Question 1

Preferred stock that the issuing corporation has the option to retire by paying a specified amount to the preferred stockholders is called:

Accepted Answer

Callable preferred stock gives the issuing corporation the option to retire (or call back) the stock by paying a specified amount to the preferred stockholders. Convertible preferred stock can be exchanged for common stock, cumulative preferred stock provides for the accumulation of dividends if they are not paid, participating preferred stock allows for additional dividends to be paid beyond the stated rate, and premium stock is not a recognized type of preferred stock.

Question 2

Which of the following is true of a stock dividend?

Accepted Answer

A stock dividend does not affect total equity but reallocates amounts within equity, typically from retained earnings to paid-in capital.

Question 3

On September 1,Ziegler Corporation had 50,000 shares of $5 par value common stock,and $1,500,000 of retained earnings.On that date,when the market price of the stock is $15 per share,the corporation issues a 2-for-1 stock split.The general journal entry to record this transaction is:

Accepted Answer

A stock split does not require a journal entry as it does not affect the total value of the stockholders' equity; it only increases the number of shares and decreases the par value per share.

Question 4

A company's board of directors votes to declare a cash dividend of $1.00 per share on its 12,000 common shares outstanding.The journal entry to record the declaration of the cash dividend is:

Accepted Answer

When a cash dividend is declared, Retained Earnings is debited to reduce equity, and Common Dividend Payable is credited to recognize the liability.

Question 5

Gracey's Department Stores has $200,000 of 6% noncumulative,nonparticipating,preferred stock outstanding.Gracey's also has $600,000 of common stock outstanding.During its first year,the company paid cash dividends of $30,000.This dividend should be distributed as follows:

Accepted Answer

The preferred stock is noncumulative and nonparticipating, which means that it does not have any special rights to receive dividends before any dividends are paid to common stockholders or to participate in any extra dividends paid to common stockholders. Therefore, the $30,000 dividend should be distributed to both preferred and common stockholders proportionally based on their ownership.

The preferred stock represents 25% of the total stock outstanding ($200,000/$800,000), so it should receive 25% of the dividend, which is $7,500. The remaining 75% of the dividend, which is $22,500, should be distributed to the common stockholders.

Therefore, the preferred stock should receive $12,000 ($7,500 rounded to the nearest thousand) and the common stock should receive $18,000 ($22,500 rounded to the nearest thousand).

Choice D is the only option that matches this distribution.

Question 6

Global Corporation had 50,000 shares of $20 par value common stock outstanding on July 1.Later that day the board of directors declared a 10% stock dividend when the market value of each share was $27.The entry to record this dividend is:

Accepted Answer

When a stock dividend is declared, the company transfers a portion of its retained earnings to the common stock dividend distributable account. In this case, the retained earnings will decrease by the market value of the dividend ($135,000), and the common stock dividend distributable account will increase by the par value ($100,000) of the new shares issued. The difference between the market value and par value ($35,000) will be transferred to the paid-in capital in excess of par value, common stock account. Therefore, option C is the only answer that correctly reflects this transaction.

Question 7

A company's board of directors votes to declare a cash dividend of $.75 per share of common stock.The company has 15,000 shares authorized,10,000 issued,and 9,500 shares outstanding.The total amount of the cash dividend is:

Accepted Answer

The answer of A company's board of directors votes to...

Question 8

Achieving an increased return on common stock by paying dividends on preferred stock at a rate that is less than the rate of return earned with the assets invested from the preferred stock issuance is called:

Accepted Answer

This situation is known as financial leverage, where the company is using borrowed funds (preferred stock issuance) to earn a higher return on their common stock. By paying a lower rate of return on preferred stock than the return earned on the assets invested from that issuance, the company is essentially using the difference to increase the return on their common stock.

Question 9

Ultimate Sportswear has $100,000 of 8% noncumulative,nonparticipating,preferred stock outstanding.Ultimate Sportswear also has $500,000 of common stock outstanding.In the company's first year of operation,no dividends were paid.During the second year,the company paid cash dividends of $30,000.This dividend should be distributed as follows:

Accepted Answer

The preferred stock is noncumulative, so only the current year's dividend is considered. 8% of $100,000 is $8,000 for preferred stock, leaving $22,000 for common stock.

