Chapter 18 - Shareholder's Equity

Consists primarily of amounts invested by shareholders when they purchase shares of stock from the corporation
a. Paid-in Capital
b. Retained Earnings
c. Treasury Stock
d. Accumulated Other Comprehensive Income

A

Represents a corporation’s accumulated, undistributed net income
a. Paid-in Capital
b. Retained Earnings
c. Treasury Stock
d. Accumulated Other Comprehensive Income

B

Shares previously sold to shareholders that are bought back by the corporation.
a. Paid-in Capital
b. Retained Earnings
c. Treasury Stock
d. Accumulated Other Comprehensive Income

C

AOCI (Accumulated Other Comprehensive Income) consists of four types of gains and losses that aren’t included in net income:

1. Net gains (losses) on AFS debt securities

2. Gains (losses) for postretirement benefit plans

3. Gains (losses) on derivates

4. Foreign currency translation adjustments

There are two attributes of OCI that are reported each period:

1. Other comprehensive income created during the current period (OCI)

2. The total OCI accumulated up to this point (AOCI)

This is the total OCI that has accumulated during the current and all prior periods

Accumulated Other Comprehensive Income (AOCI)

Is OCI or AOCI reported in the shareholder’s equity section of the balance sheet?

AOCI.

Why? AOCI is the cumulative permanent account. OCI is just the change in AOCI for this period.

T/F Components of OCI created during the reporting period can only be reported on a separate statement after the income statement, not on the income statement itself.

False; They can be reported as either an expanded version of the income statement or a separate statement presented immediately after the income statement.

A business can be one of three forms:

Partnership, Sole proprietorship, Corporation

Which form of business organization is the most dominant in terms of business volume?
a. Sole proprietorships
b. Partnerships
c. Corporations
d. All of the above are equal

C

What are the two main advantages of corporate organization?

Limited liability
Ease of raising capital

In a corporation experiencing losses, a shareholder with an investment in the firm can lose
a. An amount up to the total debts of the company
b. An amount up to what they invested
c. Nothing; they’re not liable for debts and will never lose their investment
d. A certain amount set by the board of directors

B

What are the two disadvantages of the corporate form of business?

Extensive reporting requirements

Double taxation

Corporations first pay income taxes on their earnings and again when those earnings are distributed as dividends. This refers to:
a. Limited liability
b. Preemptive rights
c. Double taxation
d. Extensive reporting

C

1. Do common shareholders have the right to vote on matters that affect them?

2. Do common shareholders have the right to share in profits when dividends are declared?

3. Do common shareholders have the right to share in the distribution of assets if the company is liquidated?

4. Do common shareholders have the right to receive distributions before creditors?

5. Do common shareholders have the right to buy a percentage of new shares issued? How much?

1. Yes

2. Yes

3. Yes

4. No. Creditors first, then Preferred, then Common.

5. Yes; up to a percentage equal to the % of shares they own now
   (A shareholder owning 1% of shares can buy new shares issued so that they still own 1%)

Preferred shares have two preferences or features that distinguish them from common shareholders:

1. Preferred shareholders typically have a preference to receive a specified amount of dividends before any dividends are paid to common shareholders

2. Preferred shareholders customarily have a preference over common shareholders as to the distribution of assets in the event the corporation is dissolved

When selling shares for cash
a. Cash is credited, shareholders’ equity is debited
b. Cash is debited, liabilities are credited
c. Cash is debited, retained earnings is credited
d. Cash is debited, shareholder’s equity is credited

D

If shares sold for cash don’t have a par value, the entire amount received is credited to the
a. common (or preferred) stock account
b. common (or preferred) stock account + any excess to paid-in capital
c. paid-in capital—excess of par account
d. retained earnings account

A

Can a company issue stock in exchange for anything other than cash? If so, how should the transaction be recorded?

Yes! Legal services, Land, Equipment, Buildings, etc.

