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C249 CH15
Stock Holder's Equity
| Jane and Linda are friends who purchased stock in the same corporation. Jane purchased common stock two years ago and has stuck with the organization. Linda recently purchased preferred stock. What is the difference between Jane and Linda’s stockholdings? | Jane will have a say in management decisions, whereas Linda will not have any influence on management. |
| Who helps corporations to transfer and record stock? | registrars |
| ______________________________________ stockholders generally have control over management within a corporation. | common |
| If Jon wants to establish a corporation in Maryland, then he will need to submit | articles of incorporation. |
| Which of the following is NOT a primary form of business organization? | the conglomerate |
| Rick says there is very little difference between the two, while Thomas maintains that both types of stock have different perks and drawbacks. Which of the following arguments should Thomas make to prove his point? | Common stockholders have a say in management decisions, while preferred stockholders most likely do not have any influence on management. |
| The partnership, the corporation, and the proprietorship are the three ______________________________ forms of business organization. | main |
| Normally, stock issued by a corporation has certain rights and privileges that can be restricted. In the absence of restrictive provisions, which of the following is NOT a right each share carries? | to share proportionately in any new issue of stocks or bonds by the corporation |
| To which of the following does the residual interest in a corporation belong? | common stockholders |
| The pre-emptive right enables a stockholder to do which of the following? | share proportionately in any new issues of stock of the same class |
| Which of the following is equal to a company’s net assets, has an amount that grows if the company is profitable, and is equal to net contributions and retained earnings? | stockholders’ equity |
| How do you find total Stockholder's Equity? | Common Stock + Preferred Stock + Paid-In Capital +Retained Earnings - Treasury Stock |
| What is contributed capital? | It is the amount provided by stockholders for use within the business. |
| True or False - Additional paid-in capital and retained earnings are both aspects of earned capital. | False |
| Which of the following is equal to a company’s net assets, has an amount that grows if the company is profitable, and is equal to net contributions and retained earnings? | stockholders’ equity |
| Rick and Dan are discussing stockholders’ equity. They are looking into the earnings of a company that set up an operation that turned very profitable over a few years. What is this capital an example of? | earned capital |
| The term residual owner means which of the following about shareholders? | They bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership. |
| Which of the following is NOT a part of stockholders’ equity? | unearned revenue |
| Richard’s company has been doing very well over the last two years. In the first year their profits went up by $50,000, and in the second year the profits went up by almost $125,000. What impact will this have on stockholders’ equity? | The stockholders’ equity will grow with profitability. |
| When capital is the result of profitable operations, it is often referred to as ________________ capital. | earned |
| Which of the following is a primary source of stockholders' equity? | both income retained by the corporation and contributions by stockholders |
| Total stockholders' equity represents which of the following? | a claim against a portion of the total assets of a company |
| What two major categories is stockholders' equity generally classified into? | earned capital and contributed capital |
| When common stock is sold by a corporation a journal entry is prepared which includes a debit to cash and a credit to the common stock account. What is assumed if the debit to cash is greater than the credit to the common stock account? | the stated value of the common stock is less than the per share price investors were willing to pay |
| Direct costs incurred to sell stock such as underwriting costs should be accounted for as which of the following options? 1. a reduction of additional paid-in capital. 2. an expense of the period in which the stock is issued. 3. an intangible asset. | 1. a reduction of additional paid-in capital. |
| Sold 10,000 shares of common stock for $13.50 per share. Issued 10,000 shares of common stock in exchange for a patent valued at $150,000. At the end of the Orion’s first year, what was the total paid-in capital? | $285,000 |
| The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. Which of the following is an acceptable method of allocation? | Proportional or Incremental |
| The par value of a stock has no relationship to the _________ value. | fair |
| The minimum value below which a company cannot issue a stock is called the _______ value. | stated |
| The overvaluation of the stockholders’ equity resulting from inflated asset values creates ________ stock. | watered |
| You can find the amount allocated to a stock by dividing the fair value of the stock by the aggregate fair value amount, and then multiplying that answer by the ________________________ | lump sum |
