Question 1

Gilbert Corporation issued a 40percent stock split-up of its common stock that had a par value of $10 before and after the split-up.At what amount should retained earnings be capitalized for the additional shares issued?

Accepted Answer

The answer of Gilbert Corporation issued a 40percent stock split-up...

Question 2

Under the residual equity theory

Accepted Answer

Under the residual equity theory, management is responsible for maximizing the wealth of common stockholders. This means that after all other obligations have been met, any leftover profits or "residual equity" should be distributed to the common stockholders. Therefore, the focus is on maximizing their wealth, rather than considering the goals of managers or viewing equities as restrictions on assets.

Question 3

When preferred stock is converted to common stock

Accepted Answer

Preferred stock is already a form of equity, and when it is converted to common stock, it remains as equity. Therefore, there is no effect on the debt-to-equity ratio. Choice D is also incorrect because a gain or loss is only reported if the fair value of the common stock received in the conversion differs from the carrying value of the preferred stock, which is unlikely.

Question 4

The equation,assets = equities,expresses which of the following theories of equity?

Accepted Answer

The equation assets = equities expresses the Entity theory of equity, which states that the business entity is separate and distinct from its owners, and its financial statements reflect this separation. In this theory, assets and liabilities are attributed to the business, rather than to individual owners or shareholders.

Question 5

A company with a $2,000,000 deficit undertakes a quasi-reorganization on November 1,2017.Certain assets will be written down by $400,000 to their present fair market value.Liabilities will remain the same.Capital stock was $3,000,000 and additional paid-in capital was $1,000,000 before the quasi-reorganization.How would the entries to accomplish these changes on November 1,2017,affect each of the following? Capital Stock Total Stockholders' Equity

Accepted Answer

The answer of A company with a $2,000,000 deficit undertakes...

Question 6

When employees are granted options as part of a compensatory stock option plan,

Accepted Answer

When employees are granted options as part of a compensatory stock option plan, total compensation is measured using a fair value method. The fair value of the options on the grant date is used to determine the total compensation cost of the options, which is then recognized over the vesting period of the options as an expense on the company's income statement. The fair value method takes into account a number of factors, such as the stock price, the exercise price, the expected volatility of the stock, and the time until the options expire.

Question 7

When a dividend paid to stockholders who own mandatorily redeemable preferred stock,the company must report the dividend

Accepted Answer

When a dividend is paid to stockholders who own mandatorily redeemable preferred stock, it is treated as an expense in the income statement, as it represents a cost of financing the company's operations. Therefore, the correct answer is B, "As an expense in the income statement." The other choices are not applicable in this situation, as the dividend is not an adjustment to retained earnings, a reduction to other comprehensive income, or a financing activity.

Question 8

Under which of the theories of equity is a manager's goals considered as important as those of the common stockholder.

Accepted Answer

The answer of Under which of the theories of equity...

Question 9

How would a stock split affect each of the following? Total Stockholders' Additional
Assets Equity Paid-in Capital

Accepted Answer

A stock split does not affect the balance sheet's total assets, total stockholders' equity, or additional paid-in capital. It simply increases the number of shares outstanding while decreasing the par value per share, keeping the overall equity value the same.

Question 10

Which of the following securities must be reported as a liability because they have the characteristics of both liabilities and equity,but the liability characteristic is dominant?

Accepted Answer

Mandatorily redeemable preferred stock must be reported as a liability because it has the dominant characteristic of a liability in that the obligation to redeem the shares at a future date is essentially a debt obligation.

Question 11

A company with a substantial deficit undertakes a quasi-reorganization.Certain assets will be written down to their present fair market value.Liabilities will remain the same.How would the entries to record the quasi-reorganization affect each of the following? Contributed Capital Retained Earnings

Accepted Answer

In a quasi-reorganization, the deficit is eliminated by reducing or writing off the company's retained earnings to zero and increasing contributed capital without any change in liabilities. Therefore, the entries to record the quasi-reorganization would decrease retained earnings and increase contributed capital, resulting in a net increase in total equity.

Question 12

What is the most likely effect of a stock split on the par value per share and the number of shares outstanding? Par Value Number of shares
Per share outstanding

Accepted Answer

A stock split decreases the par value per share and increases the number of shares outstanding. This is because in a stock split, the total value of shares remains the same but is divided among a greater number of shares, thus reducing the par value of each share while increasing the total number of shares.

Question 13

The dollar amount of total stockholders' equity remains the same when there is a an)

Accepted Answer

When a stock dividend is declared, additional shares are issued to the existing stockholders, resulting in an increase in the number of outstanding shares but no change in the total value of the stockholders' equity. Therefore, the dollar amount of total stockholders' equity remains the same.

Question 14

Which of the theories of equity is consistent with the definition of equity that is found in Statement of Financial Accounting Concepts No.6?

Accepted Answer

Proprietary theory is consistent with the definition of equity found in Statement of Financial Accounting Concepts No. 6, as it views equity from the perspective of the owners or shareholders, aligning with the concept's emphasis on owners' interests in the business.

Question 15

Assuming the issuing company has only one class of stock,a transfer from retained earnings to capital stock equal to the market value of the shares issued is ordinarily a characteristic of

Accepted Answer

This transfer from retained earnings to capital stock equal to the market value of the shares issued is a common feature of a stock dividend, but not of a stock split. Therefore, option D is the correct answer.

Question 16

How would the declaration and subsequent issuance of a 10 percent stock dividend by the issuer affect each of the following when the market value of the shares exceeds the par value of the stock? Common Stock Additional Paid-in Capital

Accepted Answer

When a 10 percent stock dividend is declared and subsequently issued, the total number of shares outstanding increases by 10 percent. As a result, the value of each share drops by 10 percent. However, in this scenario, the market value of the shares exceeds the par value of the stock, meaning that the stock is worth more than its nominal value. Therefore, the stockholders' equity will increase due to the increase in the number of shares outstanding, while the additional paid-in capital will also increase because the market value of the shares is greater than the par value of the stock.

Question 17

A feature common to both stock splits and stock dividends is

Accepted Answer

Both stock splits and stock dividends result in a reduction in the book value per share by increasing the number of shares outstanding without a proportional increase in the company's net assets.

Question 18

The purchase of treasury stock

Accepted Answer

The purchase of treasury stock reduces the number of shares that are issued and outstanding, therefore decreasing the common stock outstanding. It has no effect on the number of shares authorized by the company.

Question 19

When a stock option plan for employees is compensatory,the measurement date for determining compensation cost is the

Accepted Answer

The measurement date for determining compensation cost in a compensatory stock option plan is the first date on which both the number of shares that an individual employee is entitled to receive and the option or purchase price are known. This allows for the accurate calculation of the compensation cost associated with the stock options.

Question 20

As a minimum,how large in relation to total outstanding shares may a stock distribution be before it should be accounted for as a stock split instead of a stock dividend?

Accepted Answer

While there is no definitive answer to this question, an commonly used guideline is that a stock distribution that represents no less than 10 to 15 percent of total outstanding shares is accounting for as a stock split. This is because such distribution can have a significant impact on the market and trading of the stock, potentially leading to changes in the stock's price and liquidity. Smaller distributions are typically classified as stock dividends.

Quiz 15: Equity