Question 1

Napoli Industries had net income for Year 2 of $650,000.Napoli had an average number of shares outstanding at the end of the year of 500,000 shares.On January 1,Year 2,the market price of Napoli's stock was $20 per share.On December 31,Year 2,the market price was $22 per share.What is the price-earnings ratio for Napoli at the end of Year 2?

Accepted Answer

Earnings per share = Net income ÷ Number of shares of common stock outstanding
Earnings per share = $650,000 ÷ 500,000 shares = $1.30 per share
Price-Earnings Ratio = Market price per share ÷ Earnings per share
Price-Earnings Ratio = $22 ÷ $1.30 = 16.9

Question 2

In accordance with restrictive debt covenants,Maynard Company appropriated $20,000 of retained earnings.Which of the following entries would be required to recognize this appropriation?

Accepted Answer

The appropriation is recorded as a debit (decrease)to retained earnings and a credit (increase)to appropriated retained earnings.

Question 3

On July 1,Year 1,Village Bookstore,Inc.appropriated retained earnings in the amount of $36,000 for a future remodeling project in the basement of the bookstore.On June 30,Year 1,the balance of Retained Earnings was $82,800 and the Cash balance was $43,200.Which of the following answers shows the effect of the July 1 event on the elements of the financial statements?

Accepted Answer

The appropriation shifts $36,000 from retained earnings to appropriated retained earnings.In other words,retained earnings decreases by $36,000 and appropriated retained earnings increases by $36,000.

Question 4

On June 10,Year 1,Burton Builders,Inc. ,a publicly traded company,announced that it had been awarded a contract to build a football stadium at a contract price of $500 million.This contract would increase its projected revenues by 20% over the next three years.Which of the following statements is correct with regard to this announcement?

Accepted Answer

After a public announcement like this,the market price of Burton's stock is likely to increase immediately.While revenues are expected to increase by 20% over the next three years,this does not mean that cash flow from operations will increase by the same percentage.The announcement does not trigger any immediate recognition on the elements of the company's financial statements.

Question 5

Gilligan Corporation was established on February 15,Year 1.Gilligan is authorized to issue 500,000 shares of $6.00 par value common stock.As of December 31,Year 3,Gilligan's stockholders' equity accounts report the following balances:
  At the end of Year 3,Gilligan decides to issue a 5% stock dividend.At the time of issue,the market price of the stock was $22 per share.
-What is the number of shares outstanding after the stock dividend is issued?

Accepted Answer

Number of shares issued in stock dividend = 55,000 Outstanding shares × 5% = 2,750
Number of shares outstanding after stock dividend = Shares outstanding before stock dividend of 55,000 + Shares issued in stock dividend of 2,750 = 57,750

Question 6

Gilligan Corporation was established on February 15,Year 1.Gilligan is authorized to issue 500,000 shares of $6.00 par value common stock.As of December 31,Year 3,Gilligan's stockholders' equity accounts report the following balances:
  At the end of Year 3,Gilligan decides to issue a 5% stock dividend.At the time of issue,the market price of the stock was $22 per share.
-What is the amount of retained earnings that will be transferred to paid-in capital as a result of the stock dividend issued by Gilligan Corporation?

Accepted Answer

Number of shares issued = Outstanding shares of 55,000 × 5% = 2,750
Amount transferred = Number of shares issued × Market price of $22 per share = $60,500

Question 7

At the time that Kirby Company issued a 2-for-1 stock split,the company had 5,000 shares of $6 par value common stock outstanding.Stockholders' equity also included $15,000 of paid in capital in excess of par value-common and $22,000 of retained earnings.Which of the following statements regarding the impact of the stock split is true?

Accepted Answer

A stock split has no effect on the dollar amounts of assets,liabilities,and stockholders' equity.It only affects the number of shares of stock outstanding and the par value per share.The balance of the common stock account before the stock split equals $30,000 (or 5,000 shares × Par value of $6 per share).The balance of the common stock account after the stock split also equals $30,000 (or 10,000 shares × $3 per share).

Question 8

Which of the following statements about why companies choose not to pay cash dividends is (are)true?

Accepted Answer

Companies with a history of paying dividends usually continue to pay dividends.Also,to pay dividends in the future,a company must have sufficient cash and retained earnings.

Question 9

On September 1,Year 1,Orville Corporation has unrestricted retained earnings of $600,000,appropriated retained earnings of $400,000,cash of $850,000,and accounts payable of $50,000.What is the maximum amount that can be used for cash dividends?