| True or False: No-par stock is carried in the accounts at issue price, and without reporting any additional paid-in capital. | true |
| What is it called when stock is issued without par value? | no-par stock |
| Which of the following are created if, as a result of the issuance of stock for property or services, a corporation undervalues recorded assets? | secret reserves |
| True or False: The par value of a stock has a direct relationship to its fair value. | false |
| The ______________ value is a minimum value below which a company cannot issue the stock. | stated |
| Secret reserves are created when a corporation undervalues recorded assets as a result of the issuance of stock for property or services. | true |
| Under what circumstances will a "secret reserve" be created? | if a capital expenditure is charged to expense |
| When a corporation issues its capital stock in payment for services, which of the following would be the least appropriate basis for recording the transaction? | the par value of the shares issued |
| Which of the following is the correct method to determine the fair value of a stock? | Multiply the number of shares by the market value. |
| Which of the following types of stock includes such disadvantages as coming with high taxes, causing reduced flexibility in paying dividends, and considering the price for stock to be legal capital? | no-par stock |
| When a company converts a convertible preferred stock to common stock, they should | debit Preferred Stock accounts and credit Common Stock accounts. |
| One difference between common stock and preferred stock is that preferred stockholders have no voting rights. | True |
| Which type of preferred stock is most common? | cumulative preferred stock |
| What is meant when a preferred stock is said to be cumulative? | Dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders. |
| True or False: If a corporation wants the option to redeem outstanding preferred shares at a specified future date and at a stipulated price, they should issue callable preferred stock. | True |
| How are cumulative preferred dividends in arrears shown on a corporation’s balance sheet? | As a footnote |
| When a company converts a convertible preferred stock to common stock, they should | debit Preferred Stock accounts and credit Common Stock accounts. |
| If a preferred stock stated dividend is listed as a specific dollar amount, you can assume that | the preferred stock has no par value. |
| Which of the following is true about redeemable preferred stock? | The FASB states that it should be included as a liability. |
| True or False: If a company fails to pay a dividend for a participating preferrred stock in any year, it must pay that dividend in a subsequent year before paying any common dividends. | False |
| Which of the following is true about redeemable preferred stock? | The FASB states that it should be included as a liability. |
| What is meant when a preferred stock is said to be cumulative? | Dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders. |
| Goff Resources declared a $320,000 cash dividend. If Goff has 12,000 shares of 7%, $100 par value cumulative preferred stock outstanding with one year of dividends in arrears, how much cash will Goff distribute to common stockholders? | $152,000 |
| When a corporation issues its capital stock in payment for services, which of the following would be the least appropriate basis for recording the transaction? | the par value of the shares issued |
| When a corporation sells stock to investors, the transaction will increase which of the following | Contributed Captial - Yes, Earned Capital - No |
| Which of the following is NOT one of the major reasons why companies rarely pay dividends in amounts equal to their legally available retained earnings? | to meet federal corporation requirements that earnings equivalent to the cost of treasury shares purchased be restricted against dividend declarations |
| How has the dividend tax cut of 2003 impacted the payout of dividends to stockholders over the past decade? | It has prompted a resurgence in dividend payouts. |
| Which of the following does the SEC encourage companies that consistently pay dividends to do in their annual report? | Indicate whether they intend to continue paying dividends in the future. |
| Which of the following conditions should exist in order for a company to pay a dividend when funds are available to do so? | The company’s present and future financial positions should warrant the distribution. |
| All of the following statements about dividends are true EXCEPT | dividends must be paid in the period declared. |
| During which decade or decades did companies’ focus on growth and reinvestment of profits lead to a sharp decline in the practice of paying dividends? | 1980s and 90s |
| When a company declares a liquidating dividend, which of the following must be included in the journal entry to record the declaration? | A debit to a paid-in capital account |
| Evans Incorporated owns 25,000 shares in Swickard Enterprises. Management at Evans declares a dividend in which Evans’ stockholders will receive Swickard stock as a dividend. What type of dividend does this represent? | a property dividend |
| JT Engineering declares a dividend. A portion of the dividend is liquidating. What impact will this distribution have on additional paid-in capital and retained earnings? | It will cause a decrease to additional paid-in capital and a decrease to retained earnings |
