Deck 10: Stockholders Equity

Question 1

Top management does not need to own a significant number of shares in order to have the authority to exert great influence on the actions of a corporation.

Answer 1

True

Question 2

The ultimate power to manage a corporation is usually delegated to a corporation's top management by the common stockholders.

Answer 2

True

Question 3

The aggregate number of shares of stock sold to the public is referred to as authorized shares of stock.

Answer 3

False

Question 4

A preemptive right is

A)the right of stockholders to acquire a proportional amount of any new issues of common stock.
B)the right of stockholders to fire and replace the board of directors.
C)the right of the corporation to enter into legally binding contracts without the direct approval of the shareholders.
D)the right of stockholders to supersede the actions of top management.
E)the right of top management to act on behalf of the stockholders.

Question 5

Those shares which have been issued and that are still in the hands of shareholders are known as

A)authorized shares.
B)issued shares.
C)treasury shares.
D)outstanding shares.
E)convertible shares.

Question 6

Those shares which have been sold to outside investors at one time or another are known as

A)authorized shares.
B)issued shares.
C)outstanding shares.
D)treasury shares.
E)convertible shares.

Question 7

The total number of shares that may be issued by a corporation is known as

A)issued shares.
B)authorized shares.
C)outstanding shares.
D)treasury shares.
E)preferred shares.

Question 8

Which of the following statements is false?

A)New corporations often start with a few investors and then seek additional funding as their original ideas are shown to be profitable.
B)Groups of investors called venture capitalists provide financial support for new corporations.
C)If the early life of the company is successful,the company may have an initial public offering (IPO).
D)The IPO may be managed by an underwriting firm and shares will be sold to individual and institutional investors.
E)The accounting procedures used by a company will vary significantly based upon the stage of the company's growth cycle.

Question 9

The issuance of 1,000,$.01 par value shares of common stock at $5 per share would include which of the following journal entries?

Question 10

The account Dividends Payable is

A)debited on the date of declaration.
B)credited on the date of payment.
C)not a legal liability of the company.
D)a liability on a balance sheet prepared between the date of declaration and the date of payment.
E)a contra account found in the stockholders' equity section of the balance sheet.

Question 11

In general,what are the principal rights of shareholders?

Question 12

A corporate proxy is a written authority granted by individual shareholders to others to cast the shareholders' votes.

Question 13

Tablet Trade & Commerce has 100,000 shares of common stock authorized,10,000 shares issued and outstanding.On June 1,20X3,the company declared a $5.00 per share dividend for those of record on July 1,20X3,to be paid on August 1,20X3.Which of the following journal entries would Tablet Trade & Commerce make on August 1,20X3?

A)No journal entry is necessary.

Question 14

By using ________,shareholders may express (vote)their preference without traveling to the site of the annual meeting.

A)a preemptive right
B)a corporate proxy
C)a stock option
D)a stock split
E)a stock dividend

Question 15

Treasury stock can be

A)used for stock purchase plans.
B)used to increase cash when the treasury stock is purchased.
C)used to distribute to employees for bonuses.
D)both A and B
E)both A and C

Question 16

Additional paid-in capital is the difference between the

A)cash received from stockholders and par value of the stock.
B)cash received from stockholders and dividends of the stock.
C)dividends paid to stockholders and treasury stock purchased.
D)dividends paid to stockholders and total number of shares authorized.
E)total number of shares authorized and total number of shares outstanding.

Question 17

Corporations are perpetual entities created in accordance with federal laws.

Question 18

Limited liability means

A)that in the event of liquidation,owners need to contribute only enough additional money so as to fully pay off the creditors of a corporation.
B)the creditors of a corporation can receive only up to and no more than the amount due to them.
C)that the company is required to pay only current liabilities in the current year and has no obligation to pay long-term liabilities in the current year.
D)that corporations can have liabilities only up to a certain amount,due to limits on the company's borrowing capability.
E)the creditors of the corporation have claims on only the assets of the corporation and not the assets of the owners of the corporation.

Question 19

Tablet Trade & Commerce has 100,000 shares of common stock authorized,10,000 shares issued and outstanding.On June 1,20X3,the company declared a $5.00 per share dividend for those of record on July 1,20X3,to be paid on August 1,20X3.Which of the following journal entries would Tablet Trade & Commerce make on July 1,20X3?

A)No journal entry is necessary.

