Question 1

Dividends in arrears are associated with the

Accepted Answer

Dividends in arrears are associated with cumulative dividend preference. Cumulative dividend preference means that preferred shareholders have the right to receive any unpaid dividends from previous years before common shareholders can receive any dividends. If the company is unable to pay out dividends in a particular year, those dividends accumulate and become dividends in arrears. Only cumulative dividend preference ensures that dividends are accrued and paid out. Current dividend preference only guarantees payment of dividends in the current year, and noncumulative dividend preference does not accumulate any unpaid dividends.

Question 2

Which of the following dividend preferences is associated with common stock?

Accepted Answer

Common stock does not have any dividend preference, neither cumulative nor current. Dividends are paid to common stockholders only after those of preferred stockholders have been paid.

Question 3

Dividends in arrears on preferred stock are classified as

Accepted Answer

Dividends in arrears on preferred stock are not classified as a liability until they are declared by the board of directors. They are disclosed in the notes to the financial statements, not as a liability or equity account.

Question 4

Goshen Co. has 24,000 shares of no-par common stock with a $20 stated value and 10,000 shares of $30 par, 5 percent noncumulative preferred stock outstanding. If the company declares cash dividends of $68,000, the total amount of the dividend paid to preferred stockholders is

Accepted Answer

The preferred stockholders receive dividends based on the par value of their shares. With 10,000 shares at a $30 par value and a 5% dividend rate, the total dividend for preferred stockholders is 10,000 * $30 * 0.05 = $15,000.

Question 5

The declaration of a common cash dividend

Accepted Answer

When a company declares a common cash dividend, it is an indication that it will pay a portion of its earnings to its shareholders. This payout reduces the retained earnings balance because the company is using cash to payout earnings instead of retaining it in the business.

Question 6

Which of the following statements about retained earnings is true?

Accepted Answer

Retained earnings are the portion of a company's net income that is not distributed as dividends but is instead reinvested in the business. This helps the company fund future growth, pay off debt, and increase shareholder value. Therefore, option D is the correct statement about retained earnings.

Question 7

During the year, Trenton Company purchased 3,000 shares of its $10 par common stock at $50 per share and later sold it for $40 per share. How much did total stockholders' equity change because of these treasury stock transactions?

Accepted Answer

When a company purchases its own stock, it is recorded as Treasury Stock, which is subtracted from Stockholders' Equity. In this case, Trenton Company spent $150,000 (3,000 shares x $50 per share) to purchase the treasury stock, which decreased its Stockholders' Equity by the same amount. When the company later sold the treasury stock for $120,000 (3,000 shares x $40 per share), it realized a loss of $30,000, which further decreased its Stockholders' Equity. Therefore, the total change in Stockholders' Equity due to these transactions is a decrease of $30,000. Therefore, the correct answer is C.

Question 8

On April 30, 2012, Loufti Company declared a dividend of $40,000. Loufti Company decided that the dividend would be paid on June 15, 2012, to all shareholders of record on May 25, 2012. The journal entry to record the date of record on May 25 would include a

Accepted Answer

The date of record does not require a journal entry as it is simply the date on which the company determines which shareholders are eligible to receive the dividend.

Question 9

Which of the following is NOT an important date associated with dividends?

Accepted Answer

While important for investors to keep track of, the date of information is not directly associated with the payment or processing of dividends. The other dates - declaration, record, and payment - are all crucial for determining who receives dividends and when.

Question 10

Which of the following groups of stockholders receive first priority to the receipt of a dividend?

Accepted Answer

Cumulative-dividend preference stockholders have the first priority to receive a dividend, even if the company has not paid dividends in the past years. Current-dividend preference stockholders receive priority only for the current dividend period. Common stockholders receive dividends only after preferred stockholders have been paid. Therefore, the correct choice is B - Cumulative-dividend preference.

Question 11

The declaration of dividends by a company

Accepted Answer

The declaration of dividends decreases the balance in Retained Earnings because dividends are paid out of the company's profits, reducing the amount retained in the business.

Question 12

On April 30, 2012, Loufti Company declared a dividend of $40,000. Loufti Company decided that the dividend would be paid on June 15, 2012, to all shareholders of record on May 25, 2012. The journal entry to record the payment of the dividend on June 15 would include a

Accepted Answer

The payment of the dividend involves debiting Dividends Payable to decrease the liability and crediting Cash to reflect the outflow of cash.

Question 13

Dividends in arrears on preferred stock are

Accepted Answer

Dividends in arrears on preferred stock are not recorded as a liability until declared, but they are disclosed in the notes to the financial statements to inform stakeholders of the obligation.

Question 14

The dividend payout ratio is a measure of

Accepted Answer

The dividend payout ratio measures the percentage of a company's net income that is paid out in dividends to shareholders. This ratio is a measure of how much of a company's earnings are being distributed to shareholders and how much is being retained for future use.

Question 15

The declaration and payment of cash dividends

Accepted Answer

The declaration and payment of cash dividends reduce the cash available to a company, thus reducing the resources it has to invest in productive assets.

Question 16

On April 30, 2012, Loufti Company declared a dividend of $40,000. Loufti Company decided that the dividend would be paid on June 15, 2012, to all shareholders of record on May 25, 2012. The journal entry to record the declaration of the dividend on April 30 would include a

Accepted Answer

When a dividend is declared, the company records a liability by crediting Dividends Payable.

Question 17

Moony Corporation had 20,000 shares of $4 par-value common stock outstanding on January 1, 2012. On January 10, 2012, the firm purchased 2,000 of its outstanding shares for $18 per share. On July 22, 2012, it reissued 1,000 shares at $22 per share. Given this information, the entry to record the reissuing of the remaining 1,000 shares on August 17, 2012, at $12 per share would probably include a

Accepted Answer

When a company purchases its own shares and holds them in treasury, the shares are no longer considered outstanding. Therefore, the reissuing of those shares would decrease the number of shares held in treasury and increase the number of shares outstanding.

To record the reissuing of the remaining 1,000 shares on August 17, 2012, at $12 per share, the following entry would be appropriate:

Debit Treasury Stock for $18,000 (1,000 shares x $18 per share)
Credit Cash for $12,000 (1,000 shares x $12 per share)
Credit Paid-in Capital in Excess of Par-Common Stock for $2,000 (1,000 shares x [$18 - $4] per share)

The debit to Retained Earnings in choice B is not appropriate because there is no indication that the company incurred a loss on the sale of the shares. The debit to Paid-In Capital, Treasury Stock in choice C is incorrect because the company is not reissuing treasury stock, it is selling treasury stock. The debit to Loss on Sale of Stock in choice D is also incorrect for the same reason. The credit to Treasury Stock in choice A is correct, but it is only part of the entry that should be recorded.

Question 18

Dividends declared are reported on the

Accepted Answer

Dividends declared are reported on the Statement of Retained Earnings as a deduction from the balance of retained earnings. This statement shows how the company's profits have been affected by dividends, net income, and losses. They are not reported as an expense or revenue on the income statement and are not recognized as an asset on the balance sheet.

Question 19

When do dividends become liabilities?

Accepted Answer

Dividends become liabilities on the declaration date when the board of directors formally approves and announces the dividend, creating an obligation for the company to pay.

Question 20

As compared with preferred stock, common stock usually has favorable preferences in terms of

Accepted Answer

Common stock usually has voting rights, while preferred stock typically does not. However, preferred stock often has preferred treatment when it comes to dividends and liquidated assets.

Quiz 11: Financing: Equity