| Why only stock dividends do not reduce total stockholders’ equity? | because only stock dividends do not result in the payout of assets or incursion of a liability |
| All of the following should be included in the journal entry on the date of declaration of a small common stock dividend EXCEPT | a credit to Common Stock. |
| A stock with a selling price of $350 will likely appeal to _______ (more or fewer) investors than the same company’s stock after a 7-for-1 stock split. | fewer |
| The return on common stock equity is often used to measure a company’s | profitability. |
| The disclosures for __________ should be made in the equity section of the balance sheet rather than the notes to the financial statements. | liquidation preferences |
| If Guzman Toys wants to trade on the equity, they should issue | Preferred stock instead of common stock |
| Arnold Enterprises has issued and outstanding both common stock and preferred stock. Which of the following will have no effect on Arnold’s book value per share for common stock? | the payment of a previously declared cash dividend on the common stock. |
| The columnar format is gaining in popularity for which of the following financial documents? | statement of stockholders’ equity |
| How is the rate of return on common stock equity calculated? | By dividing net income less preferred dividends by average common stockholders’ equity. |
| How is the payout ratio calculated? | By dividing cash dividends by net income less preferred dividends. |
| How should cash dividends that have been declared but not yet paid be categorized? | as current liabilities |
| The difference between the actual return and expected return on plan assets and the amortization of the net gain or loss from previous periods are both related to the ________ component of pension expense. | Gain or loss |
| An employee’s future compensation level rather than their current compensation level is accounted for in which of the following components of pension expense? | Service cost |
| Which of the following represents the interest cost included in the pension expense recognized for a period by an employer sponsoring a defined benefit pension plan? | An increase in the projected benefit obligation due to the passage of time. |
| The FASB believes that the most realistic measure of the employer’s obligation under the pension plan on a going concern basis that should be used as the basis for determining service cost is the | projected benefit obligation. |
| The service cost of a pension plan will ________ the pension expense. | always increase |
| When calculating the interest on the liability component of the pension expense, the FASB states that interest should be compounded | The FASB does not state how often interest should be compounded. |
| True, or False: Multiplying the settlement rate by the beginning balance of the projected benefit obligation will give the interest component of the pension expense for the current period. | True |
| An employer’s required contribution to pension plan assets is decreased by which of the following? | the actual return on plan assets |
| A pension expense calculated by an employer who sponsors a defined benefit pension plan for its employees will include | the amortization of prior service costs. |
| When calculating the interest on the liability for pension expense, the settlement rate is multiplied by the ________ balance of the ________ benefit obligation. | beginning-of-the-year; projected |
| Which of the following is NOT included in the computation of pension expense? | The service cost component measured using current salary levels. |
| Which of the following describes the FASB’s conclusion about computing the service cost component of pension expense? | The projected benefit obligation using future compensation levels provides a realistic measure of present pension obligation and expense. |
| What is the relationship between the amount funded and the amount reported for pension expense? | The pension expense may be greater than, equal to, or less than the amount funded. |
| The difference between the pension expense and the payments into the pension fund are reported as | a pension asset/liability. |
| In order to calculate the actual return on plan assets, the net effect of employer contributions and benefits paid must be ________ balance of the plan assets. | subtracted from the net change in the |
| The __________ is used to determine the interest on the liability component of the pension expense. | settlement rate |
| The service cost component of pension expense must consider which of the following? | an employee’s future compensation level |
| The interest and dividends that accumulate from plan assets are used to adjust the ________ component of pension expense. | return on plan assets |
| True or False: Pension expense generally decreased by the amortization of prior service costs. | False |
| True or False: The expense caused by the increase in the accumulated benefit obligation of employees’ service during the current year is called the service cost. | False |
| How to find Pension Expense | Service cost + interest - expected return + prior service cost - net gain |
Created by:
tbeeche
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