Question 20

Tablet Trade & Commerce has 100,000 shares of common stock authorized,10,000 shares issued and outstanding.On June 1,20X3,the company declared a $5.00 per share dividend for those of record on July 1,20X3,to be paid on August 1,20X3.Which of the following journal entries would Tablet Trade & Commerce make on June 1,20X3?

A)No journal entry is necessary

Question 21

Features of preferred stock could include all of the following except:

A)callable.
B)convertible.
C)cumulative.
D)interest-bearing.
E)participating.

Question 22

Which of the following statements is NOT true regarding common and preferred stock?

A)Common stock is the most basic and common type of stock.
B)All corporations issue common stock.
C)Preferred stock owners do not usually have voting rights.
D)Preferred stockholders have priority over common stockholders regarding dividends and the distribution of assets upon liquidation.
E)With preferred shares,the amount of the dividend is generally specified and increases every year.

Question 23

Additional Paid-in Capital is also known as Capital in Excess of Par Value.

Question 24

In the United States,most corporations pay dividends every six months.

Question 25

Jacklie Syndicate began operations on January 1,20X3.The company has the following items included in the stockholders' equity section of its balance sheet on December 31,20X3 and December 31,20X4. 8% Preferred Stock,$100 par,100,000 shares authorized,
Common Stock,$3 par,500,000 shares authorized;
Total dividends declared and paid were
If Jacklie Syndicate's preferred stock were noncumulative,how much of the 20X4 dividends would have been distributed to

Question 26

Hortel,Inc.,had the following transactions during 2X03,its first year of operations.For each transaction,determine the effect each transaction had on the various stockholders' equity accounts by placing a plus sign (+),a minus sign (-),or an X in each column.
1.Hortel issued 2,500
2.Hortel declared dividends
3.The date of record for
4.Hortel paid dividends
5.Hortel authorized 800

Question 27

Florenza Establishment had 2,500,000 shares of common stock authorized.Shares issued were 1,050,000.There were 50,000 shares in treasury.
a.How many shares have been sold to shareholders?
b.How many shares are outstanding?
c.How many shares are unissued?
d.If the company declared a $2.00 per share cash dividend on January 1,20X4,for those of record on January 15,20X4,payable on January 31,20X4,prepare the journal entry for each of those dates assuming there were no changes over that period in the number of shares authorized,issued,or outstanding.

Question 28

Jacklie Syndicate began operations on January 1,20X3.The company has the following items included in the stockholders' equity section of its balance sheet on December 31,20X3,December 31,20X4 and December 31,20X5. 8% Preferred Stock,$100 par,100,000 shares authorized,
Common Stock,$3 par,500,000 shares authorized;
Total dividends declared and paid were
If Jacklie Syndicate's preferred stock were cumulative,how much of the 20X5 dividends would have been distributed to

Question 29

Retained earnings is debited on the date of payment for a cash dividend.

Question 30

Dividends become a liability of the corporation on the date of payment.

Question 31

Jacklie Syndicate began operations on January 1,20X3.The company has the following items included in the stockholders' equity section of its balance sheet on December 31,20X3 and December 31,20X4. 8% Preferred Stock,$100 par,100,000 shares authorized,
Common Stock,$3 par,500,000 shares authorized;
Total dividends declared and paid were
If Jacklie Syndicate's preferred stock were cumulative,how much of the 20X4 dividends would have been distributed to

Question 32

Which statement about cumulative preferred stock is FALSE?

A)A company does not have to pay a preferred stock dividend every year.
B)No dividends can be paid to common stockholders until all current and prior year preferred stock dividends are paid.
C)All dividends in arrears must be disclosed in a footnote to a company's balance sheet.
D)Any dividends in arrears are considered to be a liability since the company is obligated to pay these dividends.
E)In the event of liquidation,cumulative unpaid dividends must be paid before common stockholders receive any cash.

Question 33

Just because a certain number of shares are authorized does not mean that a company will ever offer that many shares to potential investors.

Question 34

If 10,000 shares have been issued,and 500 are held as treasury stock,the number of shares outstanding is 9,500.

Question 35

Prepare the appropriate journal entry for Chowder Soups for each of the events below.Each event relies on some or all of the events preceding it.
a.On January 1,20X3,Chowder Soups began operations.The company issued 20,000 shares of its $1.00 par value common stock.The shares were sold for $11 per share.
b.On November 1,20X3,Chowder Soups declared a $1.20 per share common stock dividend.
c.The record date for the common stock cash dividend was November 15,20X3.
d.On November 20,20X3,Chowder Soups paid the $1.20 per share common stock dividend.

