Problem Equity | Test Bank – 10e

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Student name:__________

FILL IN THE BLANK. Write the word or phrase that best completes each statement or answers the question.
1) The group responsible for overseeing the corporation’s activities is (are) the ________________________________.

2) A corporation has many of the same rights, duties, and responsibilities as a person because it is considered a ____________________________________.

3) The _______________________ protects stockholders’ proportionate interest in a corporation by allowing them to purchase their proportional share of any common stock later issued by the corporation.

4) A _________________ keeps a list of stockholders for stockholder meetings and dividend payments.

5) The number of shares that a corporation’s charter allows it to sell is called ____________________ stock.

6) The total amount of cash and other assets the corporation receives from its stockholders in exchange for its stock is called __________________________.

7) The cumulative net income (and loss) not distributed as dividends to a corporation’s stockholders is called ______________________.

8) Stock that is held by stockholders is called ___________________ stock.

9) The amount assigned per share to stock by the corporation in its charter is the _____________________.

10) Stock not assigned an amount per share by the corporate charter is called _________________.

11) _____________________ refers to any shares issued to obtain owner financing in a corporation.

12) The least amount that the buyers of stock must contribute to the corporation or be at risk to pay creditors at a future date is called ____________________________.

13) ___________________________ are corrections of material errors in past financial statements.

14) _______________________ is the income earned per share of a company’s outstanding common stock.

15) _______________________ is the price at which a stock is bought and sold.

16) __________________________ is the annual amount of cash dividends per share divided by the market value per share.

17) When preferred stock is cumulative and the directors either do not declare a dividend to preferred stockholders or declare one that does not cover the total amount of cumulative dividends, the unpaid dividend amount is called ____________________________.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
18) What is a corporation? Identify the key advantages and disadvantages of corporations.

19) What are the rights generally granted to common stockholders?

20) Explain how to calculate the price-earnings ratio and describe how it is used in analysis of a company’s financial condition and performance.

21) Explain how to compute dividend yield and discuss how it is used in analysis of a company’s financial condition.

22) Explain how nonparticipating preferred stock differs from participating preferred stock.

23) What is a stock split? How is a stock split different from a stock dividend?

24) Explain the difference between a large stock dividend and a small stock dividend. In addition, explain how to record these two types of stock dividends.

25) What is treasury stock? What reasons might a company hold treasury stock?

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
26) Boron Company is authorized to issue 50,000 shares of $50 par value, 8%, cumulative, fully participating preferred stock, and 750,000 shares of $5 par value common stock. Prepare journal entries to record the following selected transactions that occurred during the company’s first year of operations:

27) Avon corporation began business this year. The company is authorized to issue 500,000 shares of $100 par, 6%, noncumulative, nonparticipating preferred stock, and 1,000,000 shares of no-par common stock. The following selected transactions occurred during this year:

Prepare journal entries to record these transactions.

28) Rhoads Corporation is authorized to issue 250,000 shares of $50 par, 10%, noncumulative, nonparticipating preferred stock and 5,000,000 shares of no-par common stock. Prepare journal entries to record the following selected transactions that occurred during this year:

29) Given the following information about a corporation’s current year activities, compute the retained earnings for the current year.

30) Given the following information about a corporation’s current year activities, compute the retained earnings for the current year ended December 31.

31) Explain how each of the following items should be reported by a corporation:

(1) The accounting department discovered that a material entry was made last year to Insurance Expense instead of to Prepaid Insurance. The after-tax effect of the charge to Insurance Expense was $120,000.
(2) The accounting department determined the depreciable lives of equipment will be five years instead of the original estimate of seven years.

32) Shaw Corporation reported stockholders’ equity on December 31 of the prior year as follows:

The following selected transactions occurred during the current year:

Prepare a statement of retained earnings as of December 31 of the current year.

33) Beagle Company earned $89,925 in net income and paid cash dividends of $7,000 to preferred shareholders during the current year. Beagle had 15,500 weighted-average shares of common stock outstanding for the year. Calculate the company’s basic earnings per share.

34) Slate Corporation had the following balances in its stockholders’ equity accounts at December 31, 2020:

The following transactions occurred during 2021:

Based on the above information, prepare a statement of stockholders’ equity for 2021. Use the form below.

