Question 1

Which of the following is necessary for a corporation to pay cash dividends?

Accepted Answer

A corporation must have sufficient retained earnings to pay cash dividends. Market value in excess of par value per share is not directly related to paying cash dividends. There is no requirement for a court order or prior declaration of stock dividends to pay cash dividends.

Question 2

The major subdivisions of the Stockholders' Equity section of the balance sheet are:

Accepted Answer

The major subdivisions of the Stockholders' Equity section of the balance sheet are Paid-in Capital and Retained Earnings. Common Stock and Preferred Stock are components of Paid-in Capital. Issued Capital and Authorized Capital are not subdivisions of Stockholders' Equity. Expenses and incomes are not related to Stockholders' Equity.

Question 3

Which of the following is an effect of payment of cash dividends on a company's financial statements?

Accepted Answer

The answer of Which of the following is an effect...

Question 4

A corporation has 50,000 shares of $100 par value stock outstanding that has a current market value of $180.If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately:

Accepted Answer

The answer of A corporation has 50,000 shares of $100...

Question 5

Treasury stock is reported in the _____ section of the balance sheet.

Accepted Answer

Treasury stock represents shares of a company's own stock that have been repurchased by the company and are held in treasury. Therefore, it is considered a reduction of the stockholders' equity section of the balance sheet.

Question 6

On November 21 of the current year, Maroon Inc.reacquired 50,000 shares of its common stock at $4 per share.As a result of this transaction, net assets of the company:

Accepted Answer

When a company reacquires its own stock, it is essentially buying back some of its ownership. This reduces the number of outstanding shares, which in turn increases the value of each remaining share. However, it also means that the company has fewer assets (in the form of stocks) and more cash. In this case, the company spent $200,000 to buy back 50,000 shares, so its net assets decreased by that amount. Therefore, choice B is the correct answer.

Question 7

The excess of issue price over par of common stock is termed as:

Accepted Answer

The excess of issue price over par of common stock is termed as a premium. A premium occurs when investors are willing to pay more for the stock than its par value, indicating a high level of confidence in the company's future prospects. This excess is recorded in the books as part of the company's equity, specifically, in the additional paid-in capital account.

Question 8

What is the effect of declaring a stock dividend on the liabilities and stockholders' equity section of the balance sheet?

Accepted Answer

Declaring a stock dividend does not affect the total liabilities or the total stockholders' equity of a company. It simply reallocates part of the company's retained earnings to common stock, but the total equity remains unchanged.

Question 9

A company sold 200 shares of common stock with a par value of $5 at a price of $13 per share.What is the effect on the accounts of this transaction?

Accepted Answer

Selling 200 shares at $13 per share generates a total cash inflow of $2,600. The par value of each share is $5, so the total common stock increase is $1,000 (200 shares x $5). Since the shares were sold at a price higher than their par value, the rest of the cash received above the par value is considered paid-in capital, which is $8 per share ($13 selling price - $5 par value). The total increase in paid-in capital is $1,600 (200 shares x $8). Therefore, the effect on the accounts of this transaction is an increase in cash of $2,600, an increase in common stock of $1,000, and an increase in paid-in capital of $1,600.

Question 10

Emerald Co.has 50,000 shares at $12 par common stock outstanding.If the company decides to buy 20% of its shares for $15 per share, the total stockholders' equity will:

Accepted Answer

The total cost to buy back 20% of its shares (10,000 shares at $15 each) is $150,000. This reduces the total stockholders' equity by the amount spent on the buyback.

Question 11

Orange Inc.had 300,000 shares of $150 par value common stock outstanding at the beginning of the year.During the year, the company issued a 3-for-1 stock split.What is the number of shares outstanding after the split?

Accepted Answer

A 3-for-1 stock split means for every share owned, the shareholder now owns 3 shares. Therefore, the number of shares increases to 300,000 * 3 = 900,000 shares.

Question 12

Which of the following is a reason for a corporation to buy back its own stock?

Accepted Answer

Buying back stock can reduce the number of shares outstanding, which can increase the value of remaining shares and allow the company to reissue them for purposes such as employee bonuses.

Question 13

On which of the following dates, a company incurs liability for a dividend?

Accepted Answer

A company incurs liability for a dividend on the date of declaration. This is the date on which the company's board of directors approves the payment of a dividend to shareholders. The date of record is simply a cutoff date for determining which shareholders are eligible to receive the dividend, and the date of payment is when the dividend is actually paid out to those shareholders. The date of liquidation is not relevant to dividend payments.

Question 14

A company sold 200 shares of common stock with a par value of $5 at a price of $12 per share.Which section of the statement of cash flows will contain this transaction?

Accepted Answer

The sale of common stock is considered a financing activity as it involves obtaining funds from investors. Therefore, this transaction will be included in the financing activities section of the statement of cash flows.

Question 15

Glow Co.reacquired 60,000 shares of its common stock at $25 per share.The balance of the treasury stock account is reported on the balance sheet as a(n):

Accepted Answer

Treasury stock represents shares of a company's stock that have been repurchased by the company. When a company reacquires its own stock, it reduces the number of outstanding shares, which in turn reduces stockholders' equity. Therefore, the balance of the treasury stock account is reported on the balance sheet as a reduction of stockholders' equity.

Question 16

The primary purpose of a stock split is to:

Accepted Answer

The primary purpose of a stock split is to reduce the market price of the stock per share. This is typically done to make the stock more affordable for investors and increase liquidity in the market. The other options listed are not typically the primary purpose of a stock split.

Question 17

The reduction of par or stated value of stock by issuance of a proportionate number of additional shares is termed a:

Accepted Answer

A stock split involves the issuance of additional shares, which reduces the par or stated value of each share. A stock dividend involves the distribution of additional shares to current shareholders, but this does not necessarily involve a reduction in par or stated value. Stock options are contracts that give individuals the right to buy or sell stock at a certain price. Preferred dividends are a fixed return paid to holders of preferred stock.

Question 18

Jack Co.issued 675,000 shares at $0.25 per share of common stock.If 75,000 shares were subsequently reacquired, _____ shares are considered outstanding.

Accepted Answer

The number of shares considered outstanding is calculated as follows:

Outstanding shares = total issued shares - treasury shares

Total issued shares = 675,000
Treasury shares = 75,000

Substituting in the formula, we get:

Outstanding shares = 675,000 - 75,000
Outstanding shares = 600,000

Therefore, the correct answer is B) 600,000.

Question 19

The price at which stock is sold depends on a variety of factors such as:

Accepted Answer

The financial condition and dividend record of the corporation are significant factors in determining the stock's selling price. The corporation's financial health and track record of paying dividends can increase investor confidence and demand for the stock, leading to a higher selling price. Choice B, measuring potential liability, is more relevant to determining a corporation's financial stability and creditworthiness rather than the stock's selling price. Choice C, the likelihood of an uncertain event, can impact stock prices but is unpredictable and outside the corporation's control. Choice D, the corporation's efficiency in paying debt interest, may affect the corporation's financial stability, but does not necessarily impact the stock's selling price directly.

Question 20

Which of the following is a reason to undergo a reverse stock split?

Accepted Answer

A reverse stock split reduces the number of shares outstanding, which typically results in an increase in the market price per share. It does not directly affect the total stockholders' equity.

Quiz 8: Liabilities and Stockholders Equity