Question 36

The stockholders' equity section of the balance sheet for Alaska Outfitters' at December 31,2X03 follows:
1.________ How many shares of common stock are issued?
2.________ How many shares of common stock are outstanding?
3.________ How many shares of common stock will receive dividends if dividends are declared?
4.________ What is the cost of the treasury stock per share?
5.________ What is the value of total stockholders equity?
6.________ Suppose Alaska Outfitters issues 10,000 additional shares of common stock and receives $50,000.What is the journal entry to record the additional issuance of stock?

Question 37

Net income must be greater than zero in order to pay dividends.

Question 38

If 100,000 shares are authorized,95,000 are outstanding and 1,500 are held as treasury stock,the number of shares issued is 93,500.

Question 39

With respect to dividends,the record date comes first and is always followed by the declaration date,which is then always followed by the payment date.

Question 40

The number of shares authorized are always greater than or equal to the number of shares outstanding,which are always greater than or equal to the number of shares issued.

Question 41

Before a liquidating company can distribute any assets to common stockholders,it must pay the full liquidating value of the preferred stock to all preferred stockholders.

Question 42

A characteristic of preferred stock that gives the issuer of the stock the right to buy the stock back from the owner at a fixed price is known as

A)participating.
B)cumulative.
C)convertible.
D)liquidating preference.
E)callable.

Question 43

State the appropriate accounting term for each of the definitions given below.
a)A written authority granted by individual shareholders to others to cast the shareholders' votes.
b)The right to acquire a proportional amount of any new issues of common stock.
c)The aggregate number of shares that can be issued.
d)A characteristic of preferred stock that requires that the undeclared dividends accumulate and must be paid in the future before common dividends are paid.
e)A measure of the preference to receive assets in the event of corporate liquidation.
f)A characteristic of preferred stock that gives the issuer the right to buy the preferred stock from the owner at a fixed price.
g)A characteristic of bonds or preferred stock that gives the holder the right to exchange the security for common stock.

Question 44

Boardman Pet Supplies began operations on January 1,20X3,and issued preferred and common stock.The stockholders' equity section of the Boardman Pet Supplies's balance sheet immediately after the issuance of the preferred and common stock was as follows:
Preferred stock,$100 par,9%,100,000 shares authorized,
Common stock,$2 par,2,000,000 shares authorized,
Dividend payments were as follows:
No additional shares of preferred or common stock were issued after January 1,20X3,nor did the company ever have treasury stock.Assume there was sufficient Retained Earnings to declare dividends in each year.
How would the dividends be distributed for 20X3 through 20X6 between the preferred stock and the common stock if

Question 45

A measure of the preference to receive assets in the event of corporate liquidation is referred to as liquidating value.

Question 46

Hoffert Enterprises has 500,000 shares of common stock authorized and 100,000 shares of common stock issued and outstanding.The common stock has a par value of $6 per share.On February 1,2X13,the company declared and issued a two-for-one stock split.Assuming that the company exchanges 200,000 new $3 par value shares for the old shares,what journal entry would be made by Hoffert Enterprises on February 1,2X13?
E)No journal entry is necessary.

Question 47

Which statement about preferred stock is incorrect?

A)Callable preferred stock gives the issuing company the right to purchase the preferred stock back from the shareholder.
B)The call price on callable preferred stock is set below the par or issue price of the stock to compensate for the call feature.
C)Convertible preferred stock gives the owners of the stock the right to exchange their preferred stock for common stock.
D)Convertible preferred stock can be expected to have a lower dividend percentage than a similar nonconvertible preferred stock.
E)Participating preferred stock can receive a larger dividend than the prespecified dividend when a company has an especially good year.

Question 48

When comparing preferred stock to common stock and bonds,which of the following is incorrectly stated?

A)Preferred stock and bonds have a specific maturity date.
B)Both bonds and preferred stock pay a specific return to the investor.
C)Both preferred stock and common stock can pay dividends.
D)Both preferred stock dividends and common stock dividends become liabilities only when the board of directors declares them.
E)Common stock,and typically preferred stock,have indefinite lives.

Question 49

Restricted stock has the benefit of

A)increasing in value when stock prices fall.
B)decreasing in value when stock prices fall.
C)retaining some value even if stock prices fall.
D)being retained for three additional years past the original purchase date.
E)being used as treasury stock.