35) A corporation had current year net income of $236,800. It paid preferred dividends of $40,000 cash and had 480,000 weighted-average shares of common stock outstanding. Calculate the corporation’s basic earnings per share.

36) A company’s stock is selling for $63.36 per share and its earnings per share is $3.60 for the current year. Calculate the price-earnings ratio.

37) A company reported net income of $831,250 for the current year. The year-end market price per common share was $11.90 and there were 475,000 weighted-average shares of common stock outstanding. Calculate the company’s price-earnings ratio.

38) A company reported $960,000 in net income for the current year. Total weighted-average common shares outstanding are 150,000 shares, and the year-end market price is $67.20 per common share. Calculate the company’s price earnings ratio.

39) A company reported $1,050,000 in net income for the current year. Earnings per share is $1.75, and the year-end market price of the shares is $31.50. Calculate the company’s price earnings ratio.

40) A corporation reported net income of $2,730,000 and paid preferred cash dividends of $120,000 during the current year. There were 600,000 weighted-average shares of common stock outstanding and the market price per common share at year-end was $58.29. Calculate the company’s price-earnings ratio.

41) Gershwin Company reported net income of $428,000 and paid $8,000 in preferred cash dividends during the current year. The company had 110,000 common shares issued, and 10,000 common shares in treasury during the year. The year-end market price per common share was $41.16. Calculate the company’s price-earnings ratio.

42) A company’s stock is selling for $36.00 per share at year-end. This current year it paid shareholders a $1.44 per share cash dividend, reported earnings per share of $11.00, and had 750,000 common shares outstanding at year-end. Calculate the company’s dividend yield.

43) A corporation paid a cash dividend of $0.88 per share during the current year. It had 1,550,000 common shares outstanding at year-end, its current year earnings per share was $3.45, and the stock’s year-end market price was $10.00 per share. Calculate the company’s dividend yield.

44) Lafferty Corporation reported earnings per share of $9.75, paid a $6.00 cash dividend per share to preferred shareholders, and paid a $1.67 cash dividend per share to common shareholders. There were 10,000 shares of preferred stock outstanding and 600,000 shares of common stock outstanding during the year, and the market value per share of common stock was $41.75. Calculate the company’s dividend yield for common stock.

45) A company paid a cash dividend of $0.88 per share during the current year, and reported 18,000 shares of common stock issued, and 2,000 common shares in treasury stock during the current year. The year-end market price per share was $27.50. Calculate the following: (1) total amount of cash dividends paid to common shareholders, and (2) dividend yield.

46) A company has 2,000,000 common shares authorized, 400,000 common shares issued, and 15,000 common shares in treasury stock at the current year-end. It paid $0.96 per share cash dividends during the year. The year-end market value (price) of the stock is $15. Calculate (1) the total dividends paid and (2) the dividend yield.

47) Avro Corporation has 220,000 shares authorized, 80,000 shares issued, and 5,000 shares of treasury stock. The number of shares outstanding equals:

48) Randal Company has 25,000 shares of $10 par value common stock outstanding. Randal declares a 10% stock dividend on July 1 when the stock’s market value is $35 per share. The stock dividend is distributed on July 20. The journal entry for the declaration of the stock dividend is:

49) A company reports the following stockholders’ equity:

Paid-in Capital:

Compute the number of common shares outstanding.

50) On January 1, Wilson Incorporated had a retained earnings balance of $500,000. During the year, Wilson reported net income of $150,000 and paid cash dividends of $137,000. Calculate the retained earnings balance at its December 31 year-end.

51) Solar Components Incorporated has 50,000 shares of $2 par value common stock outstanding. Solar Components declares a 10% stock dividend on May 1 when the stock’s market value is $12 per share. The stock dividend is distributed on May 20. Prepare the journal entry for the distribution of the stock dividend.

52) Davis Enterprises has 125,000 shares of $5 par value common stock outstanding. Davis declares a 40% stock dividend on November 2 when the stock’s market value is $64 per share. Prepare the journal entry for the declaration of the stock dividend.

53) A company is authorized to issue 750,000 shares of $2 par value common stock. Prepare journal entries to record the following selected transactions that occurred during the company’s first year of operations:

54) On July 1, a corporation issued 15,000 shares of no-par common stock with a stated value of $3 per share in exchange for land with a market value of $215,000. Prepare the general journal entry to record this transaction.

