

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 Stock for $600,000.
B) Preferred Stock for $500,000 and Additional Paid-In Capital for $100,000.
C) Preferred Stock for $500,000 and Retained Earnings for $100,000.
D) Investment in Fonthouse Stock for $600,000.

Question 66

On February 16, a company declares a 34 $\prime$ dividend to be paid on April 5. There are 2 million shares of common stock issued and 100,000 shares of treasury stock. What does the company record on April 5?

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

Question 67

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 stockholders' equity, whereas a stock dividend would not.
D) A stock split would not reduce retained earnings, whereas a stock dividend would.

Question 68

If the company pays the fixed dividend on the preferred stock, the transaction will:

A) decrease Preferred stock by $20,000.
B) decrease Retained earnings by $600,000.
C) decrease Cash by $20,000.
D) increase Liabilities by $20,000.

Question 69

A cumulative dividend preference means that:

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

Question 70

A company issues 1 million shares of preferred stock with a par value of $2 and a market price of $26 per share. The issuance should be recorded as:

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

Question 71

Which of the following statements is NOT true about when Cash dividends can be paid?

A) The retained earnings account must have an accumulated balance sufficient to cover the amount of the dividends to be paid.
B) The cash account must have a balance sufficient to pay the dividends.
C) The board of directors must have declared the dividend before it can be paid.
D) Loan covenants do not restrict the payment of dividends.

Question 72

A company issues 100,000 shares of preferred stock for $40 a share. The stock has a fixed annual dividend rate of 5% and a par value of $3 per share. Preferred stockholders can anticipate receiving a dividend of:

A) $200,000 each year.
B) $15,000 each year.
C) 5% of net income each year.
D) 5% of the market value of the stock at the time the dividend is declared.

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

Question 74

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 75

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 76

Which of the following statements is true?

A) Stock splits and stock dividends both reduce the market price of a share, but only stock splits reduce the par value of a share.
B) Stock splits and stock dividends both reduce the market price of a share and the par value of a share.
C) Stock splits and stock dividends both reduce the market price of a share, but only stock dividends reduce the par value of a share.
D) Stock splits and stock dividends both reduce the market price of a share and reduce retained earnings.

Question 77

A stock dividend:

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

Question 78

Preferred stock differs from common stock in that preferred stock:

A) has more voting power and, as such, greater control over the management of the company.
B) is less risky because preferred stockholders are paid dividends before common stockholders.
C) pays a tax-free dividend.
D) has no preemptive rights or residual claims.

Question 79

On February 16, a company declares a 34 $\prime$ dividend to be paid on April 5. There are 2 million shares of common stock issued and 100,000 shares of treasury stock. What does the company record in February?

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

Question 80

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.