Should be recorded at the fair value of the shares being issued (or what is being received)

Part 1: When a company sells a security for more than one price, how is the cash received accounted for?
a. The sum of the individual par values of each security
b. The sum of the individual market values of each security
c. The market value of the highest-priced security alone
d. The average market value across all securities

Part 2: What if the security’s market value is unknown?
a. It must be estimated using the security’s par value
b. It is recorded at zero until a market price exists
c. It can be inferred from the total selling price of other securities
d. It is set equal to the market value of the common shares

1. B

2. C

The legal, promotional, and service-related costs required to issue shares is called
a. Share repurchase costs
b. Paid-in capital costs
c. Dividend declaration costs
d. Share issue costs

D

How are share issue costs accounted for? Select all that apply.
a. Cash is credited by the amount of the issue costs
b. Cash is debited by the amount of the issue costs
c. Paid-in capital is debited by the amount of the issue costs
d. Paid-in capital is credited by the amount of the issue costs
e. Common stock is debited by the amount of the issue costs
f. None of the above; share issue costs are expensed in a separate entry

A & C

Why might a company repurchase it’s own stock? Select all that apply.
a. To record a gain when the share price rises
b. To create an asset on the balance sheet
c. Because management felt share price is undervalued
d. To raise cash from new investors
e. To offset issued shares
f. To defend itself from buyouts

C, E, F

Share repurchases can be accounted for in two ways:

1. They can be formally retired

2. Recorded as treasury stock

How are the resale of formally-retired shares treated?
a. As a gain in retained earnings
b. Like a treasury stock resale
c. As a reissue at the repurchase price
d. The same as a regular issuance

D; They are treated the same as a normal issuance. See image below:

Treasury stock normally has a
a. Debit balance
b. Credit balance
c. Either of the above

A

The purchase of treasury stock is viewed as
a. A temporary reduction in shareholders’ equity that is later reversed when resold
b. A permanent reduction in shareholders’ equity that is never reversed when resold
c. A temporary increase in assets that is later reversed when resold
d. A temporary reduction in liabilities that is later reversed when resold

A

Which of the following accounts represents a corporation’s accumulated, undistributed net income (or net loss)?
a. Paid-in Capital—Excess of Par
b. Retained Earnings
c. Treasury Stock
d. Accumulated Other Comprehensive Income

B

A debit balance in retained earnings indicates:

a. A surplus
b. A liability
c. A deficit
d. A dividend payable

C

A credit balance in retained earnings indicates:
a. A dollar amount of assets previously earned and reinvested by the firm
b. A dollar amount of liabilities previously incurred and owed by the firm
c. A dollar amount of cash currently set aside for future dividends
d. A dollar amount of losses previously incurred and carried by the firm

A

What is a dividend?
a. The payment of interest a company owes to its bondholders
b. The distribution of assets a company has earned to its shareholders
c. The required payment a company owes to its shareholders each year
d. The repurchase of shares a company has issued to its shareholders

B

T/F Companies are legally obligated to pay dividends

False; there is no legal obligation to pay dividends

When a company pays a cash dividend, it announces a specific date on which the recipients will be determined.. This is referred to as:
a. Date of Record
b. Declaration Date
c. Payment Date
d. Ex-Dividend Date

A

When paying cash dividends, the last day someone can buy shares and still get a previously declared dividend is called the:
a. Declaration Date
b. Ex-Dividend Date
c. Date of Record
d. Payment Date

B

Preferred Shareholders in a cumulative agreement are:
a. Obligated to receive their percentage each year, with unpaid amounts accumulating as arrears
b. Obligated to receive their percentage each year, with unpaid amounts forfeited if not declared
c. Entitled to receive extra dividends beyond their percentage once common shareholders are paid
d. Entitled to receive their percentage only in years when common shareholders are also paid

A

A company has 80 million in annual preferred dividends but declares only 56 million this year. The preferred stock is CUMULATIVE. What happens to the 24 million shortfall?

a. It becomes a dividend in arrears that must be paid before common shareholders receive anything in later years
b. It is forfeited; the company has no obligation to make it up
c. It is converted into additional preferred shares
d. It is paid to common shareholders instead

A

A company has 80 million in annual preferred dividends but declares only 56 million this year. The preferred stock is NONCUMULATIVE. What happens to the 24 million shortfall?