55) On September 20, Fletcher Corporation issued 25,000 shares of no-par common stock for equipment having a market value of $85,000. Prepare the general journal entry to record this transaction.

56) A corporation had the following stock outstanding when the company’s board of directors declared a $75,000 cash dividend in the current year:

Allocate the cash dividend between the preferred and common stockholders assuming the preferred stock is noncumulative and nonparticipating.

57) A corporation had the following stock outstanding when the company’s board of directors declared a $55,000 cash dividend during the current year:

Allocate the cash dividend between the preferred and common stockholders assuming the preferred stock is cumulative and nonparticipating, and dividends are one year in arrears.

58) A company has $200,000 of 10% noncumulative, nonparticipating, preferred stock outstanding, and $150,000 of common stock outstanding. In the company’s first year of operation, no dividends were paid, but during the second year, it paid cash dividends of $25,000. Compute the dividends to be distributed to (1) preferred shares and (2) common shares.

59) A company was organized in January Year 1 and has 20,000 shares of $10 par value, 10%, nonparticipating preferred stock outstanding and 150,000 shares of $2 par value common stock outstanding. It has declared and paid cash dividends each year as shown below. Calculate the total dividends distributed to each class of stockholder under each of the assumptions given.

60) On June 30, a company declared a cash dividend of $0.35 per common share to the shareholders of record on July 15. The cash dividend will be paid on July 31. This company has 500,000 shares authorized and 100,000 shares outstanding. Prepare the journal entries required on June 30, July 15 and July 31.

61) The following selected transactions took place during the current year for a company:

(a) Prepare the journal entries for these transactions.
(b) If Retained Earnings had a $155,000 credit balance on January 1, and net income was $72,000 for the current year, calculate its year-end balance as of December 31.

62) Cactus Joe Corporation reported stockholders’ equity on January 1 of the current year as follows: Common Stock, $5 par value, 1,000,000 shares authorized, 600,000 shares issued; Paid-in Capital in Excess of Par Value, Common Stock, $1,025,000; Retained Earnings, $1,850,000. Prepare journal entries to record the following transactions:

63) For each of the following independent transactions a through d, prepare the necessary journal entry:

(a) Declared a $0.40 per share cash dividend on 300,000 shares of common stock outstanding.
(b) Declared and distributed an 8% stock dividend on 800,000 shares of $5 par value common stock outstanding. Market price per common share on this date was $25.
(c) Declared and distributed a 2-for-1 stock split on 400,000 shares of $12 par value common stock outstanding.
(d) Declared a 35% stock dividend on 700,000 common shares of $1 par value common stock outstanding. Market price per common share on this date was $20.

64) Parlay Corporation has 2,000,000 shares of $0.50 par value common stock outstanding. The following selected transactions related to the company’s stock took place during the current year:

Prepare necessary journal entries to record the events of April 15, May 1 and May 10.

65) On August 1, a company’s board of directors declared a 10% stock dividend to be distributed on September 1 to the stockholders of record on August 20. The company had 1,000,000 shares of $2.50 par value common stock outstanding with a market value of $23 per share. Prepare the journal entries required on August 1, August 20, and September 1.

66) Dynasty Corporation had stockholders’ equity on January 1 as follows: Common Stock, $5 par value, 1,000,000 shares authorized, 400,000 shares issued; Paid-in Capital in Excess of Par Value, Common Stock, $800,000; Retained Earnings, $3,600,000. Prepare journal entries to record the following transactions:

67) A corporation had stockholders’ equity on January 1 as follows: Common Stock, $1 par value, 1,500,000 shares authorized, 600,000 shares issued; Paid-in Capital in Excess of Par Value, Common Stock, $1,100,000; Retained Earnings, $2,300,000. Prepare journal entries to record the following transactions:

68) Prepare journal entries to record the following transactions for Bayside Inc (if no entry is necessary, indicate “no entry required”):

69) A company reported the following stockholders’ equity on January 1 of the current year:

Prepare journal entries for the following selected transactions related to this company’s stock during the current year:

70) Underwood Company’s only treasury stock transactions for the current year follow: (1) 2,000 shares of its common stock were purchased on June 1 for $80,000; (2) On July 1 it reissued 500 of these shares at $45 per share; (3) On August 1 it reissued an additional 500 treasury shares at $38 per share.

1) Prepare the journal entries required to record these transactions.
2) Calculate the balance in Paid-in Capital, Treasury Stock, on September 1 assuming its beginning-year balance is zero.

71) On January 10, Mood Corporation purchased 15,000 shares of its own common stock at $17.50 per share. On August 4, a total of 2,000 treasury shares were sold at $19.00 per share. These are the only treasury stock transactions ever made by the corporation. Prepare the journal entries required on January 10 and August 4.

72) Record the following transactions of Naches Corporation in general journal form:

(a) Reacquired 8,000 of its own $3 par value common stock at $20 cash per share. The stock was originally issued at $15 per share.
(b) Sold 2,000 shares of the stock reacquired under part (a) at $23 cash per share.
(c) Sold 3,000 shares of the stock reacquired under part (a) at $19 cash per share.

Answer Key

Test name: John Wild Ch11 Problem Material

1) board of directors or directors

2) separate legal entity

3) preemptive right

4) registrar

5) authorized

6) paid-in capital

7) retained earnings

8) outstanding

9) par value

10) no-par stock

11) Capital stock

12) minimum legal capital

13) Prior period adjustments

14) Earnings per share

15) Market value per share

16) Dividend yield

17) dividend in arrears

18) A corporation is an entity created by law that is separate from its owners and having many of the same rights and privileges granted to individuals. Ownership of corporations is represented by shares of stock. Owners of the stock are called shareholders or stockholders. Advantages of corporations include: limited liability of stockholders, ease of ownership transfer, continuous life, lack of mutual agency for stockholders, and ease of capital accumulation. Two disadvantages of corporations are: government regulation and double taxation.

19) Common stockholders generally have the right to vote at stockholders’ meetings; sell or otherwise dispose of their stock; receive the same dividend, if any on each share of common stock; purchase their proportional share of any common stock later issued by the corporation; and share in any assets remaining after creditors are paid when and if the corporation is liquidated.

20) The price-earnings ratio of a common stock is computed by dividing the stock’s market value (price) per share by its earnings per share. The price-earnings ratio represents the stock market’s expectations of a company’s future performance. Some analysts interpret the price-earnings ratio as what price the market is willing to pay for a company’s current earnings stream.

21) Dividend yield is the ratio of annual cash dividends per share divided by the market value per share of stock. The resulting dividend yield represents the annual amount of cash dividends distributed to common shares relative to their market value. Dividend yield can be used to identify whether a stock is an income stock or a growth stock. Stocks that pay large dividends on a regular basis are called income stocks. Companies that distribute little or no cash but use the cash to finance expansion are known as growth stocks.

22) Nonparticipating preferred stock limits the preferred stockholders’ dividends to the amount stated on the preferred stock. This means that any dividends above the amount stated on the preferred stock go to common stockholders. Participating preferred stock does not limit the amount of dividends that preferred stockholders can receive. This allows preferred stockholders to share with common stockholders any dividends paid in excess of the amount stated on the preferred stock.

23) A stock split is the distribution of additional shares to stockholders according to their present ownership. When a stock split occurs, the corporation “calls in” its outstanding shares and issues more than one new share in exchange for each old share. Splits can be done in any ratio. Stock splits reduce the par or stated value per share. Total paid-in capital, retained earnings, and stockholders’ equity are unchanged by stock splits. Stock dividends are distributions of additional shares of the corporation’s own stock to its stockholders without the receipt of any payment in return. A stock dividend does not change the par or stated value per share, but total paid-in capital is increased and total retained earnings is decreased. Total stockholders’ equity is unchanged from a stock dividend.

24) A large stock dividend is a distribution of more than 25% of previously outstanding shares. A large stock dividend is recorded by capitalizing retained earnings for an amount equal to the par or stated value of the shares. A small stock dividend is a distribution of less than or equal to 25% of the previously outstanding shares. A small stock dividend is recorded by capitalizing retained earnings for an amount equal to the market value of the shares to be distributed.

25) Treasury stock is the company’s own issued shares that it reacquires. Corporations acquire shares of their own stock for reasons such as using the shares to acquire another corporation, avoiding a hostile takeover of the company, reissuing them to employees as compensation, and maintaining a strong market for their stock.

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