Question 1

Zach Sports Ltd has 1,000 shares of $5.50,cumulative preferred shares and 10,000 common shares issued and outstanding.In the previous year (which was the first year of operations),the company paid total dividends of $1,000.The amount that must be paid to the preferred shareholders in the current year before any dividend is paid to common shareholders is:

Accepted Answer

The answer of Zach Sports Ltd has 1,000 shares of...

Question 2

A dividend preference for preferred shares means that:

Accepted Answer

A dividend preference for preferred shares means that preferred shareholders are allocated their dividends before any dividends are allocated to common shareholders. This is the most common type of preference given to preferred shareholders. However, it does not guarantee that preferred shareholders will receive dividends, as the company may choose to suspend or decrease dividends if it experiences financial difficulties.

Question 3

Ken Corp declared a 0.60 per share common dividend.The company has 20,000 common shares authorized,with 6,000 shares issued and outstanding.A possible journal entry to record the declaration is:

Accepted Answer

The answer of Ken Corp declared a 0.60 per share...

Question 4

Brian's Stereo Ltd issued preferred shares that have a $10 dividend.This means that:

Accepted Answer

Preferred shares with a $10 dividend mean that each preferred share is entitled to receive a $10 dividend per year.

Question 5

Pam Corporation sold 10,000 common shares at $25 per share cash.The entry to record this transaction would include:

Accepted Answer

The entry to record the sale of common shares would include a credit to Common Shares for the total value of the shares sold, which in this case is $250,000. The correct entry would be: 
Cash  $250,000 
Common Shares $250,000

Question 6

Tech Inc's board of directors voted to declare a common cash dividend of $.0.75 per share.The company has 15,000 common shares authorized,with 10,000 issued and outstanding.The amount of the dividend is:

Accepted Answer

The answer of Tech Inc's board of directors voted to...

Question 7

Bruce Corporation issued 8,000 common shares in exchange for land that has a fair market value of $184,000.The entry to record this transaction would include:

Accepted Answer

The entry to record the issuance of common shares in exchange for land would be a credit to the Land account for its fair market value, which is $184,000, and a corresponding credit to the Common Shares account for the same amount. This reflects the fact that the company has received the land in exchange for issuing new shares to the landowner. There is no need to debit either account, as both the land and the shares represent valuable assets on the company's balance sheet. Option D correctly reflects this accounting treatment by crediting the Common Shares account for $184,000.

Question 8

Preferred shares that the issuing corporation,at its option,may retire by paying a specified amount to the preferred shareholders plus any dividends in arrears are called:

Accepted Answer

Callable preferred shares can be retired by the issuing corporation at their option, by paying a specified amount to the preferred shareholders plus any dividends in arrears.

Question 9

Dallas Sports Ltd has 100 shares of $15,noncumulative,preferred shares outstanding,and $160,000 of common shares outstanding.In the company's first year of operation,no dividends were paid,but during the second year Dallas Sports paid dividends of $24,000.The dividend should be distributed as follows:

Accepted Answer

The answer of Dallas Sports Ltd has 100 shares of...

Question 10

Preferred shares that give the shareholders the option of exchanging their preferred shares for common shares at a specified rate are known as:

Accepted Answer

Convertible preferred shares give the shareholder the option to exchange their preferred shares for common shares at a specified rate. Participating preferred shares give the shareholder the right to receive additional dividends if the company achieves a certain level of profits, callable preferred shares can be repurchased by the company at a specified price, cumulative preferred shares accumulate unpaid dividends if the company is unable to pay them in full, and noncumulative preferred shares do not accumulate unpaid dividends.

Question 11

The date a board of directors votes to pay a dividend is called the:

Accepted Answer

The date of declaration is when the board of directors votes to pay a dividend and announces it to the shareholders. The date of the annual shareholders meeting is when the company holds its yearly meeting with shareholders. The date of record is the date on which the company determines which shareholders are eligible to receive the dividend. The date of payment is when the dividend is actually paid out to shareholders. Liquidating date refers to the date when a company is dissolved and its assets are sold off to pay off its debts.

