Accountancy 332/532 - Which of the following statements

Accountancy 332/532

Chapter assignment 1

Problem 1: multiple choice questions

1. Which of the following statements is correct?

A. Having retained earnings is a necessary but not sufficient condition for the Board of Directors of a corporation to declare a cash dividend.

B. According to the Accounting Standards Codification, the excess of the cost of treasury stock over the amount received from selling it should be charged to paid in capital, never to retained earnings because a corporation cannot report a loss when dealing in its own stock.

C. A and B.

D. Neither A nor B.

2. Which of the following statements is correct?

A. Large stock dividends must be approved by the stockholders before they can be declared.

B. A large stock dividend is referred to as a “stock split effected in the form of a stock dividend.”

C. A and B.

D. Neither A nor B.

3. Which of the following statements is correct?

A. When convertible preferred stock is converted into common stock, the excess of the market value of the common shares over the book value of the preferred shares is charged to paid in capital from previous conversions of preferred stock to the extent of its credit balance, then to retained earnings.

B. Blockbuster’s common stock was delisted because the company’s stockholders voted against having a reverse stock split.

C. A and B.

D. Neither A nor B.

Use the information below for Komey Inc. to answer questions 4 -6:

December 31,

2020 2021

· Cumulative Preferred stock, 8%, par $100 $ 250,000 $ 250,000

· Common stock, par $2 120,000 160,000

· Paid in capital-Common 590,000 750,000

· Retained earnings 150,000 310,000

· Common shares in treasury (5,000 shares throughout

2020 and 2021) 110,000 110,000

· Total stockholders’ equity $ 1,000,000 $ 1,360,000

· Cash dividends declared and paid during the year

· On preferred 20,000 20,000

· On common 40,000 60,000

· Net income 120,000 240,000

4. What is Komey’s return on common stockholders’ equity for 2021 (rounded)?

A. 20.3%.

B. 25.8%.

C. 23.7%.

D. 18.6%.

5. What is Komey’s payout ratio on its common stock for 2021 (rounded)?

A. 25%.

B. 27.3%.

C. 33.3%.

D. 36.7%.

6. What is the amount of the cash dividend per share of common for 2021, assuming all of the common stock issued in 2021 was issued on January 2?

A. $.75.

B. $1.00.

C. $.80.

D. $1.07.

 

7. Oneweigh Inc. presented you with the following information on January 1, 2021:

· Total assets $1,000,000

· Total liabilities 600,000

On January 2, 2021, Oneweigh entered into the following transactions:

· Issued 8,000 shares of $10 par value common stock for $100,000.

· Underwriting fees associated with the stock issuance of $10,000 were paid with the proceeds of the stock issuance.

What is Oneweigh’s debt to equity ratio immediately after the two transactions above (rounded)?

A. 120%.

B. 118.75%.

C. 117.65%.

D. 122.45%.

8. Go online and find Apple’s 10-K annual report filed with the SEC for the year ended September 26, 2020. Using this report, which of the following statements is correct?

A. For the year ended September 26, 2020, Apple spent $72,358,000,000 to repurchase its own common stock.

B. At September 26, 2020, the number of common shares issued and outstanding was 17,772,945,000.

C. A and B.

D. Neither A nor B.

9. Which of the following statements is correct about Apple Inc.?

A. The Company changed from no par common stock to par value common stock to reduce the amount paid for qualification or licensing fees in states in which Apple did business as a foreign corporation.

B. The primary motive for the Company’s 7 for 1 stock split was to reduce the market price of its common stock to a more affordable amount per share so that small investors could afford to purchase the shares.

C. A and B.

D. Neither A nor B.

10. Immediately before the declaration of a cash dividend on September 28, 2021, Carol Inc. had current assets of $500,000 and current liabilities of $350,000. The Board of Directors of Carol declared a cash dividend of $50,000 on September 28, 2021, payable on October 17 to stockholders of record on October 10. Which of the following statements is correct?

A. The current ratio after payment of the cash dividend on October 17 is lower than the current ratio before the cash dividend was declared.

B. The current ratio after payment of the cash dividend on October 17 is higher than the current ratio after the cash dividend was declared.

C. A and B.

D. Neither A nor B.

11. Which of the following statements is correct?

A. Both small and large stock dividends result in a permanent capitalization of retained earnings.

B. The announcement by a firm that states that it is planning to buy back its own common stock usually has the effect of increasing the market price of its common stock.

C. A and B.

D. Neither A nor B.

12. What is the effect of a 2 for 1 stock split on each of the following?

Shares authorized Par value per share Retained earnings

A. Increase Decrease No effect

B. No effect Decrease No effect

C. Increase Decrease Decrease

D. Increase No effect No effect

13. Assuming that the market value of a firm’s common stock is greater than its par value, what is the

effect of a 100% stock dividend on the amounts reported for each of the following?

Common stock Additional paid in capital Retained earnings

A. Increase Decrease No effect

B. No effect No effect Decrease

C. Increase No effect Decrease

D. Increase Increase Decrease

 

14. Assuming that the market value of a firm’s common stock is greater than its par value, what is the

effect of a 10% stock dividend on the amounts reported for each of the following?