Accepted Answer

The company can pay a maximum dividend of $600,000,which is the amount of unrestricted retained earnings.

Question 10

What effect will the declaration and distribution of a stock dividend have on net income and cash flows?

Accepted Answer

A stock dividend is an equity exchange transaction.Stock dividends decrease retained earnings and increase common stock and paid-in-capital in excess of par value.The income statement and statement of cash flows are not affected.

Question 11

Which of the following would not be a reason to expect an increase in the market price of the stock of Carlyle Corporation?

Accepted Answer

Many investors will sell their stock if they fear that revenue and earnings growth in the future will not be as great as they have been in the past.(In other words,investors expect the stock price to fall when this happens. )Increases in a company's stock price occur when investors believe the company's earnings will grow.An increase in the market price of stock could be due to past or expected future performance of a company or due to general optimism about the economy in general.

Question 12

Franklin Corporation reported net income of $75,000 in Year 1.The company had 100,000 shares of $12 par value common stock outstanding and a market price of $18 per share.What is Franklin's price-earnings ratio?

Accepted Answer

Earnings per share = Net income ÷ Number of shares of common stock outstanding
Earnings per share = $75,000 ÷ 100,000 shares = $0.75
Price-Earnings Ratio = Market price per share ÷ Earnings per share
Price-Earnings Ratio = $18 ÷ $0.75 = 24

Question 13

Chadwick Associates retained $850,000 of net income in the business in Year 1.If $75,000 was appropriated to satisfy the restrictive covenant of a loan agreement,what are the effects of the appropriation on the elements of the financial statements?

Accepted Answer

Appropriating retained earnings has no impact on the elements of the financial statements,aside from shifting the $75,000 from retained earnings to appropriated retained earnings.Total stockholders' equity does not change.

Question 14

Rocco Corporation decides to issue a 7.5% stock dividend on 20,000 outstanding shares of $10 stated value common stock.The distribution is made at the time the market value of the stock is $50 a share.How will the entry to record this transaction affect the company's stockholders' equity accounts?

Accepted Answer

Number of shares issued = 20,000 Outstanding shares × Stock dividend of 7.5% = 1,500
Increase in Common stock = 1,500 Shares issued × Stated value of $10 per share = $15,000
Increase in Paid-in capital in excess of par value-common = 1,500 Shares issued × (Market value of $50 -Stated value of $10)= $60,000
Decrease in Retained earnings = 1,500 shares issued × Market value of $50 per share = $75,000

Question 15

How is the price-earnings ratio calculated?

Accepted Answer

Price-Earnings Ratio = Market price per share ÷ Earnings per share

Question 16

Which of the following journal entries will be used to record the stock dividend?

Accepted Answer

Number of shares issued in stock dividend = Outstanding shares of 55,000 × 5% = 2,750
The stock dividend is recorded as a debit (decrease)to retained earnings for $60,500 (or 2,750 Shares issued × Market price of $22 per share),a credit (increase)to common stock for $16,500 (or 2,750 Shares issued × Par value of $6 per share),and a credit (increase)to paid-in capital in excess of par-common for the difference of $44,000 (or $60,500 ? $16,500).

Question 17

Which of the following describes,in part,how the declaration of a stock dividend affects the elements of the financial statements?

Accepted Answer

A stock dividend is an equity exchange transaction.A stock dividend decreases retained earnings,increases common stock,and increases paid-in capital in excess of par value-common stock.There is no effect on total stockholders' equity.

Question 18

Ben Weaver is planning to invest in one of the following companies based on their average performance over the past five years,summarized below.

If Ben is looking for a company that is likely to achieve rapid growth in revenues and profitability,which one should he choose?

Accepted Answer

The higher price-earnings ratio of Galax,Inc.indicates that the investors are optimistic about the company's future growth in revenues and profitability.

Question 19

Establishing a sole proprietorship generally requires the owner to get a charter from the state government.

Accepted Answer

Sole proprietorships do not require registration with state government.

Question 20

What is the expected impact of a 2-for-1 stock split?

Accepted Answer

A stock split has no effect on the dollar amounts of assets,liabilities,and stockholders' equity.It only affects the number of shares of stock outstanding and the par value per share.A 2-for-1 stock split decreases the par value per share by one-half and replaces each existing share with two new shares.Because twice as many shares now represent the same ownership interest,the market value per share should be one-half as much as it was prior to the split.

Quiz 11: Proprietorships,partnerships,and Corporations