Question 1

The declaration of a cash dividend decreases a corporation's stockholders' equity and increases its liabilities.

Accepted Answer

When a corporation declares a cash dividend, it reduces the retained earnings account under stockholders' equity and increases the dividends payable account under liabilities. As a result, stockholders' equity decreases and liabilities increase.

Question 2

The primary purpose of a stock split is to reduce the number of shares outstanding in order to encourage more investors to enter the market for the company's shares.

Accepted Answer

The primary purpose of a stock split is to increase the number of shares outstanding and decrease the price per share, making the stock more affordable and liquid for investors. It does not directly encourage more investors to enter the market, but it can make the stock more accessible to a wider range of investors.

Question 3

The declaration of a cash dividend decreases a corporation's stockholders' equity and decreases its assets.

Accepted Answer

The answer of The declaration of a cash dividend decreases...

Question 4

If 50,000 shares are authorized, 35,000 shares are issued, and 1,000 shares are reacquired, the number of outstanding shares is 36,000.

Accepted Answer

The number of outstanding shares is calculated by subtracting the number of reacquired shares from the number of issued shares. Therefore, the number of outstanding shares in this scenario would be 34,000 (35,000 issued shares – 1,000 reacquired shares).

Question 5

One of the conditions for paying a cash dividend is formal action by the board of directors.

Accepted Answer

This is correct. The board of directors must formally declare and approve the payment of a cash dividend to shareholders.

Question 6

Treasury stock is a contra-equity account.

Accepted Answer

Treasury stock is a contra-equity account because it reduces the overall equity of the company. It reflects the amount of shares that a company has repurchased and is holding in its own treasury, which means those shares are no longer outstanding and do not have voting rights or receive dividends. Thus, treasury stock is subtracted from the total equity of the company.

Question 7

One of the conditions for paying a cash dividend is sufficient retained earnings.

Accepted Answer

Companies can only pay dividends out of their retained earnings, which are the accumulated profits that have not been distributed to shareholders as dividends or used for other purposes. If a company does not have sufficient retained earnings, it cannot pay a cash dividend.

Question 8

If 20,000 shares are authorized, 14,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of $1 per share would amount to $13,500.

Accepted Answer

Cash dividends are paid only on the issued shares that are not held as treasury stock, so the calculation is (14,000 issued - 500 treasury) * $1 = 13,500.

Question 9

A 10% stock dividend will increase the book value per share.

Accepted Answer

A stock dividend does not affect the book value per share, as no new assets or liabilities are added to the company's balance sheet. The number of shares increases proportionally, but the book value per share remains the same.

Question 10

A corporation has 10,000 shares of $100 par value stock outstanding that has a current market value of $160. If the corporation issues a 4-for-1 stock split, the market value of the stock will fall to approximately $32.

Accepted Answer

If the corporation issues a 4-for-1 stock split, the number of shares outstanding will increase to 40,000 (10,000 x 4). The par value per share will decrease to $25 ($100 ÷ 4), but the market value per share is expected to remain the same, resulting in a new market value of $160 per share ($32 x 5).

Question 11

A corporation has 10,000 shares outstanding of $25 par value and a current market value of $100 per share. If the corporation issues a 5-for-1 stock split, the market value of the stock will fall to approximately $20.

Accepted Answer

After a 5-for-1 stock split, the number of outstanding shares will increase to 50,000 and the par value per share will decrease to $5. The market value per share will adjust accordingly based on supply and demand, but it is likely that the lower par value and increased number of outstanding shares will result in a lower market value per share. Therefore, it is possible that the market value of the stock will fall to approximately $20 after the stock split.

Question 12

Bonds payable due in 2020 are reported on the balance sheet as long-term liabilities.

Accepted Answer

Bonds payable due in 2020 are not due within the current year, therefore they are classified as long-term liabilities on the balance sheet.

Question 13

Before a stock dividend can be declared or paid, there must be sufficient cash.

Accepted Answer

While sufficient cash reserves may be desirable for a company to declare a dividend, it is not a requirement. Dividends may be paid out of profits, retained earnings, or a combination of cash and stock.

Question 14

If 50,000 shares are authorized, 35,000 shares are issued, and 2,000 shares are reacquired, the number of outstanding shares is 33,000.

Accepted Answer

Outstanding shares are calculated by subtracting the reacquired shares from the issued shares, so 35,000 issued - 2,000 reacquired = 33,000 outstanding shares.

Question 15

A corporation has 10,000 shares of $100 par value stock outstanding. If the corporation issues a 4-for-1 stock split, the number of shares outstanding after the split will be 40,000.

Accepted Answer

A 4-for-1 stock split would result in the number of outstanding shares increasing by a factor of 4, so the number of shares outstanding after the split would be 40,000 (4 x 10,000).

Question 16

The declaration of a stock dividend decreases a corporation's stockholders' equity and decreases its liabilities.

Accepted Answer

The declaration of a stock dividend does not decrease a corporation's liabilities, as it is simply a distribution of additional shares to existing shareholders. However, it does decrease the corporation's retained earnings and increase the number of outstanding shares, which can decrease the value of each individual share.

Question 17

Cash dividends are not paid on shares of treasury stock.

Accepted Answer

Cash dividends are not paid on treasury stock because treasury stock is stock that has been repurchased by the company and is no longer outstanding. Therefore, there are no shareholders to receive dividends on treasury stock.

Question 18

The declaration and issuance of a stock dividend does not affect the total amount of a corporation's assets, liabilities, or stockholders' equity.

Accepted Answer

When a corporation declares and issues a stock dividend, it increases the number of shares outstanding and decreases the value of each share proportionally. This does not change the total amount of the corporation's assets, liabilities, or stockholders' equity, as these values are all based on the same underlying assets and operations of the company.

Question 19

The reduction in the par or stated value of common stock, accompanied by the issuance of a proportionate number of additional shares, is called a stock split.

Accepted Answer

This is an accurate definition of a stock split.

Question 20

A corporation has 10,000 shares of $100 par value stock outstanding. If the corporation issues a 5-for-1 stock split, the number of shares outstanding after the split will be 2,000.

Accepted Answer

If there is a 5-for-1 stock split, the total number of shares outstanding will increase by a factor of 5. Therefore, after the split, the corporation would have 50,000 shares outstanding, not 2,000.

Quiz 8: Liabilities and Stockholders Equity