# Accounting Ch 11

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### If a corporation issues 1,000 shares of \$3 par common stock for \$7 a share, how much is the legal capital?

The legal capital is the par value per share (\$3) times the number of shares issued (1,000) or \$3,000.

### Which of these statements is false? =Ownership of common stock gives the owner a voting right. =The stockholders' equity section begins with paid-in capital amounts. =The authorization of capital stock does not result in a formal accounting entry. =Legal capital is intended to protect stockholders.

Legal capital is intended to protect stockholders.

\$28

Legal capital

### DT Inc. issued 3,000 shares of \$5 par value common stock for \$6 per share. Which of the following is one part of the journal entry to record the issuance =Credit to Common Stock for \$15,000 =Credit to Common Stock for \$18,000 =Debit to Paid-in Capital in Excess of Par Value for \$3,000 =Debit to Cash for \$15,000

Credit to Common stock = 3,000 × \$5 = \$15,000

### Wynola, Inc. issued 1,000 shares of common stock at \$10 per share. If the stock has a par value of \$4 per share, which of the following will be part of the journal entry to record the issuance? =Credit to Paid-in Capital in Excess of Par Value for \$10,000 =Debit to Retained Earnings for \$6,000 =Debit to Cash for \$4,000 =Credit to Common Stock for \$4,000

Credit to Common Stock for \$4,000

### For what reason might a company acquire treasury stock? To reissue the shares to officers and employees under bonus and stock compensation plans =To increase profit =To signal to the stock market that management believes the stock is overpriced =To increase the number of shares of stock outstanding

To reissue the shares to officers and employees under bonus and stock compensation plans

### Which one of the following decreases when a corporation purchases treasury stock? =Outstanding shares =Authorized shares =Treasury shares =Issued shares

Outstanding shares

Cost method

\$12,000

### A corporation sold 1,000 shares of its \$2.00 par value common stock for \$10.00 per share and later repurchased 100 of those shares for \$12.00 per share. Which of the following will be debited to record the repurchase of the 100 shares?

Treasury Stock for \$1,200

### A corporation has cumulative preferred stock on which it pays dividends of \$20,000 per year. The dividends are in arrears for two years. If the corporation plans to distribute \$90,000 as dividends in the current year, how much will the common stockholders receive?

Preferred dividends in arrears for two years (\$20,000 × 2) \$40,000
Preferred for current year 20,000
Total to preferred stockholders \$60,000
Total dividends available (90,000)
Amount available to common stockholders \$30,000

### Which one of the following statements is incorrect? =When preferred stock is noncumulative, any dividend passed in a year is lost forever. =Dividends may be paid on common stock while dividends are in arrears on preferred stock. =Dividends in arrears on preferred are not considered a liability. =Dividends cannot be paid on common stock while any dividend on preferred stock is in arrears.

Dividends may be paid on common stock while dividends are in arrears on preferred stock.

### Which one of the following is not a right of preferred stockholders? =Priority in relation to dividends =Priority voting rights =Priority to the assets in the event of liquidation =Preferred stockholders always have all three of the above.

Priority voting rights

### Which of the following is a feature associated only with preferred stock? a. Dividend preference b. Preference to assets in the event of liquidation c. Cumulative dividends d. All of the above

d. All of the above

### M-Bot Corporation has 10,000 shares of 8%, \$100 par value, cumulative preferred stock outstanding at December 31, 2012. No dividends were declared in 2010 or 2011. If M-Bot wants to pay \$375,000 of dividends in 2012, how much will common stockholders receive?

Before the common stockholders receive any dividends, the preferred dividends should first be distributed for the two years in arrears and the current year.
Total dividend = 10,000 × 8% × \$100 = \$80,000
Preferred dividends in arrears for two years (\$80,000 × 2) \$ 160,000
Preferred for current year 80,000
Total to preferred stockholders 240,000
Total dividends available (375,000)
Amount available to common stockholders \$ 135,000

### Which statement about stock dividends is true? =A stock dividend decreases total stockholders' equity. =A stock dividend increases total stockholders' equity for the par value of the stock being distributed. =A stock dividend has no effect on total stockholders' equity. =Stock dividends reduce a company's cash balance

A stock dividend has no effect on total stockholders' equity.

### Raptor Inc. has retained earnings of \$500,000 and total stockholders' equity of \$2,000,000. It has 100,000 shares of \$8 par value common stock outstanding, which is currently selling for \$30 per share. What will occur is Raptor declares a 10% stock dividend on its common stock?