a. It becomes a dividend in arrears that must be paid before common shareholders receive anything in later years
b. It is forfeited; the company has no obligation to make it up
c. It is converted into additional preferred shares
d. It is paid to common shareholders instead

B

Which phrase is the best memory link for the term 'dividends in arrears'?

a. Nonparticipating preferred stock
b. Cumulative preferred stock
c. Noncumulative preferred stock
d. Participating preferred stock

B

Preferred shareholders have received their full stated dividend preference. The preferred stock is PARTICIPATING. What can they receive?

a. Nothing more; the preference is their cap
b. Only the arrears from prior years
c. The right to vote on dividend amounts
d. Additional dividends beyond their dividend preference

D

A preferred stock is described as 'cumulative and nonparticipating.' Which statement is TRUE?

a. Missed dividends accumulate as arrears, and holders are limited to their stated preference
b. Missed dividends are forfeited, and holders are limited to their stated preference
c. Missed dividends accumulate as arrears, and holders can receive extra dividends beyond the preference
d. Missed dividends are forfeited, and holders can receive extra dividends beyond the preference

A

Which of the following describes a Dividend in Kind (Property Dividend)?
a. When additional shares of stock are distributed to shareholders
b. When cash is distributed to shareholders in installments
c. When something other than cash is distributed to shareholders
d. When assets are distributed to shareholders only upon liquidation

C

Which asset is the most commonly distributed in a property dividend?
a. Securities held as investments
b. Land held for future use
c. Inventory held for resale
d. Equipment held for production

A

A property dividend should be recorded at the
a. Book value of the assets to be distributed on the declaration date
b. Fair value of the assets to be distributed on the payment date
c. Historical cost of the assets to be distributed on the purchase date
d. Fair value of the assets to be distributed on the declaration date

D

What are the two steps involved in accounting for property dividends?

1. Adjust Investment in Equity Securities account to fair value

2. Record dividend payable

Which statement best describes a stock dividend?
a. Cash paid out to current shareholders in equal proportions
b. New shares issued to current shareholders at the same percentage
c. New shares issued only to preferred shareholders at one rate
d. Company assets handed out to shareholders in place of cash

B

Maria owns 10% of a company's common stock. The company declares a stock dividend. What is Maria's ownership percentage afterward?
a. Higher than 10%, since she holds more shares
b. Lower than 10%, since more shares now exist
c. It depends on the market price afterward
d. Unchanged at 10%, since all holders grow equally

D

What is the effect of a stock dividend on the company's financial statements?
a. No asset or liability changes; equity is reclassified, total unchanged
b. Assets decrease, and total equity decreases by the same amount
c. Liabilities increase and retained earnings decrease by the same amount
d. Assets increase, and total equity increases by the same amount

A

A company with 100 million shares trading at $12 declares a 100% stock dividend. Assuming the firm's total market value is unchanged, what is the approximate share count and price per share afterward?
a. 200 million shares at about $12 each
b. 100 million shares at about $6 each
c. 200 million shares at about $6 each
d. 150 million shares at about $8 each

Stock Split: Multiply shares by 2, divide Share Price by 2.

C

Which statement correctly compares the accounting for small and large stock dividends?
a. Small uses par value; large uses market value from Retained Earnings
b. Both use market value, with the amount taken from Retained Earnings
c. Both use par value, with the amount taken from Retained Earnings
d. Small uses market value; large uses par value, moved to Common Stock

D

A company with 1,000,000 shares ($1 par, $15 market price) declares a 100% stock dividend. What amount is transferred to Common Stock?
a. $1,000,000
b. $1,500,000
c. $15,000,000
d. $100,000

A

1,000,000 x $1 par = +$1,000,000.

How is a 2-for-1 stock split related to a stock dividend?
a. A 2-for-1 split equals a 50% stock dividend
b. A 2-for-1 split equals a 25% stock dividend
c. A 2-for-1 split equals a 100% stock dividend
d. A 2-for-1 split has no relation to stock dividends

C

A company elects to make no journal entry for its 2-for-1 stock split. Its par value was $2 per share. What must it do?
a. Double the par value to $4 on all records
b. Cut the par value to $1 on all records
c. Leave the par value at $2 on all records
d. Reduce the par value to $0.50 on all records

B