Question 12

Barb Inc issued 500 common shares in payment of a $1,900 bill from its accountant for assistance in filing its charter.The entry to record this transaction will include:

Accepted Answer

The entry to record the issuance of common shares in payment of a bill from an accountant for assistance in filing its charter will include a $1,900 credit to Common Shares. This is because the issuance of common shares increases the number of shares outstanding and therefore increases the equity of the company.

Question 13

Lucie Corporation was formed on January 1 of the current year.The corporate charter authorized the company to issue 100,000 common shares.During the first month of operation,the corporation issued 300 shares to its lawyer in payment of a $5,600 bill for preparing the articles of incorporation.The entry to record this transaction would include:

Accepted Answer

The transaction involves the issuance of shares for a service received, which means the cost of the legal service will be recorded as a capital expenditure (Organization Costs) rather than an expense. The entry to record this transaction would debit Organization Costs for $5,600 and credit Common Shares for $5,600. Option A is incorrect because the total amount paid is $5,600, not $3,000. Option C is incorrect because it suggests a reduction in the organization costs account, which would not be appropriate. Options D and E are incorrect because they present an incomplete entry that does not account for the total amount paid or the nature of the transaction.

Question 14

The payment of a dividend will reduce the following two accounts:

Accepted Answer

When a company pays a dividend, it reduces the cash balance as it pays out cash to its shareholders. At the same time, it reduces the dividends payable account, as it is no longer obligated to pay that amount to its shareholders. Therefore, the correct choice is B, as it includes both cash and dividends payable being reduced.

Question 15

A new corporation ended its first year of operations with assets of $100,000,liabilities of $75,000,and contributed capital (common shares)of $10,000.What was the corporation's net income for the year?

Accepted Answer

The answer of A new corporation ended its first year...

Question 16

All of the following are given as possible motivations for a corporation to issue preferred shares except:

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The answer of All of the following are given as...

Question 17

The achievement of an increased return on common shares by paying dividends on preferred shares or interest at a rate that is less than the rate of return earned with the assets invested in the corporation by the preferred shareholders or creditors is called:

Accepted Answer

Financial leverage refers to the use of borrowed funds to increase the return on investment. In this case, the company is able to achieve a higher return on common shares by paying lower dividends or interest on preferred shares or debt. This is a form of financial leverage, as the company is using preferred shareholders' or creditors' funds to generate higher returns for common shareholders.

Question 18

For preferred shares to increase the return earned by common shareholders,the preferred dividend rate as a percentage of the capital raised must be:

Accepted Answer

If the preferred dividend rate is higher than the rate of return on common and preferred equity combined, the preferred shareholders would receive a higher return and the common shareholders' return would be diluted, which could discourage investment. On the other hand, if the preferred dividend rate is equal to the rate of return on common and preferred equity combined, the return for common shareholders remains unchanged, and there is no real benefit. Therefore, the preferred dividend rate needs to be lower than the combined rate to increase the return earned by common shareholders.

Question 19

A preferred share on which the right to receive dividends is lost for any year that the dividends are not declared is a:

Accepted Answer

The preferred share described in the question is a noncumulative preferred share. This type of share does not accumulate unpaid dividends from previous years and therefore, if dividends are not declared for a particular year, the right to receive them is lost. Participating preferred shares give the shareholder the right to receive additional dividends in addition to the fixed dividends. Callable preferred shares can be bought back by the issuer at a predetermined price. Cumulative preferred shares accumulate unpaid dividends and must be paid out before common shareholders can receive dividends. Convertible preferred shares can be converted into common shares at a predetermined ratio.

Question 20

Preferred shares may be issued instead of common shares:

Accepted Answer

The answer of Preferred shares may be issued instead of...

Quiz 13: Organization and Operation of Corporations