Test Questions & Answers Ch.13 Planning Equity Financing

Chapter 13

Planning Equity Financing

MATCHING

1. Match the following terms with the descriptions below.

A. Authorized shares

B. Debt financing

C. Equity financing

D. Financial leverage

E. Financial risk

F. Issued shares

G. Legal capital

H. Outstanding shares

I. Par Value

J. Preemptive right

K. Return on owners’ equity ratio

L. Times interest earned ratio

_____ 1. The chance that a company will fail because it defaults on its debt

_____ 2. An arbitrary value assigned to shares of capital stock that is approved by the

state in which the business is incorporated

_____ 3. A right of common stockholders that allows them to maintain their percentage

ownership interest in the corporation when new shares of stock are issued

_____ 4. A measure of a firm’s ability to service its debt

_____ 5. When a firm obtains funds (cash) in exchange for a liability to repay the

borrowed funds

_____ 6. A financing strategy that uses debt to increase the rate of return on owners’

investment

_____ 7. The number of shares held outside the corporation

_____ 8. The total number of shares the state will allow a corporation to sell

_____ 9. A measure of the performance of the owners’ investment

_____10. The portion of stockholders’ equity required by the state to be retained for the

protection of the corporation’s creditors

_____11. The number of shares sold to stockholders

_____12. A means of raising cash or other assets in exchange for an ownership interest

in a company

2. Match the following terms with the descriptions below.

A. Callable preferred stock

B. Common Stock

C. Convertible preferred stock

D. Cumulative preferred stock

E. No-par stock

F. Participating preferred stock

G. Preferred stock

H. Redeemable preferred stock

I. Retired stock

J. Treasury stock

_____ 1. Stock that does not have a minimum price assigned to each share of stock

_____ 2. Preferred stock that gives the holder of the shares the right to exchange the

stock for other forms of capital (typically common stock)

_____ 3. The basic ownership unit of a corporation

_____ 4. Preferred stock that allows its holder to receive dividends in excess of the

stated dividend rate

_____ 5. The corporation own issued stock that it has repurchased in the secondary

market

_____ 6. Preferred stock that gives its owner the right to exchange the stock for cash.

_____ 7. An ownership interest that gives the stockholder preferences as to dividends

and liquidation

_____ 8. Preferred stock that allows unpaid dividend to accumulate

_____ 9. Preferred stock that gives the issuing corporation the right to buy the stock

back from the stockholders at a predetermined price

_____ 10. Shares repurchased by the corporation that it will never reissue.

3. Match the following types of ownership structures with the descriptions listed below.

A. Limited Partnership

B. Limited Liability Partnership

C. Subchapter S Corporation

D. Limited Liability Company

E. All of the above

_____ 1. Partners are responsible for their own wrongful acts but not the wrongful acts

of other partners.

_____ 2. Limited partners cannot manage the business.

_____ 3. This was created as part of the Internal Revenue Code.

_____ 4. All owners have full ownership rights and number of owners is not limited.

_____ 5. Can have no more 75 members.

_____ 6. Business Income is taxed only once.

Answers: 1.B; 2.A; 3 C; 4.D; 5.C; 6.E

4. Match the following terms with the descriptions below.

A. Cash dividend

B. Date of declaration

C. Date of payment

D. Date of record

E. DRIP

F. Dividends in arrears

G. Ex-dividend date

H. Property dividend

I. Stock dividend

J. Stock split

_____ 1. The last day to buy stock and receive a declared dividend

_____ 2. The day the corporation is legally obligated to pay a dividend

_____ 3. Payment of noncash assets to stockholders

_____ 4. The corporation exchanges its old shares for a larger number of new shares

_____ 5. The distribution of cash to corporate shareholders.

_____ 6. Stockholders must be registered in the stock transfer book on this date in order

to receive a declared dividend

_____ 7. The amount of preferred dividends that have not been paid in full

_____ 8. Program that allows stockholders to reinvest their dividend in stock rather

than receive the cash dividend

_____ 9. Date when the cash dividend is distributed to stockholders

_____10. A distribution of a company’s shares to existing stockholders

5. Financial risk is the risk associated with:

A) debt financing.

B) equity financing.

C) financing activities.

D) ownership in a corporation.

6. When employing a strategy of financial leverage,

A) the cost of using borrowed funds should be less than the return generated by the borrowed funds.

B) the interest rate on borrowed funds should be more than the rate of return on

owners’ equity.

C) the goal of the corporation is to have zero liabilities.

D) the main goal is the highest possible total income.

7. Which of the following measures both the amount of a firm’s debt financing and its equity financing?

A) Times interest-earned ratio

B) Debt-to-equity ratio

C) Return on owners’ equity

D) Return on common stockholders’ equity

8. Which of the following measures a firm’s ability to service its debt?

A) Times interest earned

B) Debt-to-equity ratio

C) Return on owners’ equity

D) Return on common stockholders’ equity

9. In which of the following scenarios would financial leverage be maximized?

1. High times-interest-earned ratio and low debt-to-equity ratio
2. Low times-interest-earned ratio and low debt-to-equity ratio
3. Low times-interest-earned ratio and high debt-to-equity ratio
4. High times-interest-earned ratio and a high debt-to-equity ratio

10. When a company borrows more money, how are the debt–to-equity and times interest earned ratios affected?

Debt to Equity Times Interest Earned

A. Increases Increases

B. Decreases Decreases

C. Decreases Increases

D. Increases Decreases

11. When a company borrows more money, how are the debt to equity and return on equity affected assuming income before interest and taxes remain the same?

Debt to Equity Return on Equity

A. Increases Increases

B. Decreases Decreases

C. Decreases Increases

D. Increases Decreases

12. Ketek, Inc. has $400,000 in assets and one liability in the form of a $150,000 note payable with a 12 percent annual interest rate. Assuming Ketek’s tax rate is 30 percent and the firm generates a 15 percent return on its assets, Ketek’s rate of return on owners’ equity is:

A) 7.20 percent.

B) 11.76 percent.

C) 15.00 percent.

D) 16.80percent.

13. Which of the following is not a source of financing for a firm?

1. Selling asset of the firm
2. Issuing stock for cash
3. Issuing a note to borrow cash
4. Net income

14. Reinvestment of a firm’s earnings in the firm is a type of:

A) leveraged financing.

B) equity financing.

C) bond financing.

D) debt financing.

15. From the selections below identify the advantage of sole-proprietorships and partnerships.

A) Unlimited liability

B) Ease of capital formation

C) Income is not taxed twice

D) Mutual agency

16. Which of the following is a disadvantage of partnerships?

A) Ease of formation

B) Income is not taxed twice

C) Mutual agency

D) Owners manage the firm

17. Which of the following is not an advantage of partnerships.

A) Ease of formation

B) Income is taxes only once

C) Owners’ manage the firm

D) Limited Liability

18. In which of the following ownership structures do none of the owners have unlimited liability?

A) Limited partnership

B) Limited liability partnership

C) Limited liability company

D) General partnership

19. Which of the following ownership structures requires only the negligent owner to have unlimited liability?

A) Limited partnership

B) Limited liability partnership

C) Subchapter S corporation

D) Limited liability company

20. Which of the following ownership structures has double taxation—once on the income generated by the business entity and again on the distributions to the owners?

A) Subchapter S corporation

B) Limited liability company

C) Limited liability partnership

D) All of the above do not have double taxation.

21. If a firm has only one class of stock, the stock is called:

A) callable stock.

B) common stock.

C) preferred stock.

D) convertible stock.

22. The preemptive right possessed by common stockholders gives them the right to:

A) dispose of the shares of stock by sale or gift.

B) receive dividends whenever they are declared.

C) share proportionately in the residual assets upon liquidation of the corporation.

D) maintain their percentage interest in the corporation when new shares of common stock are issued.

23. All of the following statements regarding preferred stock are false except:

A) there is no specified amount of dividends on preferred stock.

B) preferred stockholders receive dividends after common stockholders.

C) in the event of liquidation, preferred stockholders are paid before common stockholders.