Common stock Additional paid in capital Retained earnings

A. Increase Decrease Decrease

B. No effect Decrease No effect

C. Increase No effect Decrease

D. Increase Increase Decrease

Use the information below to answer questions 15 and 16.

Sara Lea Inc. reported the following information on June 30, 2021, prior to the declaration of a 40% stock dividend:

· Common stock, $2.50 par value, 1,600,000 shares issued $ 4,000,000

· Paid in capital 7,000,000

· Retained earnings 9,500,000

· Treasury stock, 240,000 shares at cost 2,880,000

On July 1, 2021, Sara Lea’s Board of Directors declared a 40% stock dividend on issued shares. The dividend will be distributed on July 20th to stockholders of record on July 10. The market value of Sara Lea’s common on the declaration date was $40 a share.

15. Which of the following statements is correct after recording the declaration of the stock dividend?

A. Total stockholders’ equity is $17,620,000.

B. Retained earnings is $7,900,000.

C. A and B.

D. Neither A nor B.

16. After distribution of the stock dividend, how many shares of common stock will be issued and

outstanding?

Issued Outstanding

A. 2,240,000 2,000,000

B. 2,240,000 1,904,00

C. 2,144,000 1,904,000

D. 2,144,000 2,000,000

17. Which of the following statements is correct?

A. The primary reason for Microsoft’s 2 for 1 stock split was to reduce the market value of its common shares so that the company’s common stock could be added to the Dow Jones Industrial Average.

B. Investors who acquire Class B common shares of Berkshire-Hathaway do not expect to receive cash dividends.

C. A and B.

D. Neither A nor B.

18. Simon Inc. owns 65,000 shares of common stock of Shortridge Inc. On December 31, 2021, Simon’s Board of Directors voted to distribute one share of Shortridge common for every 5 shares of Simon’s common stock outstanding. On the declaration date, Simon had 300,000 common shares outstanding. The cost of Shortridge common was $15 per share, and the market value was $18 per share on December 31, 2021. On the declaration date of the property dividend, which of the following statements is correct?

A. Retained earnings should be debited for $1,080,000.

B. Unrealized gain on marketable equity securities should be credited for $180,000.

C. A and B.

D. Neither A nor B.

19. Which of the following statements is correct?

A. Dividends in arrears on cumulative preferred stock expected to be declared and paid in 2022 are reported under current liabilities on the December 31, 2021, balance sheet.

B. Convertible preferred stockholders have voting privileges just like common stockholders.

C. A and B.

D. Neither A nor B.

20. The Board of Directors of Able Company is pondering whether to declare a stock split or a stock dividend of equivalent size. The Board wants to know which of the following statements is correct?

A. The debt to equity ratio will be higher if the Board of Directors declares the stock dividend instead of the stock split.

B. The par value of the common stock will be higher if the Board of Directors declares the stock dividend instead of the stock split.

C. A and B.

D. Neither A nor B.

21. Which of the following statements is correct?

A. Publicly-held corporations use transfer agents to pay cash dividends to stockholders.

B. For cash dividends to be taxed preferentially for federal income taxes, the dividends must meet the criteria to be classified as ordinary.

C. A and B.

D. Neither A nor B.

22. Which of the following statements is correct?

A. Investors should beware of dividend yields that are higher than the industry average if the high yield is caused by a falling common stock price.

B. According to the Accounting Standards Codification, a property dividend is a reciprocal transfer of a nonmonetary asset.

C. A and B.

D. Neither A nor B.

23. Which of the following statements is correct?

A. Acquiring the common stock of companies that have a history of paying cash dividends every year is referred to as the “dividend push” strategy.

B. Stock dividends, unlike cash dividends, are not taxed because stock dividends do not transfer wealth from the corporation to its stockholders.

C. A and B.

D. Neither A nor B.

24. Go online and determine which of the amounts below represents the market capitalization of Apple Inc.’s common stock in the month of June, 2021.

A. $1.1 trillion.

B. $1.4 trillion.

C. $1.7 trillion.

D. $2.1 trillion.

25. Go online and determine which of the dividend yields listed below represents the current dividend yield on Apple Inc.’s common stock.

A. 1.5%.

B. 1.1%.

C. .7%.

D. .3%.

 

Problem 2 is on the next page.

Problem 2: Treasury stock and cash dividends

Chrome Company began 2021 with 25,000 shares of common stock issued and outstanding. Prior to 2021, the company had never purchased any of its own common stock. During 2021 and 2022, the following events occurred:

· In November, 2021, the company acquired 1,600 shares of its own common stock for $15 per share.

· In December, 2021, the company acquired another 1,400 shares of its own common stock for $16 per share.

· Chrome’s Board of Directors declared a cash dividend of $1.00 a share on December 31, 2021. The dividend is payable on January 20, 2022, to stockholders of record on January 10, 2022.

· On January 4, 2022, the company sold 1,200 shares of the treasury shares that were acquired in November, 2021, for $18 per share.

· On January 20, 2022, the cash dividend was paid to a transfer agent who is responsible for keeping Chrome’s stockholder records and paying the company’s cash dividends.

· On March 10, 2022, the company sold all of its remaining treasury shares for $13 per share.