Question 50

Brock Investing Group granted 25,000 stock options to its employees on January 1,2X03.Each option can be exercised to buy one share of common stock.The exercise price is $40 per share.The options vest at the end of 3 years on December 31,2X05.At the grant date,the fair value of the options is $4 per option.The shares had a par value of $1.The stock options are all exercised on December 31,2X05.
Required:

Question 51

A characteristic of preferred stock that provides increasing dividends when common dividends increase is known as

A)participating.
B)callable.
C)convertible.
D)liquidating preference.
E)cumulative.

Question 52

For each of the following items,state whether its effect will be to increase,decrease,or have no change in total stockholders' equity.
a)Issue common stock at a price greater than par value
b)Issue common stock at par value
c)Issue preferred stock at a price greater than par value
d)Issue preferred stock at par value
e)Declare the current year preferred stock dividend
f)Pay the declared dividend in e.above
g)Not declaring any dividends on cumulative preferred stock,thus having dividends in arrears
h)Declaring dividends in arrears for cumulative preferred stock
i)Paying for the dividends in arrears declared in h.above
j)Having a company call all callable preferred stock

Question 53

Preferred stock is like common stock in that dividends are not a legal obligation until the board of directors declares them.

Question 54

What are stock options? Why might stock options not be exercised? Why do companies reward management with stock options as opposed to cash bonuses?

Question 55

The owners of a business have a residual interest in the assets of the company after both current and long-term liabilities have been satisfied.

Question 56

Which of the following statements regarding stock options is false?

A)Options are valuable because the executives can gain the benefits of stock price increases without bearing the risks of price declines.
B)Options are generally given to corporate officers as a form of incentive compensation.
C)Stock options are rights granted to executives to purchase a specific number of shares of a corporation's capital stock at a specific price for a specific time period.
D)Measurement of the value of stock options is simply the market value of the options at the balance sheet date.
E)Footnotes in the financial statements must reveal the number and type of options outstanding and an assessment of their value.

Question 57

Dividend arrearages occur only for noncumulative preferred stock.

Question 58

Hartman Inc.,is liquidating.The company owes $3,800 to creditors of which $2,300 is unsubordinated debentures and $1,500 is subordinated debentures,preferred stockholders with a liquidating value of $1,800,and common stockholders.If Hartman,Inc.,has cash proceeds of $6,000,how much of the proceeds do the common stockholders receive?

A)$2,700
B)$3,700
C)$ 400
D)$2,200
E)$ 0

Question 59

If the board of directors declares a $210,000 dividend in 20X3,current year dividends on cumulative preferred stock are $80,000,dividends in arrears on cumulative preferred stock are $60,000,and the common shareholders are entitled to $70,000 of the 20X3 dividend amount.

Question 60

Preferred stocks and bonds have some similar characteristics.

Question 61

Which statement is false?

A)Typically the par value of common stock is adjusted for a stock split.
B)There are no costs to the company when issuing stock splits or stock dividends.
C)In both a stock split and a stock dividend,the shareholders have the same ownership interest after the stock split or stock dividend as they had before the stock split or stock dividend.
D)Ignoring the effect of fractional shares,both stock splits and stock dividends issue shares of common stock without any additional cash payments.
E)Stock splits are often used to keep a company's stock price low enough to maintain its price within a reasonable trading range.

Question 62

Stock splits generally cause stock prices to fall.

Question 63

Alexander Pools has 700,000 shares authorized and 250,000 shares issued and outstanding of its $4 par value common stock.The stock is currently selling for $60 per share.If Alexander Pools declared and issued a three-for-one stock split by issuing 500,000 new shares and accounts for it as a stock dividend,what journal entry would be made?
E)No journal entry is necessary.

Question 64

Nolan Jewelry has 200,000 shares of common stock authorized and 50,000 shares of common stock issued and outstanding.The common stock has a par value of $5 per share.On March 1,2X13,the company declared and issued a two-for-one stock split.Assuming that the company issues 50,000 new shares and accounts for it as a 100% stock dividend,what journal entry would be made by Nolan Jewelry on March 1,2X13?
E)No journal entry is necessary.

Question 65

When a stock dividend is less than 20% of the outstanding shares,generally accepted accounting principles require the stock dividend to be accounted for at its par value.

Question 66

Chorpa,Inc.,has 700,000 shares authorized and 150,000 shares issued and outstanding of $3 par value common stock.The current market price of the stock is $50 per share.On December 1,2X13,the company declared and issued a 40% stock dividend.After the stock dividend,determine the new value for each of the following items:

Question 67

Alexander Pools has 700,000 shares authorized and 250,000 shares issued and outstanding of its $4 par value common stock.The stock is currently selling for $60 per share.If Alexander Pools declared and issued a three-for-one stock split adjusting its par value,what would be the effect on the following items after the stock split? Assume the old shares were exchanged for 750,000 new shares.

