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Accounting 2
_____ are the owners of a corporation and is controlled by the _____.
Stockholders; Board of Directors
All of the following are considered advantages of the corporate form of business except _____.
double taxation
are distributions of a corporation's earnings to stockholders.
Dividends
A debit balance in Retained Earnings is called _____.
deficit
If the stock is issued for a price that is more than its stated price, the stock is said to be sold at _____.
premium
A journal entry to record the issuance of preferred stock above par would include a _____.
credit to Paid-In Capital in Excess of Par
On March 10, Blarney Corporation issued for cash 10,000 shares of no-par common stock at $40. The journal entry to record this transaction would include a _____.
credit to Common Stock for $400,000
The _____ is the date the board of directors formally authorizes the payment of the dividend.
declaration date
A stock dividend _____ the assets, liabilities, or total stockholders' equity of a corporation.
does not change
The declaration date journal entry for a cash dividend would include _____.
a credit to Cash Dividends Payable
A $20 par value stock in a 2:1 stock split will yield a new par value of _____.
$10
On February 10, the corporation purchases back 2,000 shares of its own common stock for $50 per share. The entry to record the purchase would include a _____.
debit to Treasury Stock for $100,000
A corporation may reacquire its own stock for which of the following reasons?
To provide shares for resale to employees.
To reissue as bonuses to employees.
To support the market price of the stock.
Restrictions of retained earnings may be classified as _____.
legal
contractual
discretionary
A corporation has a $500,000 beginning balance in Retained Earnings. Its net income for the year was $200,000. Sales revenue amounted to $1,000,000, and dividends declared and paid by year-end amounted to $100,000. What was the ending balance in Retained Earnings?
$600,000
On the balance sheet, the balance of Treasury Stock is _____.
deducted from stockholders' equity
EPS is calculated as _____.
net income less preferred dividends divided by average number of common shares outstanding during the period
An increase in EPS from one year to the next indicates _____.
a favorable trend
Corporations finance their operations through _____.
Short-term debt
Long-term debt
Equity
One of the main factors that influences the decision to issue debt or equity is the effect that various financing alternatives will have on _____.
EPS
The interest rate to be paid on the face amount of the bond is called the _____.
contract rate
When a corporation issues bonds, the proceeds received for the bonds will depend on_____.
the face amount of the bonds
the interest rate on the bonds
the market rate of interest for similar bonds
When bonds are issued at their face amount, the journal entry will include a _____.
credit to Bonds Payable
The semiannual interest payment on a $10,000, 5% bond is _____.
$250
The journal entry to record the amortization of a bond discount includes a _____.
a credit to Discount on Bonds Payable
The entry to amortize a bond premium would include a _____.
a debit to Premium on Bonds Payable
When an installment note is issued, the journal entry will include a _____.
debit to Cash
On January 1, Year 1, Civic Company borrowed $200,000 on a 10-year, 7% installment note payable. The terms of the note require Civic to pay 10 equal payments of $25,000 each December 31 for 10 years. The required general journal entry to record the first payment on the note on December 31, Year 1 is _____.
debit Interest Expense, $14,000; debit Notes Payable, $11,000; credit Cash, $25,000
Any unamortized premium is reported on the _____as an addition to the face amount of the bonds.
balance sheet
Any portion of the bonds or notes that is due within one year is reported as _____.
current liability
The number of times interest charges are earned is calculated as _____.
(Income Before Income Taxes + Interest Expense) ÷ Interest Expense
An increase in the number of times interest charges are earned from one year to the next would be considered _____.
favorable
The current value of a future sum of money or stream of cash flows given a specified rate of return is known as _____.
present value
If $1,000 was deposited today at a rate of 15%, its future value in one year would be _____.
$1,150
The entry to record the first interest payment and the related amortization for bonds issued at a discount includes a_____.
credit to Discount on Bonds Payable
The entry to record the first interest payment and the related amortization for bonds issued at a premium includes a _____.
debit to Premium on Bonds Payable
An objective of purchasing temporary investments is to
earn interest revenue.
receive dividends.
realize gain from increase in market price
A company investing in another company's stock is called _____.
an investor
If an investor owns less than 20% of the outstanding stock of the investee, the accounting method utilized will be _____.
the fair value method
If an investor owns between 20% and 50% of the outstanding stock of the investee, the accounting method utilized will be _____.
the equity method
If an investor owns more than 50% of the outstanding stock of the investee, the accounting method utilized will be_____.
consolidation
1. _____ are bond investments that a company intends to hold and also has the ability to hold until their maturity date.
Held-to-maturity securities
2. The journal entry required to record the purchase of $20,000 of U.S. Treasury bonds at their face amount on May 17 plus accrued interest for 45 days would include a _____.
debit to Interest Receivable
Jacob Company's accounting period ends on December 31. The amount of an adjusting entry to accrue interest for $20,000, 4%, US Treasury bills, purchased on October 1 would be_____.
$200.00
Changes in valuation of trading securities are reported as _____.
unrealized gains or losses on the income statement either separately or under Other Revenue or Other Expenses
Changes in valuation of available-for-sale securities are reported as _____.
unrealized gains or losses in the stockholders' equity section of the balance sheet
_____ are debt securities that are purchased to earn profits from short-term changes in their market prices.
Trading securities
_____ are debt securities that a company intends to sell in the future, but not in the near term.
Available-for-sale securities
On April 11 of the current year, Zack Corporation had a market price of $48 per share of common stock. Its par value was $10 per share. For the previous year, Zack paid an annual dividend of $3.90 per share. Zack's gross revenues and net income was $5,000,000 and $2,500,000, respectively. The dividend yield for Zack Corporation would be_____.
8%
Comprehensive income is defined as all changes in stockholders' equity during a period, except those resulting from dividends and stockholders' investments.
True
False
true
What do debits increase?
assets and expenses
What do credits increase?
liabilities, owner’s equity, and revenue
A legal entity, distinct and separate from the individuals who create and operate it.
Corporations
Corporations whose shares of stock are traded in public market
public corporations
Corporations whose shares are not traded publicly are usually owned by a small group of investors.
nonpublic/private corporations
A board of people elected by stockers that periodically meet to establish corporate policies.
boards of directors
What are the advantages of corporate forms?
Corporation exists separately from its owners
it exists indefinitely
muted for raising large amounts of money from shareholders
public stocker holders can transfer their shares of stock to other stock holders
limited liability; the financial loss that a stockholder may suffer is limited to the amount invested
What are the disadvantages of corporate forms?
boards of directors and management may not always behave in the best interest of stockholders
What are the steps of forming a corporation?
Step 1: File an application of incorporation with the state.
Step 2: site grants a charter or articles of incorporation that formally creates the corporation.
Step 3: bylaws prepared by the corporate management and board of directors
Costs incurred in organizing a corporation. Ex: legal frees, taxes, state incorporation fees, license fees, and promotional costs
organizational expenses
Stockholders equity is reported in 2 main sources:
paid-in capital and retained earnings
Distributions of a corporations earnings to stockholders.
dividends
______ increases retained earnings, and _____ decreases retained earnings.
net income; dividends
a debit balance in retained earnings and is accumulated from net losses
deficit
What is outstanding stock and how is it calculated?
the stock remaining in the hands of stockholders. (authorized stock - issued stock)
dollar amount assigned to each share of stock
par value
a minimum amount of paid-in capital.
legal capital
What are the major rights that accompany ownership of a share of stock?
right to vote in matters corporations
right to share in distributions of earnings
right to share in assets upon liquidation
A class of stock with preferential rights over common stock.
preferred stock
when there is only one class of stock.
common stock
Stock that has a right to receive regular dividends that were note declared in prior years.
Cumulative stock
Stock that has been sold more than its par is _____ and stock that is sold for less than its par is ______.
premium; discount
The authorized action when board of directors declare a cash dividend.
Distribution of cash to stockholders
The authorized action when board of directors declare a stock dividend.
a stock dividend
A cash distribution of earnings by a corporation to its shareholders.
cash dividends
What is the objective of stock split?
Reduce the market price per share of the stock to attracts more investors and broadens the types and numbers of stockholders.
A stock that a corporation has issued and then reacquired.
treasury stock
A summary of the changes in the retained earnings a corporation for a specific period of time.
Retained Earnings Statement
the net income per share of common stock during a period.
earnings per share
How to calculate earnings per share
(net income - preferred dividends) / average number of common shares outstanding
Which of the following is the appropriate general journal entry for the declaration of cash dividends?
Debit Cash Dividends and credit Cash Dividends Payable
The number of shares of stock that a corporation can issue as stated in its charter is referred to as
authorized
A statement of stockholders' equity is normally prepared when there is a
a. change in paid-in capital accounts.
b. purchase of treasury stock.
c. change in stock accounts.
The purchase and resale of treasury stock is normally recorded using the __________ method.
cost
If earnings per share decreases, what does this indicate about the company's profitability?
An unfavorable trend in the company's profitability is indicated.
Which of the following is NOT true of a corporation?
a. The owners are personally liable for corporate actions.
b. It may buy, own, and sell property.
c. It may sue and be sued.
d. It may enter into binding legal contracts in its own name.
The owners are personally liable for corporate actions.
Which of the following statements regarding a 4-for-1 stock split is NOT true?
a. The market price will probably decrease.
b. A stockholder with 10 shares before the split owns 40 shares after the split.
c. Total contributed capital increases.
d. Par value per share is reduced to one-fourth of what it was before the split.
Total contributed capital increases.
The term "deficit" is used to refer to a debit balance in which of the following accounts of a corporation?
Retained Earnings
What are conditions for a cash dividend?
a. Sufficient cash
b. Formal action by the board of directors
c. Sufficient retained earnings
All of the following are normally found in a corporation's Stockholders' Equity section of the balance sheet EXCEPT
a. Dividends Payable.
b. Retained Earnings.
c. Paid-In Capital in Excess of Par.
d. Common Stock.
Dividends Payable
If a corporation has only one class of stock, the account is entitled Common Stock or
Capital stock
Cumulative preferred stock dividends that have not been paid in prior years are said to be
in arrears
Cumulative preferred stock dividends that have not been paid in prior years
in arrears
An advantage of the corporate form of business entity is
the ease of transfer of ownership.
Wave Corporation began the current year with a retained earnings balance of $25,100. During the year, the company corrected an error made in the prior year, which was a failure to record depreciation expense of $5,200 on equipment. The company earned net income of $15,100 and declared cash dividends of $5,400. Compute the year-end retained earnings balance.
$25,100 + $15,100 – $5,200 – $5,400 = $29,600
A corporation purchases 1,100 shares of its own common stock for $4,400 on February 13. On April 13, half of the treasury stock was sold for $3,100. On April 26, the other half of the treasury stock was sold for $1,750. The entry for the April 26 sale would include a
debit to Paid-In Capital from Sale of Treasury Stock for $450.
Shares purchased: 1,100 shares at $4,400 (Feb 13)
Sale on April 13: 550 shares were sold for $3,100 (cost = $2,200, profit = $900)
April 13 Journal Entry:
Debit Cash: $3,100
Debit Paid-In Capital from Sale of Treasury Stock: $900 (Sale Price $3,100 - Cost of Shares Sold $2,200)
Credit Treasury Stock: $2,200 (550 shares X $4)
Shares remaining: 550 shares (Feb 13 purchase)
Sale on April 26: The remaining 550 shares were sold for $1,750 (cost = $2,200, loss = $450)
Debit Cash: $1,750
Debit Paid-In Capital from Sale of Treasury Stock: $450 (Sale Price $1,750 - Cost of Shares Sold $2,200)
Credit Treasury Stock: $2,200 (550 shares X $4)
The charter of a corporation provides for the issuance of 101,000 shares of common stock. Assume that 61,500 shares were originally issued and 10,100 were subsequently reacquired. What is the number of shares outstanding?
51,400
Aaron Company has 81,000 shares of $11 par common stock outstanding. On May 25, Aaron Company declared a $1.60 cash dividend. The market price of the stock on May 25 was $18 per share. The journal entry for the cash dividend would include
a. a credit to Paid-In Capital in Excess of Par—Common Stock for $567,000.
b. a debit to Cash Dividends for $129,600.
c. a debit to Cash for $567,000.
d. All of these choices are correct.
a. debit to Cash Dividends for $129,600
A corporation has 40,100 shares of $24 par value stock outstanding and 45,100 authorized shares. If the corporation issues a 3-for-1 stock split, the number of shares outstanding after the split will be
40,100 shares * 3 = 120,300 shares
An interest-bearing note that requires periodic interest payments, with the face amount to be repaid at the maturity date.
bond