D) preferred stockholders are similar to common stockholders in that they are allowed one vote per share of stock owned.

24. All of the following features are common to preferred stock except:

A) right to vote.

B) right to dividends.

C) cumulative.

D) convertible.

25. All of the following are features frequently applicable to preferred stock except:

A) cumulative.

B) recumulative.

C) redeemable.

D) participating.

26. The redeemable feature of preferred stock allows the preferred stockholder

A) to buy more shares of preferred stock at a set price.

B) to redeem preferred stock for common stock with the right to vote.

C) to sell the preferred stock for a set price at certain times in the future.

D) to buy shares of common stock for cash and the preferred stock

27. Preferred stock with a $50 par value and a stated dividend of 10 percent that was sold for $100 would entitle the owner of one share to an annual dividend of:

A) $50.00.

B) $10.00.

C) $ 5.00.

D) $ 0.10.

28. When stipulated cumulative preferred stock dividends have not been paid for a given period of time, they are referred to as:

A) participating dividends.

B) dividends in arrears.

C) dividends payable.

D) stock dividends.

29. Gibraltar Corporation has 200,000 shares of 9 percent, $50 par value cumulative preferred stock authorized, 80,000 shares issued, and 75,000 outstanding, as well as 300,000 shares of $10 par value common stock issued and outstanding. Dividends relative to the preferred stock are two years in arrears. If Gibraltar declares a $2,137,500 dividend during the current period, the amount of the dividend applicable to the preferred and common stockholders would be:

A) $675,000 and $1,462,500, respectively.

B) $1,012,500 and $1,125,000, respectively.

C) $1,350,000 and $787,500, respectively.

D) $2,025,000 and $112,500, respectively.

30. Nutritech Corporation has 500,000 shares of 7.5 percent, $100 par value cumulative preferred stock issued with 45,000 shares issued and 40,000 outstanding, as well as 275,000 shares of $1 par value common stock issued and 250,000 shares outstanding. Dividends relative to the preferred stock are three years in arrears. If Nutritech declares a $2,887,500 dividend during the current period, the per share dividend applicable to the preferred and common stockholders would be:

A) $7.50 and $1.00, respectively.

B) $22.50 and $7.95, respectively.

C) $30.00 and $6.75, respectively.

D) $40.00 and $1.00, respectively.

31. The number of shares of stock a corporation has sold to its stockholders is referred to as the number of shares

A) issued.

B) callable.

C) authorized.

D) outstanding.

32. The total number of shares of stock that a state has approved for issuance to shareholders is referred to as the number of shares

A) issued.

B) callable.

C) authorized .

D) outstanding.

33. A corporation’s repurchased stock intended for reissuance at a later date is called:

A) callable stock.

B) treasury stock.

C) convertible stock.

D) redeemable stock.

34. The number of shares of stock outstanding is equal to:

A) the number of shares authorized less the number of shares issued.

B) the number of shares issued plus the number of shares authorized.

C) the number of shares issued less the number of shares of treasury stock.

D) the number of shares authorized less the number of shares of treasury stock.

35. Which of the following computations will determine the number of shares of treasury stock?

A) Shares Authorized – Shares Issued

B) Shares Outstanding – Shares Issued

C) Shares Issued – Shares Outstanding

D) Shares Issued – Shares Authorized

36. Treasury stock:

A) is an asset.

B) is a liability.

C) reduces stockholders’ equity.

D) none of the above.

37. An arbitrary value assigned to shares of capital stock and approved by the state when the business is incorporated is referred to as:

A) par value.

B) book value.

C) stated value.

D) market value.

38. If a board of directors decides to pay a dividend, the date on which they make their

decision is known as the:

A) date of record.

B) date of payment.

C) ex-dividend date.

D) date of declaration.

39. The obligation to pay a cash dividend becomes a legal liability on the:

A) date of record.

B) declaration date.

C) ex-dividend date.

D) date of payment.

40. The date that determines eligibility to receive a corporate dividend is the:

A) date of record.

B) declaration date.

C) date of payment.

D) ex-dividend date.

41. An individual stockholder’s interest in a corporation does not change when the company declares a:

A) stock split.

B) stock dividend.

C) both a and b.

D) neither a nor b.

42. In a 2-for-1 stock split, the number of shares held by a stockholder will:

A) triple.

B) double.

C) not change.

D) be cut in half.

43. A stock dividend does all of the following except:

A) increase the number of shares issued.

B) increase the number of shares outstanding.

C) decrease the assets of the corporation.

D) does all of the above.

44. Mutt and Jeff could not agree on how to share the profits and losses of their partnership. In this case, the law would require that partnership profits and losses be divided:

A) based upon a reasonable percentage return on their investment.

B) according to the amount of work performed by each partner.

C) according to each partner’s relative capital contribution.

D) equally.

45. Moe, Larry and Curly are partners in the 3S Company. Their profit and loss sharing relationship is 6:4:2. Larry’s share of $48,000 in partnership income would be:

A) $16,000.

B) $19,200.

C) $24,000.

D) $32,600.

46. John, Doe and Smitty are partners in the NoName Company. Their profit and loss sharing relationship is 7:5:3. Doe’s share of a $75,000 partnership loss would be:

A) $(37,500).

B) $(25,000).

C) $(20,000).

D) $(15,000).

47. Nap, Olie, and Eon, who are partners in the Josephine Company, had beginning capital balances of $35,000, $62,000, and $28,000, respectively. If the partners share income and losses based on the ratio of their beginning capital balances, Olie’s share of a $250,000 partnership loss would be:

A) $(155,000).

B) $(124,000).

C) $ (62,000).

D) $ (31,000).

48. Russ, Adam, and Brent, who are partners in the Bowinkles Company, had ending capital balances for the current year equal to $95,000, $43,000, and $62,000, respectively. If the partners share income and losses based on the ratio of these ending capital balances, Brent’s share of $95,000 in partnership income would be:

A) $58,900.

B) $29,450.

C) $23,900.

D) $0.

49. Tom, Dick and Harry are partners in the Wipeout Company. Their partnership income sharing agreement calls for Tom and Dick to receive salary allowances of $24,000 and $18,500, respectively. Any remaining income or loss is to be divided equally. If the company’s income was $96,500, Dick’s share would be:

A) $18,000.

B) $18,500.

C) $36,500.

D) $37,000.

50. Sage, Rosemary, and Thyme are partners in the Music Company. Their partnership income sharing agreement provides that Sage and Thyme are to receive salary allowances of $29,700 and $16,800, respectively, and that any remaining income or loss is to be divided equally among all partners. If the company’s income was $39,000, Thyme’s share would be:

A) $14,300.

B) $16,800.

C) $19,300.

D) $29,800.

51. When a partner receives a salary allowance as part of his/her partnership agreement, this means that:

A) the partner donates part of his salary to the partnership in exchange for an ownership interest.

B) the partner will be allocated a portion of the income or loss based on this salary figure.

C) the partner will receive a check for this salary if the company has a profit.

D) the partner will be paid that salary for the year regardless of whether the partnership generates income or loss.

52. Michael, Zoe and Perry are partners in the Andover Company. Their partnership income sharing agreement provides that Michael and Zoe are to receive salary allowances of $15,000 and $18,000, respectively, and that any remaining income or loss is to be divided equally among all partners. If the company had a loss of $30,000, Zoe’s capital account would:

A) increase by $18,000.

B) increase by $8,000.

C) decrease by $10,000.

D) decrease by $3,000.

53. During the current year, Jacob, Alicia, and Shawn, who are partners in the JAS Company, had average capital balances of $57,000, $49,000, and $64,000, respectively. The partners share profits and losses by allowing a 12 percent return on average capital, with any remaining income or loss divided in a ratio of 5:3:2. If the company’s income for the current year was $73,800, Shawn’s capital account would increase by:

A) $14,760.

B) $18,360.

C) $22,440.

D) $27,784.

54. During the current year, Chris, Casey, and Steve, who are partners in the CCS Company, had average capital balances of $39,000, $43,000, and $55,000, respectively. The partners share profits and losses by allowing a 12 percent return on average capital, with any remaining income or loss divided in a ratio of 7:5:3. If the company’s income was $8,940, Casey’s capital account would:

A) increase by $2,980.

B) decrease by $2,806.

C) increase by $2,660.

D) decrease by $2,500.

55. During the current year, Lisa, Tony, and Brian, who are partners in the Corsetti Company, had average capital balances of $41,000, $53,000, and $48,000, respectively. The partners share profits and losses by allowing a $16,000 salary to Lisa and a $14,000 salary to Brian, and a 12 percent return on average capital balances to all the partners. Any remaining income or loss is divided equally. If the company’s income were $101,040, Brian’s capital account would increase by:

A) $13,920.

B) $33,680.

C) $37,760.

D) $53,440.

56. During the current year, Julia, Vanessa, and Connie, who are partners in the MacIntosh Company, had average capital balances of $62,000, $56,000, and $74,000, respectively. The partners share profits and losses by allowing a $15,000 salary to Julia and a $19,000 salary to Vanessa, and a 12 percent return on average capital balances to all the partners. Any remaining income or loss is divided equally. If the company had a loss of $2,960, Julia’s capital account would:

A) decrease by $987.

B) increase by $2,440.

C) increase by $14,013.

D) decrease by $20,000.

57. Which of the following statements is true about distribution of partners earning?

A) The interest on capital reduces net income on the income statement.

B) The salary component is reported as salary expense on the income statement.

C) The interest and salary allocations have no effect on cash flows.

D) Owners’ equity is reduced by the salary allocation.

58. Which of the following is not one of the advantages of sole proprietorships and partnerships, as compared to corporations?

A) Limited liability

B) Ease of formation

C) Income is only taxed once

D) Owners are more likely to be managers

59. Which of the following is not one of the advantages of the corporation as compared to sole proprietorships and partnerships?

A) Ability to raise large sums of money

B) Ease of formation

C) Limited liability

D) Unlimited life

60. Which of the following statements about a limited liability partnership (LLP) is true?

A) An LLP has one or more general partners and one or more limited partners.

B) Partners in an LLP are liable only for their investments in the partnership.

C) Partners in an LLP are not liable for the misdeeds of another partner.

D) Only the general partners in an LLP can participate in management.

61. Preferred stock for which unpaid dividends must be paid before dividends can be paid to common stockholders is referred to as:

A) callable.

B) convertible.

C) cumulative.

D) participating.

62. If preferred stock has the right to receive dividends in excess of its stated dividend rate it is referred to as:

A) callable.

B) convertible.

C) redeemable.

D) participating.

63. If preferred stockholders have the right to sell their stock for cash to the corporation it is referred to as:

A) callable.

B) convertible.

C) redeemable.

D) participating.

64. If you own convertible preferred stock, what right does the convertibility feature give you?

A) You can convert the stock into cash whenever you want.

B) You can convert the stock into the firm’s common shares.

C) You can convert the stock into cash but only at prespecified times.

D) You have the right to receive dividends in arrears before common stock gets a dividend.

65. Callisto began 2000 with 100,000 shares of $3 par common stock. The firm declared a 3-for-1 stock split on March 1, 2010. How will the stock split affect Callisto’s stockholders’ equity?

A) Increase

B) Decrease

C) No effect

D) Unable to determine from the information given

66. Starfury Corporation has 1,000,000, $1 par shares of common stock authorized. A total of 400,000 shares have been sold to stockholders, and 10,000 shares have been repurchased by the firm. How many shares are outstanding?

A) 1,000,000

B) 600,000

C) 400,000

D) 390,000

67. Babylon Corporation has 1,000,000, $1 par shares of common stock authorized. A total of 400,000 shares have been sold to stockholders, and 10,000 shares have been repurchased by the firm for later resale. How many shares are issued and outstanding?

Issued Outstanding

A) 1,000,000 400,000

B) 390,000 390,000

C) 400,000 390,000

D) 400,000 400,000

68. Aslo Corporation has 10,000,000, $1 par shares of common stock authorized. A total of 6,000,000 shares have been sold to stockholders in 2001 and in 2008 Aslo purchased 50,000 of its own stock. Then, in 2010, 5,000 shares of the treasury shares were sold. As of the end of 2010, how many shares are issued and outstanding?

