Question 1

Which one of the following is an effect when a company buys back its own shares of stock?

Accepted Answer

When a company buys back its own shares of stock, it reduces the number of outstanding shares, which in turn increases the value of each remaining share. This can lead to an increase in the company's debt/equity ratio, as the amount of debt remains the same while the equity portion is reduced. The other options are not necessarily affected by a company buying back its own shares of stock.

Question 2

If preferred stock, which can be exchanged for long-term debt in three years, is classified as an equity financial instrument instead of a liability, then

Accepted Answer

If the preferred stock is classified as an equity financial instrument instead of a liability, it will be treated as part of the company's equity section rather than its liabilities. This will result in a lower debt/equity ratio, as the equity portion will increase without any corresponding increase in debt. The other options in the question are not necessarily affected by this classification.

Question 3

What is the effect of a corporation appropriating retained earnings for the cost of treasury stock purchased?

Accepted Answer

When a corporation appropriates retained earnings for the cost of treasury stock purchased, a portion of retained earnings is restricted from the payment of dividends. This is because appropriations of retained earnings reduce the amount of earnings available for dividends. The other choices are incorrect, as contributed capital is not affected by this transaction, owner's equity is reduced only by the amount of common stock issued or repurchased, and income is not affected by the appropriation of retained earnings.

Question 4

Which one of the following is a characteristic of equity as opposed to debt?

Accepted Answer

Voting rights are typically attached to equity, meaning shareholders have a say in company decisions, while debt does not give the holder any voting rights.

Question 5

Which one of the following is a valid reason for a stock split?

Accepted Answer

A stock split does not change the ownership percentages of individual shareholders, nor does it increase net income or book value per share. The primary purpose of a stock split is to adjust the market price of shares to a level where more individuals can afford to invest in the stock. This is typically done to make the stock more attractive to retail investors and increase liquidity.

Question 6

On which date would you make no journal entry?

Accepted Answer

No journal entry is made on the date of record of cash dividend. This is because the record date is only used to determine which shareholders are entitled to receive the dividend, and does not involve any actual cash transactions or changes in the company's financial position.

Question 7

Which of the following is considered to be an important economic consequence of incentive compensation plans using stock options?

Accepted Answer

Dilution of ownership interests is a significant economic consequence of incentive compensation plans using stock options because when employees exercise their stock options, more shares are issued, which dilutes the ownership percentage of existing shareholders.

Question 8

Baker Company has 200,000 shares of common stock outstanding. The company declares a stock dividend of 58,000 shares. According to GAAP, this dividend should be treated as:

Accepted Answer

A stock dividend is considered large if it is more than 20-25% of the existing shares outstanding. In this case, 58,000 shares on 200,000 shares outstanding is 29%, which qualifies it as a large stock dividend according to GAAP.

Question 9

Which one of the following serves to differentiate debt from equity?

Accepted Answer

The tax deductibility of interest paid on debt is a key difference between debt and equity. Dividends to equity investors are not tax deductible, while interest on debt is. This difference in tax treatment makes debt more attractive to companies because it reduces their overall tax liability. The other options may also be true, but they are not as fundamental to the differentiation between debt and equity.

Question 10

Information related to Lamar Co. for the years ending December 31, 2017 and 2016 follows:
$\begin{array}{lrr}
&12-31-17&12-31-16\
\text { Common stock } & \$ 120,000 & \$ 80,000 \
\text { Retaine dearnings at vear end (after closing) } & 100,000 & 70,000
\end{array}$

Dividends declared for 2017 totaled $20,000. How much was generated through operations?

Accepted Answer

To calculate the amount generated through operations, we need to look at the net income figure. We can see that the net income for 2017 is $50,000. Dividends declared are not included in net income, so we need to add them back. Therefore, the amount generated through operations is $70,000 ($50,000 + $20,000). The correct answer is B.

Question 11

If a corporation issues debt instead of common stock to finance the purchase of property, then the corporation has

Accepted Answer

The answer of If a corporation issues debt instead of...

Question 12

Which one of the following transactions always causes a decrease to retained earnings?

Accepted Answer

Declaring a stock dividend decreases retained earnings because it involves transferring a portion of retained earnings to paid-in capital.

Question 13

Which one of the following represents the economic effects of declaring and issuing a stock dividend?

Accepted Answer

A stock dividend does not change the total assets or total shareholders' equity; it merely transfers a portion of retained earnings to paid-in capital.

Question 14

Cash dividends are paid based on the number of shares which are

Accepted Answer

Cash dividends are paid based on the number of outstanding shares, which are those shares that have been issued and are currently held by investors. Authorized shares refer to the maximum number of shares a company is allowed to issue, while issued shares include both outstanding shares and treasury shares. Therefore, the correct choice is C.

Question 15

On January 1, 2017, Garner Corp. had 10,000 shares of $1 par value common stock issued and outstanding. The stock was selling at $10 per share. During 2017, Garner declared and issued a 10% stock dividend. The stock dividend causes

Accepted Answer

A stock dividend redistributes a portion of the company's retained earnings to its shareholders in the form of additional shares, rather than cash. This action does not involve the inflow or outflow of any assets; it merely transfers a portion of retained earnings to common stock. Therefore, the total shareholders' equity remains unchanged.

Question 16

A corporation generated assets by issuing equity securities and through profitable operations. Which effects likely occurred?

Accepted Answer

When a corporation issues equity securities, common stock increases. Additionally, when a corporation generates profits, these profits accumulate in retained earnings. Therefore, both common stock and retained earnings would increase in this scenario.

Question 17

A corporation issued common stock instead of debt to finance the purchase of non-depreciable property. Which statement is true?

Accepted Answer

By issuing common stock, the corporation is diluting the ownership of existing shareholders. They now own a smaller percentage of the company. The other options are not necessarily true - the debt/equity ratio could stay the same or decrease, income tax expense could increase or stay the same, and net income could stay the same or increase depending on the specifics of the situation.

Question 18

If a corporation uses retention of earnings to finance the purchase of property instead of issuing equity securities, then

Accepted Answer

Using retained earnings to finance the purchase of property instead of issuing equity securities does not change the debt/equity ratio because both options involve using internal financing sources rather than taking on new debt.

Question 19

Which one of the following represents the economic effects of issuing a 2-for-1 stock split?

Accepted Answer

A 2-for-1 stock split would decrease the par value per share, as the total number of shares would double without any change to the company's overall value. However, it would have no effect on retained earnings, as this is simply the portion of the company's earnings that have not been distributed as dividends to shareholders.

Question 20

Which one of the following is a result of a company issuing common stock instead of debt to finance the purchase of property?

Accepted Answer

Issuing common stock instead of debt will not increase the company's debt, so the debt/equity ratio will decrease. Leverage will not be more effective because there is no debt to leverage, and there is no reason to anticipate cash flow problems or a lower net income.

Quiz 12: Stockholders Equity