Retained earnings will decrease by \$300,000 and total paid-in capital will increase by \$300,000

False

Stock dividend

In a footnote

### Dehesa, Inc. has 8,000 shares of 5%, \$50 par, cumulative preferred stock and 50,000 shares of \$3 par common stock outstanding. No dividends were declared last year, However, the board of directors has just declared a \$50,000 dividend this year to be paid in 10 days. What amount of the total dividend will be paid to common stockholders?

Total dividend = 8,000 × 5% × \$50 = \$20,000
Preferred dividends in arrears for one year \$ 20,000
Preferred for current year 20,000
Total to preferred stockholders 40,000
Total dividends available (50,000)
Amount available to common stockholders
\$ 10,000

### Ramona, Inc. has 2,000 shares of 5%, \$100 par, cumulative preferred stock and 80,000 shares of \$4 par common stock outstanding. Last year the board of directors declared and paid an \$8,000 dividend. This year the dividend declared and paid was \$15,000. What amount of this dividend will be paid to the preferred stockholders?

Total dividend = 2,000 × 5% × \$100 = \$10,000
Preferred dividends in arrears for prior year (\$10,000 - \$8,000) \$ 2,000
Preferred for current year 10,000
Total to preferred stockholders
\$12,000

### Vista, Inc. has 300,000 shares of common stock outstanding. A 30% stock dividend was declared and issued. How many shares are outstanding after the stock dividend?

300,000 + (300,000 × 30%) = 390,000 shares

### A corporation is authorized to sell 1,000,000 shares of common stock. Today there are 400,000 shares outstanding, and the board of directors declares a 10% stock dividend. How many shares will be issued as a stock dividend?

400,000 shares outstanding × 10% = 40,000 new shares to be issued

### If a corporation has incurred a net loss, which account will it affect? =Credited to Retained Earnings in a closing entry =Credited to a paid-in capital account in a closing entry =Debited to Retained Earnings in a closing entry =Debited to a paid-in capital account in a closing entry

Debited to Retained Earnings in a closing entry

### Which one of the following is not true concerning a retained earnings restriction? =It makes a portion of the balance of retained earnings unavailable for dividends. =It is reported as a loss on the income statement. =It may arise from legal, contractual, or voluntary causes. =It generally is disclosed in the notes to the financial statements.

It is reported as a loss on the income statement.

### Which one of the following is not part of 'stock' in the balance sheet? =Non-voting Class B preferred stock, stated value =Common stock, stated value =Paid-in capital in excess of par value-common stock =Convertible Class A preferred stock, stated value

Paid-in capital in excess of par value-common stock

### How is common stock listed in the stockholders' equity section of the balance sheet? =As part of paid-in capital =Subtracted from treasury stock =After retained earnings =Before preferred stock

As part of paid-in capital

### A corporation shows the following account balances: Retained earnings \$300,000 Treasury stock 10,000 Dividends payable 20,000 Paid-in capital in excess of par value 55,000 Common stock 200,000 How much is total stockholders' equity?

\$300,000 - \$10,000 + \$55,000 + \$200,000 = \$545,000

### In the stockholders' equity section of the balance sheet, from what is the cost of treasury stock deducted?

Total paid-in capital and retained earnings

### Consider the following data for a corporation: Net income \$800,000 Preferred stock dividends \$50,000 Market price per share of stock \$25 Average common stockholders' equity \$4,000,000 Cash dividends declared on common stock \$20,000 What is the payout ratio?

\$20,000/\$800,000 = 2.5%

### Consider the following data for a corporation: Net income \$800,000 Preferred stock dividends \$50,000 Market price per share of stock \$25 Average common stockholders' equity \$4,000,000 Cash dividends declared on common stock \$20,000 What is the return on common stockholders' equity?

(\$800,000 - \$50,000)/\$4,000,000 = 18.75%.

### Which of the following does not increase the return on stockholders' equity? =An increase in the return on assets ratio =An increase in the use of debt financing =An increase in the company's stock price =An increase in the company's net income

An increase in the company's stock price

### Rynadune Inc. reported net income of \$186,000 during 2012 and paid dividends of \$26,000 on common stock. It also paid dividends on its 10,000 shares of 6%, \$100 par value, noncumulative preferred stock. Common stockholders' equity was \$1,200,000 on January 1, 2012, and \$1,600,000 on December 31, 2012. How much is the company's return on common stockholders' equity for 2012?

[\$186,000 - (10,000 shares × \$100/share × 6%)] ÷ [(\$1,200,000 + \$1,600,000) ÷ 2] = 9%.

### If everything else is held constant, what will cause earnings per share to increase? =The issuance of new shares common stock =The payment of a cash dividend to common stockholders =The payment of a cash dividend to preferred stockholders =The purchase of treasury stock

The purchase of treasury stock

Stock Dividends

Example: