Ch 18 Intermediate II

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The residual interest in a corporation belongs to the
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common stockholders
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The pre-emptive right of a common stockholder is the right to
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share proportionately in any new issues of stock of the same class
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The pre-emptive right enables a stockholder to
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share proportionately in any new issues of stock of the same class
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In a corporate form of business organization, legal capital is best defined as
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the par value of all capital stock issued
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Stockholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders
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bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.
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Total stockholders’ equity represents
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a claim against a portion of the total assets of an enterprise.
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A primary source of stockholders’ equity is
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both income retained by the corporation and contributions by stockholders
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Stockholders’ equity is generally classified into two major categories:
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earned capital and contributed capital
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The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the
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either the proportional method or the incremental method
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When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the
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par value of the shares issued.
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Direct costs incurred to sell stock such as underwriting costs should be accounted for as 1. a reduction of additional paid-in capital. 2. an expense of the period in which the stock is issued. 3. an intangible asset.
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1
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A “secret reserve” will be created if
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a capital expenditure is charged to expense.
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Which of the following represents the total number of shares that a corporation may issue under the terms of its charter?
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authorized shares
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Stock that has a fixed per-share amount printed on each stock certificate is called
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par value stock.
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Which of the following is not a legal restriction related to profit distributions by a corporation?
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The amount distributed in any one year can never exceed the net income reported for that year.
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In January 2010, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par common stock for $15 per share. On July 1, 2010, Finley Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of these treasury shares
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decreased total stockholders’ equity.
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Treasury shares are
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issued but not outstanding shares
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When treasury stock is purchased for more than the par value of the stock and the cost method is used to account for treasury stock, what account(s) should be debited?
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Treasury stock for the purchase price
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“Gains” on sales of treasury stock (using the cost method) should be credited to
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paid-in capital from treasury stock
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Porter Corp. purchased its own par value stock on January 1, 2010 for $20,000 and debited the treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from
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additional paid-in capital to the extent that previous net “gains” from sales of the same class of stock are included therein; otherwise, from retained earnings
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How should a “gain” from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?
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As paid-in capital from treasury stock transactions.
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Which of the following best describes a possible result of treasury stock transactions by a corporation?
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May decrease but not increase retained earnings
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Which of the following features of preferred stock makes the security more like debt than an equity instrument?
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Redeemable
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The cumulative feature of preferred stock
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requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders
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According to the FASB, redeemable preferred stock should be
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included as a liability.
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Cumulative preferred dividends in arrears should be shown in a corporation’s balance sheet as
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a footnote
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At the date of the financial statements, common stock shares issued would exceed common stock shares outstanding as a result of the
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purchase of treasury stock
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An entry is not made on the
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date of record
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Cash dividends are paid on the basis of the number of shares
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outstanding.
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Which of the following statements about property dividends is not true?
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The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred.
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Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December 31, 2010, Houser distributed these shares of stock as a dividend to its stockholders. This is an example of a
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property dividend
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A dividend which is a return to stockholders of a portion of their original investments is a
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liquidating dividend
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A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to
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a paid-in capital account
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If management wishes to “capitalize” part of the earnings, it may issue a
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stock dividend
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Which dividends do not reduce stockholders’ equity?
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Stock dividends
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The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding
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decreases retained earnings but does not change total stockholders’ equity
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Quirk Corporation issued a 100% stock dividend of its common stock which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued?
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Par value
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The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings to contributed capital an amount equal to the
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market value of the shares issued
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At the date of declaration of a small common stock dividend, the entry should not include
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a credit to Common Stock Dividend Payable
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The balance in Common Stock Dividend Distributable should be reported as a(n)
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addition to capital stock
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A feature common to both stock splits and stock dividends is
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that there is no effect on total stockholders’ equity
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What effect does the issuance of a 2-for-1 stock split have on each of the following? Par Value per Share and Retained Earnings
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Decrease and No effect
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Which one of the following disclosures should be made in the equity section of the balance sheet, rather than in the notes to the financial statements?
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Liquidation preferences
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The rate of return on common stock equity is calculated by dividing
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net income less preferred dividends by average common stockholders’ equity
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The payout ratio can be calculated by dividing
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cash dividends by net income less preferred dividends
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Younger Company has outstanding both common stock and nonparticipating, non-cumulative preferred stock. The liquidation value of the preferred is equal to its par value. The book value per share of the common stock is unaffected by
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the payment of a previously declared cash dividend on the common stock
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Assume common stock is the only class of stock outstanding in the Manley Corporation. Total stockholders’ equity divided by the number of common stock shares outstanding is called
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book value per share.
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Dividends are not paid on
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treasury common stock.
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Noncumulative preferred dividends in arrears
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are not paid or disclosed.
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How should cumulative preferred dividends in arrears be shown in a corporation’s statement of financial position?
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Note disclosure
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A corporation is incorporated in only one state regardless of the number of states in which it operates.
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True
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The preemptive right allows stockholders the right to vote for directors of the company.
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False
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Common stock is the residual corporate interest that bears the ultimate risks of loss
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True
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Earned capital consists of additional paid-in capital and retained earnings
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False
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True no-par stock should be carried in the accounts at issue price without any additional paid-in capital reported.
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True
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Companies allocate the proceeds received from a lump-sum sale of securities based on the securities’ par values.
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False
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Companies should record stock issued for services or noncash property at either the fair value of the stock issued or the fair value of the consideration received.
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True
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Treasury stock is a company’s own stock that has been reacquired and retired.
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False
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The cost method records all transactions in treasury shares at their cost and reports the treasury stock as a deduction from capital stock.
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False
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When a corporation sells treasury stock below its cost, it usually debits the difference between cost and selling price to Paid-in Capital from Treasury Stock.
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True
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Participating preferred stock requires that if a company fails to pay a dividend in any year, it must make it up in a later year before paying any common dividends.
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False
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Callable preferred stock permits the corporation at its option to redeem the outstanding preferred shares at stipulated prices.
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True
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The laws of some states require that corporations restrict their legal capital from distribution to stockholders.
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True
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The SEC requires companies to disclose their dividend policy in their annual report.
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False
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All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a corporation.
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False
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Dividends payable in assets of the corporation other than cash are called property dividends or dividends in kind
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True
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When a stock dividend is less than 20-25 percent of the common stock outstanding, a company is required to transfer the fair value of the stock issued from retained earnings.
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True
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Stock splits and large stock dividends have the same effect on a company’s retained earnings and total stockholders’ equity.
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False
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The rate of return on common stock equity is computed by dividing net income by the average common stockholders’ equity.
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False
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The payout ratio is determined by dividing cash dividends paid to common stockholders by net income available to common stockholders.
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True

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