Question 1

Many stockholders choose to invest in preferred stock because:

Accepted Answer

Choosing preferred stock allows investors to receive dividends before common stockholders, providing a consistent income stream. Preferred stock does not typically have voting rights or the ability to convert to common stock. While dividend distributions may increase, it is not a guarantee and should not be the sole reason for choosing preferred stock.

Question 2

After a corporation declares a cash dividend, what takes place on the date of record?

Accepted Answer

No entry is necessary on the date of record. This date is simply used to determine which shareholders will receive the dividend.

Question 3

When a corporation declares a small stock dividend, which of the following is false?

Accepted Answer

When a corporation declares a small stock dividend, the total stockholders' equity remains the same as the retained earnings are transferred to the capital stock accounts. Therefore, choices B and C are true. However, there is no cash dividend paid out, so choice A is false. Additionally, since retained earnings are transferred to the capital stock accounts, retained earnings decrease, making choice D true.

Question 4

When a corporation decides whether to pay a cash dividend, which of the following is an important consideration?

Accepted Answer

The balances in the corporation's cash account are an important consideration because dividends require the corporation to distribute cash to its shareholders. If there is not enough cash available, the corporation may have to borrow funds or issue more shares to raise the necessary cash. The number of authorized shares, the book value of treasury stock, and the balance of paid-in capital do not directly impact the decision to pay a cash dividend.

Question 5

When a corporation declares a stock dividend, which of the following is true?

Accepted Answer

When a corporation declares a stock dividend, the equity of the company remains the same as it represents the ownership interest of the shareholders. The dividend is paid out in the form of additional shares of stock, therefore, it does not affect cash or retained earnings directly.

Question 6

When a corporation pays a previously declared cash dividend, which of the following is true?

Accepted Answer

The answer of When a corporation pays a previously declared...

Question 7

When a corporation declares a cash dividend, which of the following is true?

Accepted Answer

When a corporation declares a cash dividend, it reduces retained earnings, which is a component of equity, thus decreasing equity.

Question 8

Magnum Corporation had 60,000 of its $3 par common stock issued before its recent 3-for-1 stock split. The market price of the stock was $30 per share before the split. Which of the following is true as a result of the split?

Accepted Answer

In a 3-for-1 stock split, the number of shares increases threefold, and the par value per share decreases proportionally. Therefore, the par value decreases from $3 to $1 per share.

Question 9

What is the primary reason for a stock split?

Accepted Answer

The answer of What is the primary reason for a...

Question 10

The stockholders' equity section of the December 31, 2011, balance sheet for Inglenook Interiors, Inc. before its recent stock dividend:  Inglenook declared a 10% stock dividend when the market price per share was $8.00. After the stock dividend, the components of Inglenook's stockholders' equity section were:
Common Stock Paid-in Capital Retained Earnings

Accepted Answer

The answer of The stockholders' equity section of the December...

Question 11

Patch, Inc. plans to distribute $134,000 in dividends. It has outstanding 200,000 shares of 7% $10 par preferred stock (cumulative) and 60,000 shares of $2 par common stock. How much will be distributed per share on preferred and common stock?$\begin{array} { l l } 
\text { Preferred stock } & \text { Common stock } \
\text { A. } \$ 3.35 & \$ 1.12 \
\text { B. } \$ 0.70 & \$ 2.00 \
\text { C. } \$ 0.67 & \$-0- \
\text { D. } \$ 1.68 & \$ 1.68
\end{array}$

Accepted Answer

The answer of Patch, Inc. plans to distribute $134,000 in...

Question 12

When is a liability for cash dividends created?

Accepted Answer

A liability for cash dividends is created at the date of declaration when the board of directors formally authorizes the payment of dividends to shareholders. At this point, the company has a legal obligation to pay the declared dividends, and the liability is recognized on the balance sheet. The date of record determines which shareholders are eligible to receive the dividend, and the date of payment is when the actual cash is distributed to shareholders.

Question 13

If a corporation declares a 2-for-1 stock split, which of the following is true?

Accepted Answer

The answer of If a corporation declares a 2-for-1 stock...

Question 14

On June 1, 2011, Donner Technologies declared a $50,000 cash dividend to be distributed to its common stockholders of record on June 15, 2011. The dividend will be paid on July 1, 2011. The required journal entry on June 1 includes a:

Accepted Answer

On June 1, the company declares a dividend, which reduces retained earnings. The entry is a debit to retained earnings and a credit to dividends payable.

Question 15

If a corporation issues cumulative, participating preferred stock, which of the following is true regarding the rights of the preferred stockholders?

Accepted Answer

Cumulative, participating preferred stock means that preferred stockholders have the right to receive current-year dividends as well as all unpaid dividends from prior years. They do not have to forgo dividends for any periods when no dividends are declared. They do not receive a fixed dividend each year regardless of the amount of dividends declared. They may or may not have an option to convert their shares to common stock at a specified date, but this is not a defining feature of this type of preferred stock.

Question 16

Dividends in arrears are required to be reported in:

Accepted Answer

Dividends in arrears are not a liability until declared, so they are disclosed in the notes to the financial statements to inform users of potential future obligations.

Question 17

Parnell, Inc. has 5,000 shares of $5 par, 3% cumulative preferred stock outstanding and 25,000 shares of $2 par common stock outstanding. No dividends have been paid for the past two years. If the company wishes to distribute $2 per share to the common stockholders, what is the total amount of dividends that must be paid in the current year?

Accepted Answer

The company must first pay the cumulative preferred dividends for the past two years and the current year before paying common stockholders. Preferred dividends per year = 5,000 shares * $5 * 3% = $750. Total preferred dividends for three years = $750 * 3 = $2,250. Then, $2 per share to 25,000 common shares = $50,000. Total dividends = $2,250 + $50,000 = $52,250.

Question 18

On January 15, 2011, Rockney Systems, Inc. paid a cash dividend that had been declared prior to the end of its 2010 fiscal year. The entry to pay the dividends includes a debit to:

Accepted Answer

When a company declares dividends, it records a debit to Retained Earnings and a credit to Dividends Payable. When the dividends are paid, the company records a debit to Dividends Payable and a credit to Cash, which reduces the liability created by the initial dividend declaration. Therefore, option B is correct – the entry to pay dividends includes a debit to Dividends Payable and a credit to Cash.

Question 19

On January 1, 2010, Framm Corporation issued 10,000 shares of its 10%, $20 par value cumulative preferred stock. No dividends were declared by Framm in 2010 or 2011. In 2012, Framm had a profitable year and was in a strong cash position, so it declared a dividend of $200,000. How much of this dividend was paid to Framm's common stockholders?

Accepted Answer

The preferred stock dividend is $20,000 per year (10,000 shares x $20 par value x 10%). Since the dividends are cumulative, Framm owes $20,000 for 2010 and $20,000 for 2011, totaling $40,000. Subtracting this from the $200,000 declared dividend leaves $160,000 for common stockholders.

Question 20

Which of the following is the appropriate general journal entry to record the declaration of a cash dividends?

Accepted Answer

The answer of Which of the following is the appropriate...

Quiz 10: Stockholders Equity