Question 68

Soxlette Company has 700,000 shares authorized and 250,000 shares issued and outstanding of its $4 par value common stock.The stock is currently selling for $60 per share.If Soxlette Company declared and issued a 70% stock dividend,what would be the effect on the following items after the stock dividend?

Question 69

Printers for You began operations on June 1,2X13.The company authorized 15,000 shares of $1 par value common stock.Printers for You sold 15,000 shares of common stock for $5 per share on June 2,2X13.On August 15,2X13,Printers for You repurchased 1/2 of the outstanding common stock for $6 per share.On August 31,2X13,Printers for You sold 1,000 of the treasury stock.On September 1,2X13,the company declared a three-for-one stock split.After the split

A)total stockholders' equity remained the same.
B)total stockholders' equity increased.
C)total stockholders' equity decreased.
D)assets and liabilities increased.
E)assets and liabilities decreased.

Question 70

Which of the following statements about large stock dividends is true?

A)If the market price of the stock before a 50% stock dividend is $30,the market price after the stock dividend will be $45.
B)If the market price of the stock before a 50% stock dividend is $30,the market price after the stock dividend will be $60.
C)A stockholder who owned 50 shares of stock before the 50% stock dividend,will own 100 shares of stock after the stock dividend.
D)With a 50% stock dividend,Retained Earnings is reduced by the par value of new shares of stock issued.
E)With a 50% stock dividend,Retained Earnings is reduced by the market value of new shares of stock issued.

Question 71

Stock dividends and stock splits involve additional shares of stock distributed to shareholders without any cash payment to the firm.

Question 72

When shareholders are entitled to stock dividends in amounts equal to fractional units,corporations issue additional shares for whole units plus cash equal to the market value of the fractional units.

Question 73

Bettle Company has 500,000 shares authorized and 100,000 shares issued and outstanding of $4 par value common stock.The current market price of the stock is $25 per share.On May 1,2X13,the company declared and issued a 5% stock dividend.What journal entry would the company make on May 1,2X13?

Question 74

Ronald Cummings purchased 800 shares of Barnum Corp.'s common stock for $15 per share.Barnum Corp.'s shares have a par value of $2.If Barnum Corp.declared and issued a two-for-one stock split,and later declared and paid on the same day a cash dividend of $1.00 per share,what journal entry would Ronald Cummings make in order to record the cash dividend from Barnum Corp.?

Question 75

Soxlette Company has 700,000 shares authorized and 250,000 shares issued and outstanding of its $4 par value common stock.The stock is currently selling for $60 per share.If Soxlette Company declared and issued a 5% stock dividend,what journal entry would the company make?

Question 76

Ronald Cummings purchased 800 shares of Barnum Corp.'s common stock for $15 per share.Barnum Corp.'s shares have a par value of $2.If Barnum Corp.declared and issued a two-for-one stock split,what journal entry would Ronald Cummings make?
E)No journal entry is necessary.

Question 77

Ronald Cummings purchased 800 shares of Barnum Corp.'s common stock for $15 per share.Barnum Corp.'s shares have a par value of $2.Assume Barnum Corp.declared and issued a 100% stock dividend.Subsequently,Ronald Cummings sold all of his holdings in Barnum Corp.for $9 per share.What journal entry would Ronald Cummings make to record the sale of his shares of the Barnum Corp.?

Question 78

Soxlette Company has 700,000 shares authorized and 250,000 shares issued and outstanding of its $4 par value common stock.The stock is currently selling for $60 per share.If Soxlette Company declared and issued a 30% stock dividend,what journal entry would the company make?
E)No journal entry is necessary.

Question 79

Ronald Cummings purchased 800 shares of Barnum Corp.'s common stock for $15 per share.Barnum Corp.'s shares have a par value of $2.If Barnum Corp.declared and issued a 3% stock dividend when the market price per share was $16,what journal entry would Ronald Cummings make?
E)No journal entry is necessary.

Question 80

Kimberly Conrad owns 150 shares of Dalor Organization.On January 13,2X13,Dalor Organization declared and issued a 3% stock dividend.The market price per share of Dalor Organization's stock is $35,and the par value is $1.00 per share.What is the journal entry to be made by Dalor Organization with respect to the stock dividend distribution to Kimberly Conrad?