Issued Outstanding

A) 6,000,000 5,955,000

B) 10,000,000 9,955,000

C) 6,000,000 6,045,000

D) 6,050,000 6,045,000

69. Zathras Corporation has 2,000,000, $1 par shares of common stock authorized. A total of 800,000 shares have been sold to stockholders and 40,000 shares have been repurchased by the firm and retired. How many issued and outstanding shares does Zathras have?

Issued Outstanding

A) 2,000,000 800,000

B) 800,000 800,000

C) 800,000 760,000

D) 760,000 760,000

70. If a corporation goes out of business, whose claims would be satisfied last, if at all?

A) Preferred shareholders

B) Common shareholders

C) Employees

D) Creditors

71. Which of the following is not a right of common stockholders?

A) Preemptive right

B) Right to vote

C) Right to dividend when declared

D) All the above are rights of common stockholders.

72. Which of the following is not a right of common stockholders?

A) Preemptive right

B) Right to vote

C) Right to dividend when declared

D) The redemptive right

E) All the above are rights of common stockholders.

73. When a corporation issues additional stock, current shareholders will be able to purchase new shares in proportion to their current ownership because of the:

A) liquidation right.

B) preemptive right.

C) redemption privilege.

D) cumulative privilege.

74. Creditors are interested in a corporation’s stockholders’ equity because:

A) stockholders’ equity will be used to pay the creditors’ claims.

B) they get to vote in corporate elections when their claims are past due.

C) they are entitled to dividends before any are paid to common stockholders.

D) stockholders’ equity represents a margin of safety for meeting their claims on assets.

75. Double taxation is a disadvantage of the corporate ownership structure. What does double taxation mean?

A) Corporate tax rates are double the tax rates of sole proprietorships and partnerships.

B) Corporations are subject to both a tax on profits and on retained earnings.

C) Corporate profits are taxed at both the corporate and individual level.

D) Corporate profits are subject to both federal and state income taxes.

76. Which of the following is true about the characteristics of a corporation?

77. Which of the following is true about the characteristics of a partnership?

78. Which of the following is true about financial leverage?

A) Financial leverage boosts the rate of return for the creditors of the firm.

B) Financial leverage can increase the rate of return on owners’ equity when the rate of return on invested assets is greater than the interest rate paid to creditors.

C) Financial leverage is created when there is no debt and the rate of return is increased with an increase in sales.

D) Financial leverage increases sales by increasing the amount invested in plant and equipment rather than financial assets such as bonds and stock.

79. Which of the following is NOT one of the four basic rights of a corporation’s common stockholders?

A) Stock appreciation rights

B) The right to vote

C) The right to dividends when declared by the board of directors

D) The preemptive right

80. Which of the following is NOT a potential feature of preferred stock?

A) Cumulative preferred stock

B) Participating preferred stock

C) Redeemable preferred stock

D) Convertible preferred stock

E) All the above could be a feature of preferred stock.

81. On which of the following dates is no accounting entry made?

A) Date of payment

B) Date of record

C) Date of declaration

D) Entries are made on all three dates

82. On which of the following are accounting entries made on both dates?

A) Date of record and date of payment

B) Date of payment and ex-dividend date

C) Date of declaration and date of payment

D) Date of record and date of declaration

83. Which of the following statements is true about the debt-to-equity ratio?

A) The greater the debt-to-equity ratio, the smaller the opportunity to increase the return on equity of a firm through financial leverage.

B) The greater the debt-to-equity ratio, the greater the chance the firm will not meet its debt obligations.

C) The size of a of a company’s debt-to-equity ratio is directly related to amount of a firm’s sales.

D) The lower the debt to equity ratio the higher the risk that financial leverage will have a negative impact on a firm’s return on equity.

84. Which of the following balance sheet accounts describes the stockholders’ claims on the assets of a firm that have been created by the company’s operating profits?