Question 10

A corporation declared and issued a 15% stock dividend on October 1.The following information was available immediately prior to the dividend:  The amount that contributed capital will increase (decrease)as a result of recording this stock dividend is:

Accepted Answer

The answer of A corporation declared and issued a 15%...

Question 11

A stock dividend is recorded with a transfer from:

Accepted Answer

A stock dividend represents a distribution of additional shares to existing shareholders, so there is no transfer of assets involved. Instead, the transfer is made between the retained earnings account (where the company holds its earnings from past periods) and the contributed capital account (where the company tracks the capital it has received from shareholders). Specifically, the transfer is from retained earnings to contributed capital, because the stock dividend does not reduce the total amount of earnings held by the company, but rather adjusts the allocation of those earnings among the existing shareholders.

Question 12

All of the following statements regarding stock dividends are true except:

Accepted Answer

Stock dividends do not decrease the number of shares outstanding, they increase the number of shares outstanding but reduce the value per share. All other statements are true.

Question 13

Hutter Corporation declared a $0.50 per share cash dividend on its common shares.The company has 20,000 shares authorized,9,000 shares issued,and 8,000 shares of common stock outstanding.The journal entry to record the dividend declaration is:

Accepted Answer

The journal entry to record the dividend declaration involves debiting retained earnings (for the total amount of the dividend declared) and crediting common dividends payable (to reflect the liability of paying out the dividend to shareholders). Since the company has issued 9,000 shares but only has 8,000 shares outstanding, not all shareholders will receive the dividend. Therefore, the entry will only reflect the dividend payable to the 8,000 outstanding shares. The correct journal entry is Debit Retained Earnings $4,000; credit Common Dividends Payable $4,000.

Question 14

A liability for dividends exists:

Accepted Answer

A liability for dividends is created on the date of declaration, as this is when the company formally commits to paying the dividend.

Question 15

Eastline Corporation had 10,000 shares of $10 par value common stock outstanding when the board of directors declared a stock dividend of 3,000 shares.At the time of the stock dividend,the market value per share was $12.The entry to record this dividend is:

Accepted Answer

The answer of Eastline Corporation had 10,000 shares of $10...

Question 16

Preferred stock which confers rights to prior periods' unpaid dividends even if they were not declared is called:

Accepted Answer

Cumulative preferred stock confers the right to prior periods' unpaid dividends even if they were not declared. This means that if a company misses a dividend payment, those missed payments accumulate and must be paid before any dividends can be paid out to common stockholders.

Question 17

A company's board of directors votes to declare a cash dividend of $1.00 per share on its 12,000 common shares outstanding.The journal entry to record the payment of the cash dividend is:

Accepted Answer

When a company declares a dividend, it creates a liability called Common Dividend Payable for the amount to be paid to shareholders. This liability account is credited for the amount of the dividend and Cash is debited for the same amount when the dividend is actually paid. Therefore, the correct journal entry to record the payment of the cash dividend is to Debit Common Dividend Payable $12,000 and Credit Cash $12,000.

Question 18

Preferred stock with a feature allowing preferred stockholders to share with common shareholders in any dividends in excess of the percent or dollar amount stated on the preferred stock is called:

Accepted Answer

Participating preferred stock allows preferred stockholders to receive their stated dividend and share in any excess dividends with common shareholders. Cumulative preferred stock means any unpaid dividends accumulate and must be paid before common shareholders can receive any dividends. Callable preferred stock means the issuer has the option to buy back the stock from shareholders at a predetermined price. Convertible preferred stock can be converted into common stock at a specified conversion rate. Preferential preferred stock is not a commonly used term in finance.

Question 19

Hutter Corporation declared a $0.50 per share cash dividend on its common shares.The company has 20,000 shares authorized,9,000 shares issued,and 8,000 shares of common stock outstanding.The journal entry to record the dividend payment is:

Accepted Answer

The answer of Hutter Corporation declared a $0.50 per share...

Question 20

A corporation's distribution of additional shares of its own stock to its stockholders without the receipt of any payment in return is called a:

Accepted Answer

The distribution of additional shares of a corporation's own stock to its stockholders without the receipt of any payment in return is called a stock dividend. This is different from a stock subscription, which is an agreement to purchase shares at a later date, and premium or discount on stock, which refers to the difference between the stock's market price and its face value. Treasury stock, on the other hand, refers to shares that have been repurchased by the issuing corporation and are being held in its treasury.

Quiz 13: Accounting for Corporations