Chapter 11: Reporting and Interpreting Owners’ Equity



Chapter 11: Reporting and Interpreting Owners’ Equity

Ownership of a Corporation

1. What rights does an owner of common stock receive?

2. How are corporations created?

3. What is a company’s authorized number of shares?

4. What are issued shares?

5. What are outstanding shares?

6. What are unissued shares?

Types of Capital Stock

1. What is common stock?

2. How is the dividend rate for common stock determined?

3. What is par value?

4. What is legal capital?

5. What is preferred stock?

6. What is convertible preferred stock?

Accounting for Capital Stock

1. What is contributed capital?

2. What are the two components of contributed capital?

3. What is retained earnings?

4. What is an IPO?

5. What is a seasoned new issue?

6. Assume a company sold 10,000 shares of stock for $15 per share with a par value of $.10 per share. What journal entry would the company record?

7. What does a company record when their stock is sold in the secondary market?

8. What does a company record when they issue stock to acquire assets or services?

9. Assume a company was short of cash, but needed to purchase a piece of equipment. They issued 5,000 share of stock when the stock was selling for $10 per share (par value is $.10 per share). The equipment had a market value of $60,000. What journal entry is needed to record the purchase?

10. What are stock options?

11. Why are stock options given to managers?

Treasury Stock

1. What is treasury stock?

2. What are the two methods used to accounting for treasury stock?

3. How does a company record the acquisition of treasury stock under the cost method?

4. What type of account is treasury stock?

5. If the company resells the treasury stock for more or less than they paid for it will they recognize a gain or a loss?

6. What does a company record if they sell treasury stock for more than they paid for it?

7. What does a company record if they sell treasury stock for less than they paid for it?

8. The balance sheet of Alachua Company showed the following data about its common stock, par $10; authorized shares, 100,000; outstanding shares 55,000; and issued shares 60,000. What is the number of treasury shares?

9. On 1/1/2002, the stockholders’ equity section of the balance sheet of Kwame Corporation reflected the following:

Common Stock (par value $5; issued and outstanding 30,000 shares) $150,000

Contributed capital in excess of par (additional paid-in-capital) 120,000

Retained earnings 80,000

The following transactions occurred during the year:

On 3/1/2002, the company buys back 2000 shares at $20 per share.

On 6/1/2002, the company reissues 1000 of the shares acquired on 3/1/2002 for $22 per share

On 9/1/2002, the company reissues the remaining 1000 of the shares acquired on 3/1/2002 for $17 per share

Net income for the year was $100,000 and the company issued cash dividends of $30,000

a. What effect did the 3/1/2002 transaction have on stockholders’ equity?

b. What effect did the 6/1/2002 transaction have on retained earnings?

c. What effect did the 9/1/2002 transaction have on retained earnings?

Accounting for Cash Dividends

1. Does a corporation have a legal obligation to pay dividends?

2. What is the declaration date?

3. What is the date of record?

4. What is the date of payment?

5. What journal entry is recorded when a company declares a dividend?

6. What journal entry is recorded when a company pays the dividend already declared?

Dividends on Preferred Stock

7. What is current dividend preference?

8. What is cumulative preferred stock?

9. What is noncummulative preferred stock?

10. What are dividends in arrears?

11. At January 1, 2002, Bubra Corporation had outstanding capital stock as shown below:

a. Common Stock 100,000 shares outstanding, $5 par value

b. Preferred stock 20,000 shares outstanding $10 par, 8% cumulative. The stock was issued at a price of $15 per share.

During December, 2002 it declared and paid dividends. As a result, total cash dividends of $48,000 was paid to the preferred stockholders. How many years were the preferred dividends in arrears?

12. The Basket Corporation has the following classes of stock:

Preferred stock, 8%, $500 par, 1,000 shares issued and outstanding, noncummualtive.

Common stock, par $5, 100,000 shares issued, 50,000 outstanding.

In 2000, Basket Corporation was incorporated in Florida. It paid no dividends in its first year of existence. In 2001, the board of directors of Basket declared a total dividend of $180,000 to be paid to the holders of preferred and common stock. What was the amount of the dividend paid in 2001 on each share of common stock?

Dividend Yield Ratio

1. What is the equation for the dividend yield ratio?

2. What does the dividend yield ratio measure?

Accounting for Stock Dividends and Stock Splits

1. What are stock dividends?

2. What does a company record when they declare a stock dividend?

3. What is considered a large stock dividend?

4. What is used to determine how much should be debited to Retained Earnings in a large stock dividend?

5. What is considered a small stock dividend?

6. What is used to determine how much should be debited to Retained Earnings in a small stock dividend?

7. What is the entry to record the declaration of a stock dividend?

8. On 1/1/2001, the stockholders’ equity section of Kofi Corporation’s balance sheet showed the following:

Common Stock (par $10; authorized 100,000 shares, outstanding 10,000 shares) $100,000

Contributed Capital in excess of par (additional paid in capital) 50,000

Retained Earnings 160,000

During the year 2001, the following summarized transactions occurred (assume the transactions occurred in the order given):

1. Issued a 10% stock dividends when the market price was $12

2. Purchased treasury stock (200 shares at $11 each)

3. Declared and paid a cash dividend of $19,800

4. Net income for the year is $30,000

a. How many shares are outstanding at the end of 2001?

b. What is the balance in the retained earnings account at the end of the year?

9. What is a stock split?

10. Does a stock split require a journal entry?

11. What is required when a stock split is declared?

Dividend Payout Ratio

1. What is the ratio for the dividend payout ratio?

2. What does the dividend payout ratio measure?

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