A) Retained Earnings

B) Net Income

C) Contributed Capital

D) Paid-in-Capital in Excess of Par

85. Which of the following statements is not true about the times-interest-earned ratio?

A) The greater the times interest earned, the lower the risk of defaulting on the firm’s debt.

B) The greater the interest expense, the lower the firm’s times-interest-earned ratio.

C) The smaller the times-interest-earned, the lower the financial risk of the company.

D) A high times-interest-earned and a high debt-to-equity ratio means the company is effectively using financial leverage.

86. The Securities and Exchange Commission does not allow firms to report redeemable preferred stock in the stockholders’ equity section of the balance sheet. Why do you suppose it imposes this restriction?

87. What is par value? Why do corporations usually select a low par value?

88. Explain the relationship between a stock’s par value and its market value.

89. What is a DRIP? How can it be advantageous to both a corporation and its stockholders?

90. Does the term preferred mean that preferred stock is a better investment than common stock?

91. Explain why the combination of mutual agency and unlimited liability create a great deal of risk for partnerships.

92. A recent article in a business publication described a leading cosmetics company as being in financial difficulty because it was highly leveraged. What does highly leveraged mean? Can it ever be good to be highly leveraged? Explain.

93. What does the combination of the debt-to-equity ratio and the times-interest-earned ratio

tell an analyst?

94. Larry, Mo, and Curley are partners in Stooges Company with the following balances in their capital balances.

Larry $100,000 Mo $70,000 Curley $25,000

Their partnership agreement has the following provision for the division of income and losses.

Each partner to receive 10 percent of their capital balance.

Curley is to receive a salary of $30,000.

Any residual is to be divided on a 5:3:2 basis.

If Stooges Company generated $20,000 of net income, how would it be divided among the partners?

Answers:

95. Chuck, Ron, and Wayne are partners in the Zieman Dance Hall Company with the following balances in their capital balances.

Chuck $120,000 Ron $70,000 Wayne $40,000

Their partnership agreement has the following provision for the division of income and losses.

Each partner to receive 10 percent of their capital balance.

Wayne has a salary allowance of $50,000.

Any residual is to be divided on a 5:3:2 basis.

Calculate how the following income and loss amounts would be divided among the partners.

1. $70,000 of net income
2. $15,000 net loss

Answers:

96. Tescott Corporation is authorized to issue 500,000 shares of $1 common stock and 50,000 shares of preferred stock. The preferred stock has a $20 par value, and a 10 percent dividend, is cumulative. Tescott has 100,000 shares of common stock issued and outstanding and 6,000 shares of preferred stock issued and 5,000 outstanding. The preferred stock is two years in arrears when the board of directors declares a $300,000 dividend. How much of the dividend goes to common stockholders and how much to preferred stockholders?

Answers:

Preferred stock dividend $20 × 0.1 = $2

Preferred stock in arrears 5,000 shares × $2 × 2 = $20,000

Current year preferred stock dividend 5,000 shares × $2 = $10,000

97. Marisa, Andrew, and David are partners in the MAD Company. Their average capital balances for the current year were $48,000, $63,000, and $54,000, respectively. Their partnership income-sharing agreement includes the following provisions: (1) a salary allowance of $25,000 for Marisa and $20,000 for David, (2) a 10 percent return on average capital for all partners, and (3) any remainder divided equally. Determine the increase or decrease in each of the partner’s capital accounts assuming (a) net income is $66,000 and (b) net loss is $4,500.

Answers:

98. Merchants Corporation has 30,000 shares of 6.5%, $100 par value cumulative preferred stock and 200,000 shares of $10 par value common stock issued and outstanding. There are two years of dividends in arrears on the preferred stock. Determine the amount of dividends each class of stock will receive in total and per share assuming the company declares a $935,000 dividend.

Answers:

Preferred stock: 30,000 × $100 × 6.5% = $195,000 per year × 3 years = $585,000 in total $585,000/30,000 shares = $19.50 per share

Common stock:

$935,000 – $585,000 = $350,000 in total $350,000/200,000 shares = $1.75 per share