Question 1

Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.

Accepted Answer

Restricted retained earnings are funds that are not available for dividend distribution, whether for preferred or common stock dividends, as they are reserved for specific purposes such as legal requirements or contractual obligations.

Question 2

Cash dividends are not a liability of the corporation until they are declared by the board of directors.

Accepted Answer

Cash dividends are not considered a liability until the board of directors formally declares them. Until that point, they are simply a potential use of retained earnings.

Question 3

Retained earnings represents the amount of cash available for dividends.

Accepted Answer

Retained earnings represent the portion of net income that a company chooses to keep and reinvest in the business, rather than distribute as dividends to shareholders. Therefore, retained earnings are not immediately available for dividends, although they may be used for dividend payments in the future.

Question 4

The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.

Accepted Answer

The amount of a cash dividend liability is recorded on the date of declaration, not the date of record. The date of record is used for identifying shareholders who are eligible to receive the dividend.

Question 5

Common Stock Dividends Distributable is shown within the Paid-in Capital subdivision of the stockholders' equity section of the balance sheet.

Accepted Answer

Common Stock Dividends Distributable represents the portion of dividends on common stock that has been declared but not yet paid to shareholders. It is classified as a component of Paid-in Capital in the stockholders' equity section of the balance sheet.

Question 6

A 3-for-1 common stock split will increase total stockholders' equity but reduce the par or stated value per share of common stock.

Accepted Answer

A 3-for-1 common stock split does not change the total stockholders' equity; it only reduces the par or stated value per share of common stock and increases the number of shares outstanding.

Question 7

A detailed stockholders' equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.

Accepted Answer

The stockholders' equity section will list the various types of equity accounts such as common stock, preferred stock, retained earnings, etc. It will not list the names of individual shareholders eligible to receive dividends on the date of record.

Question 8

Return on common stockholders' equity is computed by dividing net income by ending stockholders' equity.

Accepted Answer

Return on common stockholders' equity is computed by dividing net income by average common stockholders' equity, not by ending stockholders' equity.

Question 9

The Accumulated Other Comprehensive income account can have either a debit or credit balance.

Accepted Answer

The Accumulated Other Comprehensive Income account can have either a debit or credit balance, depending on whether the overall amount of unrealized gains or losses on items such as available-for-sale securities, foreign currency translation, and pension plans is positive or negative.

Question 10

A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease.

Accepted Answer

A 10% stock dividend increases the number of shares outstanding, which dilutes the book value per share since the total equity remains the same while the number of shares increases.

Question 11

Many companies prepare a stockholders' equity statement instead of presenting a detailed stockholders' equity section in the balance sheet.

Accepted Answer

Some companies choose to present a separate stockholders' equity statement instead of including a detailed stockholders' equity section within the balance sheet. However, this decision is up to the company and both presentation methods are acceptable.

Question 12

Retained earnings that are restricted are unavailable for dividends.

Accepted Answer

Retained earnings that are restricted have a specific purpose designated by the company and are not available for payment of dividends.

Question 13

Treasury stock should not be classified as a current asset.

Accepted Answer

Treasury stock is not a current asset because it represents the company's own stock that has been repurchased and is no longer available for sale to investors. It is typically classified as a contra equity account on the balance sheet, reducing the overall shareholder equity of the company.

Question 14

A debit balance in the Retained Earnings account is identified as a deficit.

Accepted Answer

A debit balance in the Retained Earnings account represents cumulative losses and dividends that have exceeded earnings, which is commonly referred to as a deficit.

Question 15

The payout ratio is computed by dividing total cash dividends declared by retained earnings.

Accepted Answer

The payout ratio is computed by dividing total cash dividends declared by net income, not by retained earnings.

Question 16

Dividends may be declared and paid in cash or stock.

Accepted Answer

Dividends can be paid in either cash or stock. Cash dividends involve the company distributing money to shareholders, while stock dividends involve the company distributing additional shares of stock to shareholders.

Question 17

The stockholders' equity statement shows the changes in each stockholders' equity account and in total stockholders' equity during the year.

Accepted Answer

The stockholders' equity statement is a financial statement that shows the changes in each stockholders' equity account, including common stock, retained earnings, and additional paid-in capital, and in total stockholders' equity during the year.

Question 18

Net income of a corporation should be closed to retained earnings and net losses should be closed to paid-in capital accounts.

Accepted Answer

Net losses should be closed to retained earnings and may reduce the balance of this account or result in a deficit. Paid-in capital accounts represent the amount of capital that shareholders have contributed to the corporation and are not affected by net losses.

Question 19

Treasury stock purchased for $25 per share that is reissued at $20 per share, results in a Loss on Sale of Treasury Stock being recognized on the income statement.

Accepted Answer

When treasury stock is reissued at a price lower than its cost, it results in a gain on sale of treasury stock, not a loss. Therefore, the statement given in the question is false.

Question 20

A retained earnings statement shows the same information as a corporation income statement.

Accepted Answer

A retained earnings statement shows the changes in a corporation's retained earnings account over a period of time, while an income statement shows the corporation's revenues, expenses, and net income for the same period. While the two statements are related, they do not show the exact same information.

Quiz 11: Corporations: Organization, Stock Transactions